Manufacturers Put Focus on Understanding Profitability

Manufacturers are entering into a new era of ‘disruptive complexity’ which is fundamentally changing the way manufacturers compete and succeed, according to the KPMG’s 2014 Global Manufacturing Outlook (GMO).

In an attempt to capitalize on this environment, manufacturers say they will dramatically increase spending in R&D, pursue new collaborative business models and integrate new technologies to analyze and stimulate profitable growth.

This year’s GMO reveals that only 12 percent of manufacturers would categorize themselves as being ‘very effective’ at determining product profitability. Further, 85 percent of respondents said they plan to make either “moderate” to “substantial” investments into systems for product or service cost improvement over the next 12-24 months.

“This isn’t simply about mining data and building spreadsheets; it’s about accessing the appropriate information, at the right level of granularity and – maybe most importantly – with the right speed and frequency to generate timely insights that help people make better business decisions,” noted Jim Scalise, a Management Consulting Partner with KPMG in the US.

Growth through innovation and collaboration

According to the KPMG 2014 GMO, almost half of manufacturers plan to double R&D spending in product development over the next 12-24 months.

There are also signs that breakthrough innovation is gaining importance as a strategy for 39 percent of industrial manufacturers, up 8 percentage points from KPMG’s 2013 GMO, representing a 25 percent increase in companies pursuing such strategies.

“The manufacturing world is in an era of hyper-innovation,” said Jeff Dobbs, Global Chair, Industrial Manufacturing  and a Partner with KPMG in the US. “Ultimately, those organizations that do not balance investment in ‘incremental innovation’ with investment in ‘breakthrough innovation’ may find themselves left behind competitively.”

Manufacturers in Germany appear set to lead in breakthrough innovation with 77 percent citing it as their primary R&D strategy for product development.

Among the industrial sectors included in the survey, 50 percent of respondents from the Conglomerates sector say breakthrough innovation will be their primary R&D strategy.

In terms of business models, 88 percent of respondents say partnerships over in-house efforts will shape manufacturers’ approach to innovation, up significantly from 51 percent in KPMG’s 2013 Global Manufacturing Outlook.

Additionally, 68 percent say they are adopting more collaborative business models with suppliers and customers.

Improving supply chain visibility

This year’s GMO reveals that limited visibility across the supply chain remains a growing concern for manufacturers, even though many have made notable progress towards improving transparency.

Forty percent – versus 20 percent in KPMG’s 2013 GMO – say they lack information and material visibility across their supply base. Thirty eight percent say they lack critical details on supplier performance and 36 percent lack adequate supply chain IT systems.

According to half of respondents, the biggest obstacle to achieving more visibility is a lack of mature technology, followed by lack of governance (19 percent) and lack of strategy (14 percent).

Despite those challenges, visibility has improved over the past twelve months with 22 percent of respondents now claiming to have complete visibility (up from just 9 percent in 2013). For the most part, these gains in visibility have resulted from stronger relationships between manufacturers and their top tier suppliers.

More than three quarters of respondents say that their relationship with top-tier suppliers is now strong enough for them to share real-time capacity and demand data.

“The upward trend is promising given the fact that almost three quarters of our respondents think they can achieve a globally integrated supply chain within the next five years,” Dobbs said.

“However, we believe there is still much work to be done around trusted relationships, transparency and technology enablement to foster these types of collaborative business models.“

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