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Customer Line Integration

New Opportunities for Experienced Manufacturers

By John R. Brandt and George Taninecz

Customer Line Integration:

New Opportunities for Experienced Manufacturers

In their efforts to meet the rapid and continuously changing demands of customers in the past quarter century, manufacturers have recongured nearly every aspect of their businesses. After repeatedly asking themselves a difcult question What value does the production of a product bring to the business of manufacturing? many had to face the stark reality: Production represents an ever diminishing share. Controlling production and making products are no longer the heart of manufacturing and havent been for some time. Instead, leading organizations now work with a team of partner companies, each of which brings its own expertise to meet the needs of a particular customer group. As manufacturers adapt to this new reality, they optimize their business strategies and processes to create greater value for their customer who promptly ask for more! This new paradigm extends to the shopoors of manufacturers themselves, as savvy executives realize that their own suppliers manufacturers of high-tech production equipment and third-party line integrators are often better at planning, designing and installing new production lines and upgrades than they are. How did this come to pass? Why do manufacturers now seek outside expertise to execute a process so fundamental to their business successes or failures? A quick review of recent structural changes in manufacturing offers insights in this growing trend and practical advice on how to prot from it.

From Mass Production to On-Demand Satisfaction

Once upon a time, a single imperative drove North American manufacturers: Create production lines that churn out products as fast as the machinery would allow and then run every machine at full capacity accepting as unavoidable the resulting piles of inventory both in the plant and throughout the distribution system. Manufacturers sought to maximize their machines output, thereby justifying (absorbing) the cost of both equipment and labor. A good manufacturing facility was one that ran long, efcient production runs without much focus on customization or demand variation. Today that world seems as ancient as the industrial dinosaurs that once stood astride it.

A combination of heightened global competition, shortened product development cycle times and increased demand for customized products means that manufacturing executives now face a far more complex supply chain and production environment. Managers must now optimize their production, assembly, test, and packaging lines to coordinate precisely with uctuating customer demand. This requires that each machine or process within a production line be tuned to deliver a component to the next stage when and only when it is needed: The right product at the right time in the right quantity. Why? Because in todays lean environment, the end of the line must deliver only what has been ordered no more and no less. Managing an on-demand production line requires new skills, leaving manufacturers with a key question: Where will it be most effective to procure that expertise?

Many other manufacturers, however, made a different choice. For those who believe that making a product creates a competitive advantage, hiring manufacturing specialists to improve the effectiveness of the production process became a path toward increased protability. First came consultants, who taught lean principles, six sigma, and the like, which primarily concentrate on optimizing the links between processes and production equipment. Is it any surprise that manufacturers see the next step in production process improvement as focusing on the equipment itself?

From Products to Solutions

Another trend driving line integration is the realization by manufacturers that customer value no longer resides primarily in the product itself, but in many other nonproduct factors, including: Quality/reliability/timeliness of delivery and services; Total cost of ownership/procurement/business relationship; Provision of solution bundles, of which the core product or service may be a small part; Transparent access to information that serves the end-customer and supports the product or service; and Provision of valuable business expertise, even if unrelated to the core product or service.

From Vertical Integration to Supply-Chain Management

Where once manufacturers assumed that they must master and control each part of the production process, they now understand that they must focus on what they do best no more and no less. Savvy execs realize that mastering each part of the production process is not only impossible, it impedes productivity and prots. And while outsourcing may have started with such non-core activities as human resources, accounting, and information technology, leaders are increasingly comfortable outsourcing functions traditionally associated with manufacturing excellence, including product design, engineering, logistics, and delivery. For some, the decision to outsource the entire production process gave rise to entirely new businesses contract manufacturing and contract design and suggested that manufacturers no longer needed to own or run an assembly line, or to design the products that run on them.

Yet as manufacturers turn their attention to providing these non-product attributes, someone still needs to focus on optimizing product production. Who within the supply chain has the expertise to take on this responsibility?

Manufacturers Are Suppliers And Customers

As supply-chain manufacturing has taken hold, a vendor community is developing to provide the products and services that manufacturers still need, but nd unprotable to maintain in-house. Manufacturers are becoming these suppliers customers, and, like their own customers, they demand total solutions instead of products. For example, an increasing number of winners of the IndustryWeek Best Plants Award are demanding from their suppliersand providing to their customersnon-product customer value attributes such as just-in-time and point-of-use delivery, as well as on-site inventory management.1 Similarly, manufacturers who report the most progress toward world-class manufacturing status are more likely to be receiving and offering such value services (see chart), according to data from the IW/MPI 2006 U.S. Census of Manufacturers and the 2006 Canada Manufacturing Study. For example, 59% of U.S. and Canada plants that have made signicant progress toward or fully achieved world-class manufacturing status receive just-in-time supplier deliveries vs. just 31% of plants that have made no progress toward world-class.2 With the success that world-class

manufacturers have experienced by partnering with component and material suppliers, is it any wonder that manufacturers now seek similar success in line integration by partnering with the vendors who provide their production equipment? Together, these structural changes, accelerated by new technology and globalization, have forced manufacturers to reinvent the production process. Theyve reduced headcount by implementing increasingly complex production technologies that require integration among a vast array of mechanical, electrical and electronic components. And theyve succeeded in producing more goods than ever while delivering them at lower prices within ever tighter timeframes. Yet these gains have been won at considerable risk, as the ARC Advisory Group notes, Engineering expertise once maintained by manufacturers has shrunk to critically low levels. Many of the automation services that are required throughout the lifecycle of a plant or factory can no longer be performed in-house. Users are looking to the next logical choice for these services the suppliers that provide them with the automation products, systems, and software that keep their plants running.3

Use of Inventory-Management Practices (% of U.S. and Canada Plants)

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IndustryWeek dustryWeek Best Plants award competition, IndustryWeek magazine, IndustryWeek/Manufacturing Performance Institute 2006 U.S. Census of Manufacturers and the 2006 Canada Manufacturing Study, sponsored by Advanced Manufacturing and the Manufacturing Performance Institute. Supplier-Provided Automation Services Worldwide Outlook, ARC Advisory Group, 2004.

Source: IW IW/MPI 2006 U.S. Census of Manufacturers, 2006 Canada Manufacturing Study

Capturing the Opportunity

Manufacturers who are ready to take the next stepoutsourcing their line integration activities and upgrades to expertsrst must select an integrator. They should evaluate integrators based on ve key factors: Project similarity: Look for integrators who have successfully designed and installed projects similar to the proposed project. First, consider the scope of the project. Some integrators excel at complete line and complex assembly jobs. Others are best at stand-alone work cells. Still others focus on integrating particular lines, such as conveyor systems or packaging lines. Next, consider whether to partner with a specialist or a generalist. Manufacturers in industries that are large enough, such as pharmaceutical, food, and oil/gas industries, can nd numerous integrators who specialize in their particular industry, nearly guaranteeing that the integrator will understand the subtleties of the business. Other manufacturers may prefer to choose an integrator with experience installing a particular type of line in a variety of industries, to ensure the project gets the benet of new perspectives.

Product variety and partner preference: Decide whether to partner with an equipment vendor or a third-party integrator. Manufacturers who have decided to purchase a particular brand of equipment might opt to have the vendor integrate the line, to take advantage of the vendors in-depth knowledge of the equipment. Manufacturers who would rather hire third-party integrators tend to want to tap the integrators familiarity with a variety of products, seeking the best overall solution. However, many equipment vendors say they are willing to integrate other vendors products, and are designing products that can integrate with third-party systems. Project team type: Ask if the line integration will be staffed by subcontractors or in-house experts. Generally, subcontractors could provide the benet of increased specialization, but too many subcontractors could needlessly lessly increase the price and complexity of managing the project. The use of in-house staff could make managing the project more cost-efcient and easier to implement. Integration process plan: Explore how the integrator works with its clients, including initial project specication requirements, project changes or updates, cost and timeline estimates, and ongoing service and support. Will the integrator help to create the design document that describes the present system and the proposed improvements, or require that the manufacturer provide it? Does the integrator work on a time-andmaterial basis, or xed-quote? Will the integrator allow for updates and changes to the project? Is there a formal or informal process for handling changes? And nally, does the integrator offer ongoing service and support? Due diligence: Verify the integrators nancial stability by reviewing public documents and the integrators reliability by interviewing customer references. Ask how and how quickly the integrator solves problems and whether the integration project met expectations, stayed on time and on budget.

Once the partnership is established, manufacturers need to manage six key partnership elements to ensure its ongoing success. They include4: Clarity of roles: Each participant must understand how its contribution allows the production line to perform at an optimum level. Manufacturers should expect to share detailed information about customer needs, as well as the particular competitive advantage they hope to achieve with the new line integration or upgrade. Longterm partnerships require that each participant agree on a roadmap that unites current and expected customer requirements with the hardware, software, and services that will deliver on those requirements. End-user focus: The manufacturer should expect the machine equipment vendor/integrator to understand end-user needs. The best illustration of this comes from a 2003 IndustryWeek Best Plant winner: We not only try to partner with the best suppliers in the industry, but [with] the best customers, the plant manager declares. Not only are we taking business from our competition, but our customers are taking business from their competition. Thats resulting in additional sales volume for us. By knowing the endusers needs as well as his customer does, the supplier wins an increasing share of its customers increasing share of the market.5 Trust: In addition to the leap of trust required to share the end-user information necessary to forge a successful partnership, the manufacturer and equipment vendor/ integrator must come to an understanding regarding the degree to which the partnerships line congurations are proprietary. Non-compete agreements must delineate which industries and to what extent the vendor/integrator may sell the new technology, processes, and expertise that derive from the partnership. In particular, successful partnerships acknowledge that the equipment vendor cannot be held hostage to unending, all-encompassing non-compete

agreements. Many agreements set a length of time during which the equipment vendor cannot sell the solution to a competitor, with the understanding that by the time the vendor is free to resell solutions, the partnership will have begun implementing the next project. No time limit or a shorter time limit should be granted for resale to non-competitors. Ultimately, the manufacturer must feel condent that the implementation will not be sold to a competitor, while the vendor/integrator must be able to capitalize on the knowledge gained from a new implementation. Shared goals: In collaboration, parties must agree to production standards and benchmark metrics. They must work in tandem to maximize overall competitiveness, including joint efforts to improve quality and delivery. Flexibility: Both parties must understand the need to quickly change course to meet inevitable changes in the marketplace. Use of common information technology systems, as well as proactive, periodic, and systematic assessment and analysis of the partnership, can facilitate such exibility. Win-win thinking: A stable, long-term partnership requires that both the manufacturer and the equipment provider/integrator prot from the relationship.

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List adapted from: David Drickhamer, Envisioning the Ideal Value Chain, IndustryWeek, May 21, 2001. George Taninecz, In Good Company, IndustryWeek, October 2003.

A Win-Win Collaboration
Within every challenge lies an opportunity. In their customers new demands for line integration and upgrade services, smart machine equipment vendors are nding opportunities to grow their businesses, while increasing both margins and customer retention rates. Indeed, service is the fastest growing segment of the automation market today, according to the ARC Advisory Group. Their research shows that the worldwide market for supplier-provided automation services is expected to grow at a 9.1% compound annual growth rate over the next ve years (see chart).6 Equipment vendors face the same challenges as their customers. Manufacturers no longer want to buy machines; they, too, are looking to buy solutions to their production problems. The hardware that equipment providers deliver no longer provides a competitive differentiator for either the equipment manufacturer that sells it or the customer who buys it. ARCs report notes, As manufacturers adopted standard, commercial-off-the-shelf (COTS) products and components to reduce the cost of hardware [they] eliminated most of the proprietary competitive advantage that automation suppliers could build into their hardware. With hardware no longer a competitive differentiator, suppliers looked to their software and service offerings as well as vertical industry expertise to make up for the losses experienced in the hardware business.7 As manufacturers outsource elements of line design and implementation or upgrades, they do so at different levels, creating opportunities for machine equipment makers of all sizes. Not all vendors will have the capacity to deliver complete solutions, and not all customers will be able to invest in turnkey integration services. Larger equipment manufacturers will work to capture the opportunities to provide full-line integration and contract partnerships that provide continuous line integration and upgrade services. Smaller equipment vendors will want to capture their share of this lucrative market by creating alliances that offer extensive integration services, either with larger, full-service integrators, or with a group of small manufacturers who, together, combine specialized expertise. In addition, there are signicant opportunities to provide line integration at each step of the integration or upgrade process, from consulting and engineering and design through to spare-parts management and replacement. These opportunities also include installation and training, system and device maintenance, and performance management. ________________________________________________________________________________ 6 Supplier-Provided Automation Services Worldwide Outlook, ARC Advisory Group, 2004. 7 Supplier-Provided Automation Services Worldwide Outlook, ARC Advisory Group, 2004.

Today, experienced manufacturers understand the need for continuous, rapid change, as well as the resulting need to question every business practice. They understand and expect new strategies that provide competitive advantage to be copied quickly and to become standard business practices. And they know that within each new strategy lie the seeds of the next change. Companies that recognize early the need for change will be rst to capitalize on new opportunities.

The common theme throughout any industrys restructuring is the imperative to shift specic process responsibility to that link in the supply chain that can most effectively meet it in terms of cost, quality, speed, and expertise. Savvy manufacturers will recognize that line integration and upgrades are the next logical processes that require the specialization that outsourcing can bring.

______________________________________________________________________________________ John R. Brandt is CEO of the Manufacturing Performance Institute and the former editor of both Chief Executive and IndustryWeek. George Taninecz is Vice President, Research, of the Manufacturing Performance Institute and the former managing editor of IndustryWeek. ______________________________________________________________________________________ If your company would like to increase productivity and improve yields while being cost-efcient at the same time, then Italian machinery and technology should be a consideration in your upcoming capital purchases. Contact Machines Italia c/o the Italian Trade Commission at 1-888-ITALTRADE, or visit us at for more information on how Italian companies and technologies are providing North American companies with the expertise to produce the right product at the right time in the right quantity and to help them grow their businesses, while increasing both margins and customer retention rates. MACHINES ITALIA C/O ITALIAN TRADE COMMISSION 1-888-ITALTRADE NEW UPDATES AND INFORMATION ADDED PERIODICALLY!

Customer Line Integration: New Opportunities for Experienced Manufacturers is brought to you by the Italian Institute for Foreign Trade (I.C.E.) and its U.S.-based Italian Trade Commission as part of their Machines Italia promotional program. This program is designed to promote capital goods trade between Italian machinery manufacturers and U.S. companies. Participating Italian machinery manufacturers associations include Agriculture/Farm Machinery; Ceramics; Earthmoving Machinery; Food Technology; Footwear, Leathergoods and Tanning; Foundry and Metallurgical Machinery; Glass; Marble and Stone; Metalworking; Packaging; Plastics and Rubber Printing; Graphics and Converting; Textile Machinery; and Wood.

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