Global manufacturing outlook growth while managing volatility

Global Manufacturing Outlook: Growth while Managing Volatility Global research commissioned by KPMG International from the Economist Intelligence Unit Interviewees Bob Kickham Senior Vice President, Procurement, Luvata Barbara Kux Head of Supply Chain Management, Siemens Ding Liguo Chairman, Delong Holdings Alex Molinaroli Vice President and President, Power Solutions, Johnson Controls Preface Global Manufacturing Outlook: Growth while Managing Volatility is a KPMG International report that investigates how large industrial manufacturers are dealing with market and input volatility in a global marketplace The report was written by the Economist Intelligence Unit, which also executed the online survey and conducted the interviews on behalf of KPMG International We would like to thank all of the executives who participated in the survey and interviews for their valuable time and insight The survey was conducted in June and the interviews in July of 2011, and both reflect the economic and financial conditions at that time Dr Steve New Fellow: Management Studies, Oxford University’s Säid Business School Martin Richenhagen Chairman, President and Chief Executive Officer, AGCO Henry Yu Chief Executive Officer, General Steel Holdings © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved About the survey A total of 220 senior manufacturing executives participated in the survey All respondents are responsible for, or significantly involved in, finance, supply chain, procurement or strategic development Respondents represent the aerospace and defense, metals, engineering and industrial products sectors, including industrial conglomerates All participants represent companies with more than US$1 billion in annual revenue; 40 percent hail from organizations with more than US$10 billion in revenue Nearly half (47 percent) of respondents are C-suite executives or board members They are geographically split among Western Europe (31 percent), North America (30 percent) and Asia-Pacific (25 percent), with the remainder coming from the rest of the world What are your organization’s global annual revenues in US dollars? Which of the following best describes your title? 0.9% Board member 0.5% CEO/President/Managing director 3.6% $1bn to $5bn 21.36% $6bn to $10bn $11bn to $25bn 48.18% More than $25bn 18.18% 1.4% 12.7% CFO/Treasurer/Controller COO 13.2% CIO/Technology director 6.4% 15.9% Other C-level executive SVP/VP/Director 5.9% 21.8% Head of business unit Head of department 17.7% Manager 12.27% Other In which region are you personally based? 3.64% What is your primary industry? 0.45% 21.36% 10.00% Western Europe 30.91% North America 31.36% 30.00% Aerospace and defense Asia-Pacific Middle East and Africa 24.55% Latin America Eastern Europe Engineering and industrial products (including industrial electronics) Conglomerate (eg, multi-industry organization) 22.27% 25.45% Metals © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Foreword At the end of 2010 it looked like the long-awaited economic recovery was finally underway, but a series of global shocks throughout 2011 have taken the steam out of the positive momentum, casting doubt on a wider market recovery Despite these challenges, Diversified industrial (DI) companies – accustomed to cyclical swings and continuous volatility – are clearly preparing themselves for the long haul In this year’s Global Manufacturing Outlook survey, growth has emerged as a predominant theme along with a continuing focus on cost, risk management and global supply chain resilience Today, companies are choosing to pursue growth through both product innovation and strategic alliances They are also finetuning product costs with more sophisticated design and process improvements, positioning production capabilities closer to growth markets, and enhancing transparency to manage global risk To provide context to this year’s survey results, the report contains a broad range of insights from KPMG partners, industry experts and innovative DI companies These experts also weigh in on what it will take for companies to respond to the challenges and opportunities of today’s volatile global economy and distance themselves from the competition Despite the prolonged uncertainties DI businesses face, many companies emerged from the 2008–2010 downturn with significantly reduced cost structures, more cash and liquidity, and a laser focus on their customers and markets In an age and industry where volatility has become a given, companies that possess these attributes and pursue these strategies will likely define the standard of success in the next five years Our report results show that DI companies are clearly positioned for growth, but they are doing so with a healthy respect for unpredictability and volatility Jeff Dobbs KPMG Global Head of Diversified Industrials © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Content Executive summary The business outlook: growth ahead, but risks loom Growth strategies: managing volatility Reworking supply chains to support growth Conclusion 14 24 33 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Executive summary Despite a generally profitable year, many leaders of global manufacturing firms face a number of challenges Just as the global economy looked like it was gaining momentum, the Japanese tsunami struck, unravelling many global supply chains Since then, volatility has become a key watchword, as a wide array of macroeconomic risks – most notably the European and US debt crises – raise uncertainty over future demand and the spectre of a “double dip” recession Yet executives at major manufacturers – organizations polled in an Economist Intelligence Unit survey representing firms with at least US$1 billion in revenue – are cautiously optimistic that they can realign their businesses toward top-line growth while managing the multitude of cost challenges KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Some of the key findings emerging from our research include: • Price volatility is the biggest headache for manufacturers The number-one challenge identified for the year ahead is that of price volatility of raw materials and other inputs Bob Kickham, senior vice president, procurement, at Luvata – a global metals and manufacturing group – recounts how a few years back a US$10 shift in copper prices in one day was an extraordinary occurrence He is now immune to daily swings of up to US$250 Selected by 44 percent of firms globally, ahead of any other issue, price volatility is especially acute for Asian firms, selected by 54 percent of respondents • Although the push toward emerging markets continues, this does not imply the demise of manufacturing in the West One of the more striking research findings is that the US registers second only to China as a destination for new sourcing in the next 12 to 24 months It ranks third highest even for emerging market manufacturers “We’re going in both directions,” says Martin Richenhagen, CEO of AGCO, a global farm equipment manufacturer, of his organization’s investment plans in both Asia and North America Of course, it is clear that emerging markets are a major driver of growth: 52 percent of manufacturers say their growth plans hinge on these markets But many plan to invest in mature markets too: 43 percent of respondents aim to expand capacity in developed markets, more than twice the proportion that plan cutbacks • In the pursuit of growth, manufacturers are prioritizing new products One noticeable shift when comparing respondents’ views from the last two years versus the next two years is the added attention that firms will devote to new products Over the next two years those planning to rely on existing products in existing markets will more than halve (from 44 percent to 19 percent), whereas those planning to sell new wares in existing and new markets will increase from 37 percent to 56 percent This will put a premium on innovation, and the survey shows that organizations are placing more emphasis on research and development (R&D) Indeed, innovation/R&D will be the second-highest priority for investment/expansion, after cost management Many are opening design centers in high-growth markets In doing so, however, they will be challenged by a shortage of skills, the top human resources concern cited by executives in those markets • Diversification into new markets and new products will converge with a push toward input and process standardization In response to both input price inflation and volatility, many organizations are prioritizing increased standardization More than half of manufacturers polled (55 percent) plan to standardize production processes across sites, while nearly half (45 percent) will move toward standardized inputs across product lines Given the concomitant shift toward a greater focus on new products, however, standardization poses a risk of homogenous product lines that could fail to engage consumers Another challenge will be managing the tensions that could arise between Sales and Procurement, as one function tries to push new products into the market while the other works to standardize inputs • Investment in supply chain risk management will continue, with a particular focus on transparency Many organizations have already made substantial investments in bolstering their risk management functions over the past couple of years Stung by the severity of the tsunami in Japan, this push will continue, with a particular focus on improved supply chain visibility, to better assess where potential vulnerabilities lie The use of technology to improve supply chain visibility is the number-one tool that executives plan to rely on to identify risks (selected by 49 percent of respondents) KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved The business outlook: growth ahead, but risks loom Many global manufacturers can look back on a good year Job growth picked up against one year ago, while both industrial output and global trade were robust The Institute of Supply Management’s Purchasing Managers Index (PMI), a monthly snapshot of sentiment among procurement executives, showed that as of mid-2011, confidence among manufacturers in the US had risen consistently for nearly two years This confidence was mirrored by manufacturing executives surveyed by the Economist Intelligence Unit in June 2011 One in four survey respondents describe themselves as “very optimistic” about their organization’s prospects for the coming one to two years, while a further 53 percent are “optimistic.” Luvata, a global metals and manufacturing group with revenues of over €3 billion, is one example “2009 was a very poor year, the eye of the recession But during 2010–11, we’ve doubled our profits and we expect to be back at 2008 levels by the end of 2011,” says Bob Kickham, the firm’s senior vice president for procurement “Next year, we see that trend continuing, with double-digit increases, while we’re cautiously optimistic in terms of growth in profitability.” But compared with findings highlighted in the 2010 Global Manufacturing Outlook1, a degree of caution has crept in, primarily triggered by the European and US debt crises that have dominated the headlines in mid-2011 Overall, confidence is slightly down on a year ago This matches a similar drop in the PMI (see chart) European manufacturers are the most ambivalent about prospects, while Asian firms are most bullish US manufacturers were also optimistic, perhaps because at the time of the survey, the full impact of the country’s debt crisis was not known Given the potential of downside risks, such differences are unsurprising The rate of gain in overall economic output has declined in the US and Europe, as the global economy lost some of its momentum This is filtering through to manufacturers Joe Kaeser, the chief financial officer of Siemens, a conglomerate with revenues of €76 billion in 2010, recently advised that increased efforts would be required to maintain growth going forward, as “the tailwind from the economic recovery is likely over.”2 Financial crises in the euro zone have dimmed Europe’s economic outlook Japan is still recovering from the effects of its devastating March tsunami Global Manufacturing Outlook: Relationships, Risk and Reach, KPMG International, September 2010 Siemens sees end to ‘tailwind of economic recovery’, Financial Times, June 28, 2011 KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved How optimistic are you about your business outlook in the next 12 to 24 months? 51% 27% 53% 25% 21% 15% 2% Very optimistic Optimistic Neither optimistic nor pessimistic 2010 Survey 6% 1% Very pessimistic Pessimistic 2011 Survey Source: Economist Intelligence Unit survey, 2011 and 2010 Purchasing Managers Index: Manufacturing January 2008–July 2011, a reading above 50 indicates a general expansion; below 50 a general contraction 70 60 50 40 30 20 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Jan-08 Apr-08 10 Source: Institute for Supply Management (ISM) KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved The Baltic Dry Index (BDI), an index of shipping costs, remains close to record-low levels Developed economies are just starting to grapple with their debt burdens, with government austerity ahead In emerging markets, the outlook is more positive, but risks lurk there too Inflation remains high while concerns mount about the overheating of China’s economy “The global steel industry has been volatile in past months, and is likely to remain uncertain in coming months,” says Ding Liguo, chairman of Delong Holdings, a China-headquartered steel manufacturing group with 2010 revenues of RMB9.9 billion (US$1.5 billion) He adds that steel production in China has been affected as the country implemented credittightening measures to rein in inflation and cool its housing market KPMG Insight Integrated Finance Governance David Frey KPMG Partner, Advisory, KPMG in China Financial management is becoming more central in managing risk both for companies operating in Asia and for Asian companies looking to expand globally In both cases managers are becoming responsible for transactions and processes that are occurring thousands of miles away across multiple locations To get a handle on that, I have been advising my clients to move their target operating model toward a structure with more integrated finance governance For too long finance has been stuck at headquarters where managers have been allowed to see their primary function as saying “no” to spending requests Instead, the most agile organizations are seizing on finance as a way to bring additional value in terms of analytics and insight As the amount of data and noise proliferates, finance offers a way to gain insights and align the underlying business case I’m seeing clients move toward center of excellence models where finance professionals, skilled in analytics, valuations, mergers, or treasury are housed together centrally where they can serve as a repository of knowledge for outlying offices That has been a very effective way to gain strategic leverage KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insight By showing an interesting case of a manufacturer grasping resource scarcity as a driver for recycling, the Global Manufacturing Outlook underpins that the sector is increasingly showing leadership by turning global challenges into opportunities, thus safeguarding sustainable economic growth in the long run Yvo DeBoer KPMG Special Global Advisor on Climate Change and Sustainability Which of the following cost control measures will you focus on in the coming 12 to 24 months? percent respondents Collaborating with suppliers to reduce costs 40% Consolidating production/manufacturing sites 36% Realigning our labour force to key growth areas 29% Standardising key inputs/components, eg global or regional platforms 28% Implementing shared back office/service centres 24% Outsourcing 24% Product range rationalisation Reducing our labour force Cutting back and/or holding off on planned investments Exiting unprofitable product lines and/or geographies 22% 20% 16% 16% Source: Economist Intelligence Unit survey, 2011 Case Study Johnson Controls: Raw material price pressures drive new recycling strategies One of the implications of the shift of the world’s center of economic gravity eastwards is a fundamental change in competition for raw materials such as lead Just four years ago, China accounted for 25 to 30 percent of global demand for lead; it now accounts for nearly 70 percent This has major consequences for Johnson Controls’ battery products “The biggest part of our core lead-acid business is lead, so the ability to secure lead at a 20 competitive price is crucial, as it’s the biggest single item on our bill of materials,” explains Alex Molinaroli, the business unit’s president and recycling operations across its core US and European markets – no mean feat given that lead is both heavy and toxic Fortunately, it is also an eminently recyclable The firm has ramped up its tracking of supply, right down to material In turn the firm’s specific levels of mining activity supply situation has eased significantly “In the US, we More significantly, it has now recover and recycle pushed itself to become the 97 percent of the lead we sell,” world’s biggest lead recycler, says Mr Molinaroli Other taking back all old batteries to manufacturers will no doubt provide a steady supply This be assessing where they can involves collection, distribution follow suit KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insight Advanced Cost Management Doug Gates KPMG Principal, Advisory, Business Effectiveness, KPMG in the US Companies are still closely watching cash expenditures and while there is more emphasis now on growth than two years ago, many are developing approaches to more tightly scrutinize new product development expenditures and expected ROI Many DI companies have streamlined their R&D staffs and integrated them into core product groups to get the right products to market, faster We’re seeing an increased focus now on the development of global design standards, processes, and systems to enable design activities to occur as if in a virtual global design center This provides greater design flexibility, which in turn supports global build flexibility KPMG Global Manufacturing Outlook: Growth while Managing Volatility 21 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insight Loek Helderman Head of Global Tax Efficient Supply Chain Management, KPMG in the Netherlands Supply Chain Restructuring Today’s environment demands an integrated supply chain that takes a holistic approach both inside and outside of company walls From an internal perspective, KPMG’s Value Chain Management approach ensures that supply chain decisions are not made in a vacuum When business and supply chain restructurings take place, our plans integrate related factors in addition to the commercial aspects, such as: • Tax • People/HR • Legal & regulatory • Finance, accounting and reporting If any additional developments in supply chain and supplier management occur, we encourage 22 clients to revisit these factors to prevent possible erosion of the commercial benefit or bottom-line efficiency From an external perspective, an integrated supply chain builds on relevant supplier knowledge and innovation capabilities beyond those that are internally available To effectively manage supplier relationships, I often advise clients to establish a dedicated supplier account management organization that is aligned to the strategic objectives of the business, and fully integrated into the company’s product innovation platforms and R&D function This is often best achieved by developing partnerships with a portfolio of strategic suppliers and combining a benefits-sharing mechanism to improve quality and service levels KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insight Graham Smith KPMG Global Head of Engineering & Industrial Products After a year of uncertain recovery and continued uncertainty, attitudes within the Engineering and Industrial Products (E&IP) sector remain cautious, according to Graham Smith, head of KPMG’s E&IP practice “Last year, the predominant focus was on cutting costs This year, it’s all about optimizing the back office and support functions, making previous cost improvements permanent and avoiding the ‘cost boomerang’ effect where costs creep back in.” To that end, companies are doubling down on performance measurement Smith observes, “management is taking a much closer look at how budget dollars are being spent and what the return is on that investment.” That emphasis creates a domino effect across the organization “Product managers and process owners have much less tolerance for waste,” adds Smith “They know such inefficiency acts as a drag on results and may lead to reduced budget allocations for the unit going forward.” As a result, many more organizations are refining their key performance indicators to monitor this on a continual basis, embedding them in the culture of the business and using them to guide spending decisions But while E&IP companies are looking to capitalize on efficiencies made over the last 12 to 18 months, most are intent on growing top-line results as well “Cost management isn’t going away, but leaders in the sector know that competitive differentiation will come from innovation and R&D.” Smith expects engineering and industrial companies to channel cost savings toward new and faster product development and strategic acquisitions that will strengthen their product portfolio and give them a leg up in key geographies Graham Smith “Product development and speed of response are key as flexible and more nimble organizations will win more market share by taking it from competitors in the current economic climate in mature markets,” Smith asserts Greater consolidation will take place as stronger, leading players refine their business models and enter into more joint ventures and partnerships in the emerging markets of Brazil, Russia, India and China (BRIC), as well as other accelerating economies “Having shored up their operating structures over the past two years, many E&IP organizations are now well-poised to seize opportunities in high-growth markets This in turn will mean revisiting the appropriateness of their operating models to ensure they are lean, flexible, contain minimum fixed costs, and can deliver an acceptable shareholder return.” KPMG Global Manufacturing Outlook: Growth while Managing Volatility 23 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Reworking supply chains to support growth Given the highly varied nature of manufacturing, supply chain strategies also vary widely Depending on the sector, some are highly centralized while others are highly distributed, for example Nevertheless, a number of trends stand out: • A shift toward standardization • Increased localization and responsiveness • Tighter collaboration with suppliers • A greater emphasis on risk management Standardization of parts and processes One priority for manufacturers is standardization, in terms of both production processes (55 percent) and inputs (45 percent) According to survey respondents, these are the top two supply chain initiatives that firms plan to embrace The appeal is clear: standardizing inputs across several products can help reduce the number of materials a company uses and, by concentrating on fewer materials, improve its purchasing power Standardized processes are similarly beneficial, enabling companies to share expertise from more efficient sites AGCO, for example, has a major initiative under way to improve profitability, based partially on standardization The project aims to improve the company’s cost of goods sold, 75 percent of which is accounted for by raw materials AGCO has set up an internal process to standardize its production techniques across its global production network For example, it is consolidating its manufacturing platform for midsize tractors to create a single platform It is also constructing a new factory in China, to be launched in 2013, that will be used to build a single drivetrain for its various midsize tractors “The reason we’re doing this is that we expect significant cost savings, of around 600 to 800 basis points,” says Mr Richenhagen In the longer term, it will also be used as a local production base But standardization is not without risks Dr Steve New, a Fellow at Oxford University’s Säid Business School, notes that some manufacturers that have taken standardization too far have created homogenous product lines that may fail to engage consumers or cater to the specific needs of customers KPMG Insight Dr Alexander Riedel KPMG Principal, Advisory, KPMG in Germany Now that certain markets such as automotive are recovering, many are concerned over expanding too rapidly given uncertainty with long-term market signals Realizing market potential over the next to 10 years will require a greater level of coordination, cooperation, and collaboration between OEMs and suppliers To optimize market potential over the next to 10 24 years will require a greater level of coordination, cooperation, and collaboration between OEMs and suppliers Prerequisites for success will include the tight alignment of demand forecasts, early sharing of new product concepts, and risk sharing on capital expenditures and new product development initiatives KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Global Manufacturing Outlook: Growth while Managing Volatility 25 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Given the shift toward a greater focus on new products, this is a risk that manufacturers will need to consider as they promote standardization Another challenge will be managing the tensions that will arise between sales and procurement, as one function tries to push new products into the market while the other works to standardize inputs (see case study Luvata – managing the tension between product uniqueness and input standardization on page 27) Increased localization and responsiveness A second theme, directly aimed at supporting the push into new markets, is in localizing or adapting products Forty-three percent of survey respondents selected this as a priority for their businesses, after standardization of inputs across product lines (45 percent) This is especially critical for emerging market firms, second only to process standardization Bringing production closer to clients (cited by 33 percent of respondents) will make it easier to be more responsive to changing demand patterns, although some manufacturers would also benefit from reduced distribution costs “The problem with buying from China is that to it well you need to buy in huge batches,” says Dr New This makes it hard to respond to shifts in the marketplace, once certain volumes are committed to However, for some firms, seeking to bring production closer to end-customers raises another tension: a desire to consolidate manufacturing and production sites, as noted earlier, in order to better manage costs Yet bringing supply chains closer to end-customers is unavoidable for some manufacturers Johnson Controls’ Mr Molinaroli notes that the nature of its battery business makes it fundamentally a local one Because of the weight and the materials used in the company’s batteries, a global supply chain does not work “We build our products and our supply chain all in the same region we serve,” he says Which of the following is applicable for your business in the coming 12 to 24 months, in terms of its supply chain strategy? We will increasingly seek to standardize our production processes across all sites 55% Where possible, we will increasingly seek to standardize our inputs across product lines 45% We are increasingly focused on customization/ localization of our products for key customers/markets 43% We will seek to reduce costs by shortening our overall product development lifecycle We will seek to shorten our supply chain, to bring production closer to key clients/markets We will divest ourselves of products that are not core to our business to concentrate on our capital allocation We will acquire our suppliers to reduce the risk of supply and price/margin volatility of key inputs 41% 33% 32% 31% Source: Economist Intelligence Unit survey, 2011 26 KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insight Gus Gaeta KPMG Principal, Advisory, Business Effectiveness, KPMG in the US The Shift to Nearshoring The practice of “near-shoring,” or “re-shoring” to bring distant operations closer to the end market has become increasingly more important within DI and across other industries that have significant manufacturing or assembly elements While the original motive behind off-shoring was to deliver cost savings by allowing companies to take advantage of labor, tax, or regulatory incentives, now rising costs in labor and logistics – as well as high inventory carrying costs caused by longer lead times – are starting to dilute those savings These factors are causing companies to revisit their business models As they embark on this process, I advise them to be diligent in choosing new locations as they expose themselves to intellectual property, currency, environmental, compliance and supplier risks that must be hedged by proactive business-continuity planning to minimize supply chain disruptions As companies redistribute their global capabilities, I often suggest the following tips: Analyze demand Examine how stable your demand is in a prospective region since you need to be confident that the volume needed to justify a major move is there and will remain Seek manufacturing centers of excellence Have a clear perspective of the capabilities that the location you are considering has to offer, making sure there is an abundance of the skill sets for your type of manufacturing Look for manufacturing centers of excellence within your field Build strong procurement Ensure your procurement organization is strong enough to help you qualify sources and manage and monitor suppliers on a global basis Your suppliers will need to be global and flexible enough to follow your footprint Expand existing operations Make sure that you are fully leveraging any local facilities and capabilities you may have rather than starting from scratch It is easier to build upon existing capacity and infrastructure to “expand a campus.” Campus environments also lend themselves well to modular manufacturing because it is easier to add on, adapt and take away capabilities as needed, helping to increase flexibility and responsiveness Case Study Luvata: Managing the tension between product uniqueness and input standardization Manufacturers’ strategy of expanding into new product areas can collide with the desire to increase supply chain standardization Luvata is a case in point One of the company’s strategic aims is to expand into unique product areas, to avoid overly commoditized markets However, Bob Kickham, senior vice-president for procurement, is pushing standardization to keep costs under control “All buyers are for standardization,” he says “Unfortunately, our strategy is around getting niche and getting close to customers.” For example, one of the firm’s operating units, which supplies tubes to the air conditioning industry, works to make these smaller and lighter, using new materials “We’re trying to push the boundaries to make more efficient, non-standard products,” he says “All this causes strong, healthy tension between the guys that manage the supply chain and those managing customers,” says Mr Kickham Part of the solution is closer collaboration with suppliers “We’re trying to create more and more forums not to beat up suppliers on raw price, but to look at how we can jointly take our costs and share value on that,” he says “If we can look at smarter ways of reducing costs, while both making profits, that’s a good place for us to be.” KPMG Global Manufacturing Outlook: Growth while Managing Volatility 27 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Dr Gerhard Dauner KPMG Insight European Leader for Diversified Industrials, KPMG in Germany Dr Gerhard Dauner, KPMG’s European Leader for Diversified Industrials (DI), sees uncertainty making a return “At the end of last year,” says Dr Dauner, “people began to feel more optimistic Order intake was increasing and consumer spending looked like it might make a return.” But lingering questions over the debt crisis in Europe, the slow recovery in the United States and rising inflation in emerging markets have cast new doubts “As a result,” he says, “DI players in Europe are stepping back and questioning whether this is the right environment to make major acquisitions.” With volatility expected to remain a constant well into next year, European DI companies are partnering much more closely with suppliers “Whereas one year ago,” says Dr Dauner, “the emphasis was on risk and financial health checks to ensure supplier solvency, now it’s much more about managing the information flow.” Today, managers are spending far more time exchanging information to gauge demand, adjust inventories and gain as much visibility as they can in order to be able to make short-term adjustments if required However, it is crucial not only to maintain the flexibility to reduce capacity in periods of recession, but also to effectively extend production volume in order to seize business opportunities in times of economic revival With so much volatility, it is inevitable that companies in industrial markets consider making structural changes to their operating model in order to secure a globalized customer and supplier base, while at the same time delivering optimized cost structures However, ”The future of cost management will not necessarily be about trimming costs, but rather about being innovative in achieving sustainable cost efficiency turning to proper working capital management solutions,” 28 Dr Dauner explains Furthermore, moderate growth expectations in Europe force entrepreneurs to think about broadening their presence in emerging countries that not only represent attractive customers and offer the potential for raising additional cost advantages in their supply chain As DI entities flex their business models, many are taking a look inward to see if they have the right competencies and processes to capitalize on long-term trends Dr Dauner notes, “DI organizations face a shortage of engineers and operations experts, not only in Europe, but in key locations around the globe.” Dr Gerhard Dauner That issue has implications on the growth agenda as well “DI players in Europe recognize that they must invest in innovation and tools for growth But many of my clients are grappling with the issue of how to allocate their R&D business globally and where to position their competency centers.” To gain insight, Dr Dauner says, DI organizations are digging deeper into their business data “We talk about business intelligence,” explains Dr Dauner, “but the challenge is turning that into strategic and operational planning intelligence in order to tease out emerging megatrends and position the organization to respond on a regional basis.” Mastering those issues is key to sustainability Sustainable business used to be thought of as just a cost issue But Dr Dauner says DI leaders, particularly in Europe, see it as a core strategic issue, one that informs better sourcing, partnering and growth “Ultimately, sustainability is at the heart of profitability and serves as one of the ways that savvy organizations are looking to ride out continued market turbulence.” KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Closer collaboration with suppliers Cost, quality and reliability, the top three priorities for supply chains cited in last year’s research, remain at the top this year Yet the importance of trusted relationships with suppliers has nearly doubled One obvious reason is the need to deepen relationships in order to help ride out volatility in prices A hallmark of this is a rise in longer-term contracts with suppliers, aimed at stabilizing key input prices One-inthree survey respondents says his or her firms are seeking to increase the use of long-term contracts, while most others will retain existing contract durations Another element is speed: working more closely with suppliers can help speed up operational processes and information flows, which in turn can assist with both cost and quality Closer engagement with suppliers also supports the drive to develop new products Siemens, for example, is encouraging supplier involvement much earlier in its projects “What we more and more is to collaborate cross-functionally and bring our suppliers and R&D teams together in order to explore new ways to jointly optimize functionality and cost,” says Ms Kux This activity was initially met with skepticism, given fears of exposing intellectual property These worries have receded, however “Combining the supplier’s innovational strength with our own adds value by revealing more efficient ways to meet specifications,” says Ms Kux “It doesn’t help if suppliers talk to a supply chain management guy, and he then talks to R&D.” One example of Siemens’ successful collaboration with suppliers can be found with printed circuit boards, where slight size adjustments substantially reduce waste on the supplier side “Savings potential like these only become obvious when we [collaborate] with suppliers,” says Ms Kux A greater emphasis on risk management and supply chain transparency The past few years have served as a wake-up call for many manufacturers When asked to rate the effectiveness of various aspects of their supply chain, survey respondents are least confident about risk For example, nearly one in five (18 percent) describes his or her organizations as “not effective” at managing supplier risk audits and a further one in three (32 percent) as only “somewhat effective.” But the depth of the recession, the impact of various natural disasters and a hugely unpredictable economic cycle have all forced firms to hone their risk management practices “Our risk management function includes the supply chain and goes all the way down to alternative suppliers, alternative materials, alternative locations, where capacity is, where we need capacity allocated and so on,” says Mr Molinaroli “It’s all incredibly more robust than how it used to be.” Regarding your supply chain as a whole, which of the following are the most important attributes? 58% Cost Quality 45% 49% Reliability Trusted relationships Access to technology/R&D Proximity to production sites Ability to co-create on new products/components 30% 14% 22% Flexibility Access to talent 66% 55% 57% 15% 11% 14% 16% 8% 10% 7% 9% 41% 2011 2010 Source: Economist Intelligence Unit surveys, 2011 and 2010 KPMG Global Manufacturing Outlook: Growth while Managing Volatility 29 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Many survey respondents say they are investing in risk management, especially in technology, to improve supply chain visibility (49 percent) Japan’s devastating tsunami highlighted how little many manufacturers knew about their supply chains Increased supply chain complexity in recent years has been inevitable for many, as products have become more complex “Once things have a microchip within them, your supply chain is immediately 50 times more complex,” says Dr Steve New, a research fellow at Oxford University’s Säid Business School As a result, even firms with relatively sophisticated supply chains can be impeded by disruptions Hence the notion of supply chain visibility has been gaining traction: adding technology to gain a better understanding of where risks might lie will be the primary focus for manufacturers polled for this report “Most organizations have good visibility of their tier-one suppliers, and then it gets progressively cloudy beyond that,” says Dr New Which of the following tools/approaches will your organization rely on most in the coming 12 to 24 months to identify risk in your supply chain? Use of technology to increase visibility across the supply chain 49% Developing the risk management capabilities of key suppliers and/or setting appropriate standards 45% Conducting assessments of our supply chain processes 45% Dashboards and alerts to provide early warning of issues Use of simulations/scenario planning/impact assessments/continuity planning Increasing personnel/resources for our risk function 40% 31% 27% Source: Economist Intelligence Unit, 2011 KPMG Insight Kimberly Rodriguez KPMG Principal, KPMG in the US Tips for de-risking global supply chains: Look beyond tier suppliers to have real transparency in your supply chain Expand and correlate risk parameters to include geopolitical, economic and environmental risk issues in addition to the basic quality and delivery factors and build these factors into your sourcing and pricing decisions Make all associated risk data available in real time, regularly updated and benchmarked across the supply chain Evaluate your supply chain globally and implement processes regionally to account for the dramatic differences in supplier maturity, access to information, and quality 30 KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Firms will also build on closer supplier collaboration to help develop the risk management capabilities of key partners (45 percent) Other tools, such as risk dashboards (40 percent) and the use of scenario planning or simulations (31 percent), are also gaining traction Beyond the tools themselves, many firms are also working to ensure that they have multiple suppliers for key inputs This is a balancing act, however, as having too many suppliers makes it difficult to develop the streamlined supplier networks for which 51 percent of the survey respondents are striving Overall, respondents’ strategies toward number of suppliers are fairly even: the proportion of firms planning to increase the suppliers’ list (29 percent) is balanced out by those that seek to reduce it (28 percent) In some instances, however, options may be limited AGCO’s Mr Richenhagen says that despite the importance to manufacturers of having multiple suppliers for the same components to combat risk, it is sometimes not feasible to so “You can’t just change an engine; this is a major operation, like open heart surgery, so it would take a huge amount of engineering and planning to change suppliers,” he says Instead, a greater emphasis should be devoted to understanding the financial health of suppliers Whatever the approach, manufacturers will be focusing on such risk practices in the years ahead KPMG Insight Supply Chain Transparency Dr Gerhard Dauner European Leader for Diversified Industrials, KPMG in Germany Since the supply chain represents a significant share of the typical operating cost for a manufacturing company, even a slight uptick in productivity can create considerable savings Rationalizing the supply base is one way to this, but the disaster in Japan underscored the need for balance As DI organizations continue to look for ways to reduce cost and the number of suppliers, they will need the visibility in their supply chain to avoid undue concentrations in any area and to get the flexibility they require in order to quickly react to changes in demand Hence, we are seeing demand from our clients for tools and approaches that provide greater transparency across the supply chain KPMG Global Manufacturing Outlook: Growth while Managing Volatility 31 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Conclusion As manufacturers pin their hopes on a return to growth, they will so with fresh lessons in mind Importantly, most are looking ahead to the coming years – with much expected macroeconomic volatility – with a robust approach to cost and risk management In short, companies are: • Employing sophisticated cost management techniques Rising or volatile input prices are here to stay Becoming smarter about cost management – rather than rudimentary cost-cutting – will become the ethos of the company and an important factor in every decision made • Improving and deepening both the corporate and supply chain risk management team and tools, and linking them to more detailed demand forecasting Leading manufacturers are taking more vigorous measures to assess end-market shifts in order to respond more rapidly • Gaining a deeper understanding of the precise make-up and health of supply chains, beyond only tier firms Increasingly complex supply chains have exposed firms to hidden risks several tiers down Manufacturers able to gain visibility of these relationships will be better positioned to identify and react to geographic and financial vulnerabilities • Increasing collaboration with, and supporting, key suppliers Especially as cost pressures rise, deeper relationships with suppliers – encompassing not only supply chain personnel, but also R&D, finance and other functions – will continue to increase in importance As one executive describes it, manufacturers have to realize that while the old industrial model was essentially a solo sport, with vertical integration “from womb to tomb,” the new model is far more of a team sport, with greater interdependencies requiring far more collaboration 32 KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Global Manufacturing Outlook: Growth while Managing Volatility 33 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Global Diversified Industrials Leaders: Jeff Dobbs Global Head of Diversified Industrials T: +1 313 230 3460 E: jdobbs@kpmg.com Eric Damotte Global Head of Metals T: + 349 1456 3406 E: edamotte@kpmg.es Graham Smith Global Head of Engineering & Industrial Products T: +44 20 7311 4731 E: graham.smith@kpmg.co.uk Dr Gerhard Dauner European Leader, Diversified Industrials KPMG in Germany T: +49 89 9282 1136 E: gdauner@kpmg.com Joerg Strater Global Head of Tax for Diversified Industrials T: +49 211 475 8381 E: jstrater@kpmg.com Marty Phillips Global Head of Aerospace & Defense T: + 678 525 8422 E: mwphillips@kpmg.com Andy Williams ASPAC Leader for Diversified Industrials KPMG in Singapore T: +656 411 8088 E: andrewmwilliams@kpmg.com.sg Additional Key Contacts: Yvo De Boer KPMG Special Global Advisor Climate Change & Sustainability KPMG in the UK T: +44 20 7694 2931 E: yvo.deboer@kpmg.co.uk Douglas Gates KPMG Principal, Advisory Business Effectiveness KPMG in the US T: +1 703 286 6691 E: dkgates@kpmg.com David Frey KPMG Partner, Advisory KPMG in China T: +8 610 8508 7039 E: david.frey@kpmg.com Loek Helderman KPMG Head of Global Tax Efficient Supply Chain Management KPMG in the Netherlands T: +31206 561415 E: Helderman.Loek@kpmg.nl Peter Fung Head of Industrial Markets KPMG in China T: +8 610 8508 7017 E: peter.fung@kpmg.com Gus Gaeta KPMG Principal, Advisory Business Effectiveness KPMG in the US T: +1 312 665 2389 E: ggaeta@kpmg.com Richard Rekhy Head of Advisory KPMG in India T: +91 124 307 4303 E: rrekhy@kpmg.com Dr Alexander Riedel KPMG Principal, Advisory KPMG in Germany T: +49 89 9282 1210 E: ariedel@kpmg.com kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future No one should act on such information without appropriate professional advice after a thorough examination of the particular situation The views and opinions expressed herein are those of the survey respondents and not necessarily represent the views and opinions of KPMG International © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm All rights reserved The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Designed by Evalueserve Publication name: Global Manufacturing Outlook – 2011 Publication number: 110841 Publication date: September 2011 Kimberly Rodriguez KPMG Principal, Advisory KPMG in the US T: +1 313 230 3000 E: kdrodriguez@kpmg.com Michele Hendricks Global Executive for Diversified Industrials KPMG in the US T: +1 212 872 3641 E: mhhendricks@kpmg.com Martha Collyer Senior Marketing Manager KPMG in Canada T: +1 41 777 3505 E: mcollyer@kpmg.ca [...]... development initiatives KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Global Manufacturing Outlook: Growth while Managing Volatility 25 © 2011 KPMG... infrastructures are built with steel.” KPMG Global Manufacturing Outlook: Growth while Managing Volatility 13 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Growth strategies: managing volatility Manufacturers are reshaping... respondents Cost management 39% Innovation/R&D 35% Production capacity in high -growth markets 32% Production capacity in domestic markets 24% Supply chain resilience 24% Risk management Overall top-line growth 22% 14% Source: Economist Intelligence Unit survey, 2011 18 KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss... development of global design standards, processes, and systems to enable design activities to occur as if in a virtual global design center This provides greater design flexibility, which in turn supports global build flexibility KPMG Global Manufacturing Outlook: Growth while Managing Volatility 21 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network... 2011 KPMG Global Manufacturing Outlook: Growth while Managing Volatility 9 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved Growth and price forecasts 2010–2015 2010e 2011f 2012f 2013f 2014f 2015f Real GDP growth (PPP... rights reserved KPMG Global Manufacturing Outlook: Growth while Managing Volatility 33 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Global Diversified Industrials Leaders: Jeff Dobbs Global Head of Diversified... uncertain demand (35 percent) KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insight Marty Phillips KPMG Global Head of Aerospace & Defense... improve quality and service levels KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insight Graham Smith KPMG Global Head of Engineering & Industrial... E&IP organizations are now well-poised to seize opportunities in high -growth markets This in turn will mean revisiting the appropriateness of their operating models to ensure they are lean, flexible, contain minimum fixed costs, and can deliver an acceptable shareholder return.” KPMG Global Manufacturing Outlook: Growth while Managing Volatility 23 © 2011 KPMG International Cooperative (“KPMG International”),... Intelligence Unit survey, 2011 16 KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity Member firms of the KPMG network of independent firms are affiliated with KPMG International KPMG International provides no client services All rights reserved KPMG Insights Joerg Strater KPMG Global Head of Tax for Diversified ... realign their businesses toward top-line growth while managing the multitude of cost challenges KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG International Cooperative... Preface Global Manufacturing Outlook: Growth while Managing Volatility is a KPMG International report that investigates how large industrial manufacturers are dealing with market and input volatility. .. supply and price/margin volatility of key inputs 41% 33% 32% 31% Source: Economist Intelligence Unit survey, 2011 26 KPMG Global Manufacturing Outlook: Growth while Managing Volatility © 2011 KPMG