As we move into 2011, recovery seems to be moving along at an acceptable pace as good news slightly outweighs the bad. The U.S. manufacturing trend reflects a healthy rebound in automotive and stronger exports for larger firms. If the housing and commercial real estate markets return, even modestly, manufacturing could be the catalyst for stronger economic growth in mature economies.
Customer sentiment is a bit fickle, lingering around the group psychology of “it’s not getting better, but it’s not getting worse,” but with employment numbers looking better at the end of the year and a relatively strong 2010 holiday season, renewed consumer confidence could push economic growth even higher.
Overall the prospects for recovery are delicate; 2010 results had the benefit of being compared with a lousy 2009, and there is some question as to whether 2011 can keep up the growth. However, profitability is solid, and that will give manufacturers some operating flexibility. And it may all come down to how much the consumer buys into the recovery. The industry is ready to grow but wants to get better sense of the pace.
We believe 2011 will demonstrate a bit of a growth dip compared with 2010, although profits will hold up well. And steady but modest growth in 2011 will catapult the industry into robust recovery in 2012. Manufacturers will seek to profit while they prepare.
For global supply chains, we see 2011 as a “back on track” and “back to basics” year. While we do not anticipate massive IT spending growth, there is no question that pent-up demand and a need to push forward with new capabilities are going to drive expenditures in 2011. But, at the same time, supply chain organizations are going to be cautious and focus on those things that return high probability benefits.
We expect to continue to see investments in inventory management/optimization and sales & operations planning (S&OP) tools, and also expect to continue to see consistent investment in planning and demand responsiveness capabilities.
In the context of the economic environment and specific implications for supply chain, IDC Manufacturing Insights offers the following ten predictions for 2011:
1. Manufacturing supply chain organizations, recognizing the inherent complexity in their global supply chains, will look for ways to drive out unnecessary complication through segmentation, simplification and the use of more practical analytics. While market complexity is the reality, as a result of global trade, extended supply networks, shortened product life cycles and product range proliferation, complication has been the result in business process, IT applications and inefficient decision making. As manufacturers look to address “complexity versus complication,” the latter can be “deconstructed” through business process redesign, the judicious application of technology and a clear prioritization of business strategy.
2. IT vendors will continue to develop business intelligence and analytics tools that enable manufacturers to improve decision making at the strategic, tactical and operational levels. However, it is not just about the investment in IT tools; it is also about creating an integrated decision environment where there is alignment between the highest-level strategic decisions and the lowest-level operational ones. Given that operational decisions tend to outnumber their strategic counterparts by a ratio exceeding 100:1, this alignment becomes critical to ensure, for example, that the achievement of low-level KPIs correlates to the board-level scorecard for the business.
3. Although demand forecasting continues to be important, supply chain organizations will begin to recognize the critical role of supply-side responsiveness. Certainly it should be important to improve demand sensing and forecasting capability (particularly if a company lags behind competitors), but it’s equally important to respond quickly to the inevitable unanticipated changes to that forecast. In other words, it’s increasingly important, given market and demand volatility, to have the ability to be more responsive to demand changes in the marketplace. Manufacturers and retailers may well find, given the relative state of their forecasting capabilities, that investments in improved responsiveness will drive greater business returns.
4. Supply chain visibility will climb on the IT application priority list as manufacturing companies increasingly identify critical use cases to drive both cost savings and improved service levels. Manufacturing supply chain organizations will no longer chase the elusive, blue-sky vision of visibility; rather, they will identify a specific use case that addresses a particular business problem, define the requirements for information access and availability, and make it happen.
5. In the context of taking a broader view of total cost, supply chain organizations will gain a new appreciation for shortening lead times through profitable proximity sourcing strategies. Even though cost containment remains the top priority for most supply chain organizations, there has been a realization that the retention of key customers and improving overall service levels are critical factors in surviving the global recession. As such, we expect a new focus on improving service levels and on the “costs” inherent in long lead times. Although it will vary by product segment, we expect to see companies actively looking to shorten lead times through a more balanced approach to global sourcing.
6. Cost containment, and the desire for variable supply chain structures, will continue to drive outsourcing of operations, but will also bring a more enlightened perspective to SaaS and “skills resourcing.” Although manufacturing companies are more optimistic about the future than they were a year ago, there is considerable caution in terms of supply chain design and investment priorities. The magnitude of the recovery and its effect on “my company” will continue to reinforce the notion of “hedging at a design level” with variable-cost rather than fixed-cost infrastructure.
7. Supply chain modernization will pick up speed again as manufacturing companies look to drive fulfillment excellence through transportation, warehouse and labor management tools. One of the more interesting insights from the various surveys we conducted in 2010 was the resurgence of appreciation for customer service. It is our view, therefore, that companies will once again focus on modernizing the fulfillment side of their supply chain with the goals of driving fulfillment excellence and improved customer service performance while holding costs under control.
8. As manufacturers increasingly outsource manufacturing and expand in emerging regions, they will search for ways to improve information sharing and support more organic collaborative processes across the extended supply chain. One of the concepts that we introduced in 2010 was the concept of “organic collaboration” — this is collaboration that occurs very naturally — not because we want to force intra-silo or inter-organizational collaboration, but because our processes simply become collaborative, akin to the way that Facebook and text messaging have become a significant means of communication for many social circles. Indeed, the rapid adoption of consumer social networking and collaborative technologies may be viewed as a precursor for the coming wave of collaborative business interactions.
9. Value chain captains will put a stake in the cloud to level-set technology capabilities, with focus on aligning with the “clock speed” of the supply chain. We expect 2011 to find an increasing number of manufacturers exploring how they can use cloud computing to address technology gaps, most often for communication but also for collaboration. Business relationships in the value chain can be increasingly supported online, using a social business framework for support with the intersection of Web 2.0, Enterprise 2.0, and collaboration platforms and applications.
10. Manufacturers will invest in learning how to incorporate mobility applications and smart devices into the supply chain while balancing IT management concerns with employee enthusiasm. 2011 will be a learning process for manufacturers, with good and bad surprises ahead as manufacturers explore mobility. Providing secure information accessibility through mobile devices is going to be high on the list for IT organizations. It’s also to be remembered that mobile applications and smart devices aren’t necessarily going to be just a new means of data collection or data availability; we also expect them to support new processes.
Supply chain organizations have been taking and will continue to take a very targeted approach to IT investment and capability development while attempting (where possible) to drive variable-cost rather than fixed-cost “investment” as a short to medium term “design hedge.” It has also become quite clear that global supply chain complexity is here to stay and that companies must find ways to manage that complexity in better and less complicated ways.
Simon Ellis is practice director, Supply Chain Strategies, with analyst firm IDC Manufacturing Insights.