Thou shalt decrease manufacturing and supply chain costs – a mantra under threat?

For those of you who are blue in the face following yet another conversation about where costs can be reduced, the fact that cost cutting features at the top of discrete manufacturers’ business strategies for the next two years, will come as no surprise.

As concerns about rising costs of raw materials show no signs of abating, and prices continue to be driven down, the only variable left to influence profitability is the manufacturing process itself, so cost reduction must be an ongoing focus.

Manufacturers in Western Europe and North America in particular remain concerned about the cost of raw materials and manufacturing, as do those in the metal fabrication industry, according to research undertaken by IDC Manufacturing Insights.

IDC interviewed 720 discrete manufacturers operating in eight countries across four sectors – industrial machinery, metal fabrication, hi-tech and automotive, in the largest survey of its type ever undertaken. Inventory carrying and energy costs also feature prominently in manufacturers’ lists of business concerns.

However a surprise change in emphasis is emerging. For the first time, cost cutting, along with improved productivity, is being forced to share the limelight with customer retention as a primary business strategy for operational excellence. In fact, reducing operational costs is actually cited as the third most important strategy being adopted by manufacturers in the next two years.

This relative relegation in the pecking order, is indicative of a sector which is licking its wounds after a tough few years, and adopting a more conservative approach to growth. This conservative approach is focused on protecting existing customers and market share from increased competition above all other strategies.

However, the renewed focus on customer retention places enormous pressure on discrete manufacturers to cut costs further, because in order to offset necessary investment in customer fulfilment and satisfaction, manufacturers have to squeeze every spare piece of capacity and efficiency out of their processes.

Manufacturers’ sentiment towards supply chain costs is a good example of this juggling act in practice. Reduction of supply chain costs ranks as an initiative of moderate priority and features significantly lower than decreasing manufacturing operational costs.

This is largely because the supply chain has an enormously important role to play in supporting customer retention strategies through optimising fulfilment. Cost cutting in the supply chain therefore has to be balanced carefully against investment in initiatives such as demand planning and forecasting, in the pursuit of greater customer satisfaction. Excessive cost cutting in customer focused areas will almost certainly be counterproductive to overarching business strategies.

But it seems manufacturers in Western markets are much better equipped to achieve this challenge. IT infrastructure continues to be viewed as a key component in facilitating customer fulfillment and efficiency of manufacturing operations. 63.8% of respondents in Western Europe and 57.6% in North America have either seen ROI in less than 12 months, or financially measurable hard or soft benefits from their ERP system.

Manufacturing cost reduction is viewed as one of the top benefits of ERP systems, second only to profitability and improved decision-making, which in itself helps to reduce costs. This is in contrast to China, whose relative immaturity means it has yet to recognise and exploit ERP systems for cost reduction and productivity optimisation.

The conservative cost and customer retention-led strategies highlighted in this research are crucial for manufacturers to remain competitive, but they have to be balanced against investment in innovation to secure competitive edge. While China has been slow to grasp the mantle when it comes to technology, its agility means that it can get products to market faster, and adopting a conservative, customer retention-led approach for too long may risk future success.

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Andrew Kinder is director of product marketing at Infor. He is charged with setting the strategy, determining focus industries, aligning forward development direction and driving global execution through marketing and sales enablement for advanced ERP and supply chain solutions.