Technology on the turn?

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Magazine Article, Source : The Manufacturer
Zone : IT in manufacturing
Published : January 2004

As the global economy improves, what are the prospects for investment in manufacturing IT, asks Stephen Pritchard

T he past year has been tough for manufacturing, but there is evidence that economic conditions are improving. Although Gartner, the US based industry analyst group, expects IT spending budgets to ‘thaw’ in 2004, with the hi-tech and consumer packaged goods (CPG) sectors leading the way, investment in IT could well lag behind other capital expenditure in the manufacturing sector, as companies continue to question the value of technology spending. Also, as technologies evolve and mature, they will continue to have different impacts in different areas of business.

Sectors that have been relatively slow to invest in technology - such as areas of engineering, food and even some process industries - may grab for the ‘low hanging fruit’ and see more rapid improvements than sectors that have continued to invest during the downturn. Yet vendors report that technology adoption continues to run more slowly in process, rather than discreet manufacturing.

And technology could drive a further wedge between large and small businesses. Larger companies have long stood to gain the most through business automation technologies such as ERP or supply chain management. They have the money to invest in the best technical solutions and enjoy economies of scale, which only add to the effic-iency gains that come from improved business practices and more streamlined administration.

Smaller companies may simply not enjoy the same scale benefits from their spending on IT. At the most basic level, the IT industry is still struggling to find effective ways to reduce the upfront costs of technology. A server is still a server and a network connection is still a network connection, and attempts to break these down into consumption-based units, also known as utility computing, are only slowly entering the mainstream.

In fact, the main initiatives around utility computing have centred around contracts with very large companies, such as Procter and Gamble and Philips Electronics. Although some smaller IT companies have come up with business models that give the flexibility and more gradual cost ramps smaller manufacturers need, the majority of utility computing initiatives seem to be benefiting the larger companies.

This trend provides an illustration, in microcosm, of the picture in much of manufacturing IT. As the technologies around process control, supply chain management, planning in its various forms and even customer relationship management (CRM) become more sophisticated, so investments become more expensive.

As companies try to squeeze the maximum efficiency out of their manufacturing and distribution pro-cesses, the law of diminishing returns comes in to play.

Consultants and analysts who cover IT in manufacturing frequently argue that it is the earliest steps in automation that yield the greatest benefits. Often, this comes as manufacturers adopt the best practice methods set out in software programs such as ERP.

Each further step, however, and each further efficiency, is often more expensive and complex to achieve. To maximise efficiency in the supply chain, for example, a manufacturer will need to link its IT systems to is suppliers’ computers, and quite possibly to the order systems of its customers.

This is far more costly, and far more involved, than simply implementing an internal ERP project. Smaller manufacturers might struggle to release the capital for the hardware and software they need.

They might also struggle to persuade larger business partners to link in to their systems. Instead, they might be forced to connect to either suppliers’ or customers’ systems rather than one that is optimised for their own needs. But without these connections they will not be able to drive costs out of their supply chain. In some cases, smaller companies may not even be able to bid for contracts unless they adopt a customer’s system.

Nor is this the only area where smaller and mid-sized manufacturers could face problems. Some of the emerging technologies - with the potential to bring significant improvements to areas such as supply chain management or stock control - are expensive to implement.

Two wireless technologies illustrate the point. There has been much speculation about the growth of radio-frequency ID tags (RFID) in both manufacturing and distribution; the tags could replace bar codes within a few years.

But although the tags themselves are cheap (currently well below $1 each), scanning and tracking systems represent a more substantial investment. And manufacturers also need to budget for integrating the data produced by RFID into existing business systems. This is unlikely to be cheap.

Mobile devices, such as PDAs and smart phones, offer similar potential but pose similar problems.

Although the hardware is relatively inexpensive, and enterprise software vendors such as Oracle and SAP are building increasing support for mobile devices into their programs, businesses are finding that inconsistent standards and unproven technologies make practical deployments difficult and often, expensive.

The wide range of equipment on the market means that creating a standard interface is not as easy as it could be; support costs inevitably go up when companies have to support multiple devices. And many of the costs are hard to quantify in advance: some analysts estimate that as much as three quarters of the cost of an enterprise application project can come from integration.

If businesses fail to embrace these new technologies, they run the risk of losing competitiveness to larger rivals who can afford the up-front expenditure. This is no hollow threat, as the prize for smarter supply chain and demand management systems, as well as more tightly-controlled, just-in-time processes is substantial.

As with the early MRP and ERP deployments, and large-scale supply chain management projects, costs for the new technologies will fall as more vendors compete in the market. With companies such as Wal-Mart planning to make widespread use of RFID by 2005, the technology is here to stay.

For manufacturers, the question is not whether to invest in this area, but whether to do so now - perhaps trading higher costs for an early competitive edge - or to wait for costs to come down. In some industries, such as consumer packaged goods, the choice may well be made for suppliers by their (retail) customers.

And although the cost of some newer technologies may be a burden for smaller and mid-sized manufacturers, elsewhere in IT the cost is improving.

The larger enterprise software companies are turning their attentions to the mid-market: Henning Kagermann, CEO of SAP, has said that nearly all large businesses that want ERP have it, so the focus has to be on the mid-market.

This view is supported by the entry of Microsoft into the enterprise software business, through its Business Solutions division. As a challenger in the market - and one with deep pockets - Microsoft is likely to prove a more vigorous competitor to the likes of SAP and I2 than many of their existing, smaller rivals. And both Microsoft and SAP concede that they will only win business from smaller companies by producing software that is both cheaper to buy and to own.

Costs are also coming down in integration, one of the hidden expenses of many, if not most, manufacturing IT deployments.

Integration, messaging and document exchange technologies have all matured rapidly over the last year to 18 months. Microsoft’s .net and the rival Java language, J2EE, have both gained rapid acceptance among software vendors.

This is making it far easier to link applications. Instead of developers writing bilateral connections for each piece of software, they can write software that talks to a common messaging layer in either Java or .net. It is even possible to connect applications using the rival standards to each other. Developing connections in this way, systems integrators report, is vastly easier and cheaper than using older-style technologies such as EDI; Java and .net will also run over the public internet, further lowering costs.

At the document level, the widespread acceptance of the XML standard is making it easier for companies to share data, whether it is orders or technical specifications, over networks. XML is also opening up the path to automated document exchange, through email or servers running software such as Microsoft BizTalk. This allows manufacturers to set up links to suppliers and customers, or even between their own sites, more quickly and easily than before.

What these advances have in common, how-ever, is that they generate ever-greater quantities of data. Data in itself is of little use to a business, and so the IT industry has reacted by adding more and better analysis tools to their systems. Companies such as Siebel Systems, the market leader in CRM, expect analysis to be an important source of revenues in 2004.

Other vendors will no doubt follow suit, and the trend towards greater emphasis on analytics fits in well with another, wider IT trend: the need to do more with less, and to make better use of existing investments.

For the largest, most technologically aware and innovative manufacturers, 2004 will be a year of extending the reach of their systems further into suppliers’ and customers’ businesses, and a move towards real-time supply chain information driven by mobility and technologies such as RFID.

For the smaller and mid-tier company, these will be technologies to monitor rather than implement. But continued competition between IT vendors, and a growing emphasis on the mid-tier, should make technology both cheaper and more effective for all manufacturers over the coming year.

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