A fully optimised ERP can help address the new complexities that are driving manufacturers back home, says HSO’s Gavin Oberholzer.
Not that long ago, offshoring appeared the only way forward. Reports of overhead cuts of around three-quarters led many manufacturers to believe they had no choice but to make the move to remain competitive.
But how things change. Inevitably wage bills in fast-developing economies such as Brazil, India and China began to increase. At one point, the cost of Chinese labour rose 20% year-on-year.
There were also other unpredicted overheads such as the need for new management teams to oversee the operations and to navigate local regulations.
In some instances designs are copied and cheaper imitations produced, crowding the market and diluting brands. Profits became eroded and the cost-quality ratios no longer balanced.
However, there’s evidence that the problems run even deeper than this. What many offshoring businesses didn’t predict a decade ago was the huge upheaval of the digital revolution and the impact it would have on all aspects of manufacturing – from supplies to customer expectations.
Late last year, a study by Lloyds Bank predicted that Britain’s car manufacturers will create 50,000 new jobs over the next two years as they bring production back to the UK. The main reason cited is revealing – they need to create more reliable and shorter supply chains.
In a pool questioning car manufacturers and their supply chains – ranging from SMEs to industry giants such as Jaguar Land Rover – 70% said that they plan to ‘onshore’ more of their production over this time.
Businesses are no longer as straightforward as they used to be. They may be running projects across multiple international borders and legal systems; have some products that are process orientated and others that are discrete, and they need to be able to plan across all these different boundaries and models.
These days manufacturing is too complex for production facilities to stray too far away from suppliers, markets and centres of research.
“Successful firms will be capable of rapidly adapting their physical and intellectual infrastructures to exploit changes in technology as manufacturing becomes faster, more responsive to changing global markets and closer to customers,” says the introduction to the UK Government Office for Science’s report, The Future of Manufacturing.
However, the changes are already happening. And it’s very challenging to be agile and responsive to customers dynamically changing needs when production facilities are halfway across the world.
The report also points out that although manufacturing has traditionally been defined as the production process in which raw materials are transformed into physical products, physical production is now at the centre of a wider manufacturing value chain.
Manufacturers are increasingly using this to generate new and additional revenue, with production playing a central role in allowing other value-creating activities to occur.
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This typically involves supporting or complementing products. For example, even as far back as 2009, Rolls Royce was reporting that almost half its revenue (49%) came from services [servitization].
So the manufacturing ecosystem is becoming far more interwoven with trends towards clustering to further strengthen innovation and efficiency.
It is leading to a pressing need for over-arching control and information enabling a leaner, synergistic workflow and agility across all functions including production; warehousing; project; asset management; change management; demand forecasting, and servicing.
Manufacturers also need to absorb increased labour costs when their production facilities are brought back onshore, and although there are often government incentives, there is still usually a significant shortfall.
Consequently the search is on to find new ways to cut costs such as increased automation and advanced robotics. Manufacturers are using every means available to reduce waste, energy and materials, introducing disruptive technologies and gaining increased insight through connected sensors and big data analysis.
However, great gains can be made using the system that already sits at the hub of many manufacturing operations – the ERP system.
Many have not been upgraded or optimised to meet these new demands even though the vendors of industry standard solutions are adding to their capabilities all the time.
Research firm, the Aberdeen Group, has recently found that the average ERP in a mid-sized organisation is more than seven years old. Some manufacturers have off- and then on-shored again during that time.
A report by Forrester into the future of ERP, Global, Industry and Technology Forces Shape the ERP Landscape points out that traditionally, ERP has stayed true to its name and has been used as a tool to plan operations in terms of process management and cost retrenchment.
However, more recently vendors are taking a more creative approach by incorporating more up-to-the-minute capabilities to enable new business models and revenue streams.
A ‘one size fits all’ approach is no longer adequate. These advances mean that even those organisations already running ERP will benefit from upgrading.
The right implementation partners can help fill in the gaps of industry standard solutions to tailor them to specific industry needs.
An onshoring company has to keep a very tight control of its margins, so must measure the impact of every new activity on the entire organisation.
If a business is making a transition from selling products to selling services, the products that they manufacture become assets and those assets now have maintenance programmes, new revenue buckets and streams attached to them.
These all need to be assessed and controlled, with a centralised source of constantly updated data.
Hard lessons have been learnt, but the main problem that drove the offshore trend in the first place – the need to remain competitive in an increasingly global market – still hasn’t gone away.
To compete with low cost economies the UK manufacturer has to distinguish their products through innovation, digital integration, and through the provision of value added services that modern customers’ demand.
Coming home will involve selecting the right new technology capabilities and using them to full advantage.
ERP plays such a central role that it is only common sense to adapt it to meet today’s new demands.
It allows the manufacturer to provide a cohesive; superior; more agile, and valued customer experience that allows them to rise above the cost race to the bottom.