An exciting new era of global manufacturing is ahead - driven by shifts in demand and by innovation in materials, process, and information technology. The prospect is for a more “global” manufacturing industry in which developing economies are the source of new customers as well as the source of low-cost production. It will also be a period of rapid innovation, based on new technologies and methods. However, these opportunities will continue to evolve in an environment of far greater risk and uncertainty than before the great recession. Some forces are already being felt: rising wages in low-cost locations, the shift of global demand towards developing economies, the proliferation of products to meet fragmenting customer demand, and the growing importance of value-added services.
Manufacturing continues to matter a great deal to both developing and advanced economies. The McKinsey Global Institute reports that global manufacturing output (measured as gross value added) continues to grow by 2.7 percent annually and grew by 7.4 percent in large developing economies between 2000 and 2007. Over the next 15 years worldwide consumption will double and developing economies will continue to drive global growth. New consumers will require different products with unique features and price points, forcing manufacturers to offer more varieties and SKUs (stock keeping units). At the same time, customers in more established markets are demanding more variety and faster product cycles, driving additional fragmentation.
Manufacturing is diverse and not subject to simple one-size-fits-all approaches. It is evolving to include more service activities, and new innovations in materials, production processes, and information technology will create opportunities to develop new kinds of products. These innovations will create additional demand and drive further productivity gains across manufacturing industries and geographies.
To translate strategies into action and make the most of long-term investments, companies will need agile operations. Agility in operations goes far beyond simply ensuring business continuity in the face of risk; it is about exploiting opportunity. Companies with agile operations not only respond more successfully to difficulties, but they also preempt possible disruptions. To execute with agility, companies will need to develop new operational capabilities and methods including enhanced data-gathering and analytics to better manage supply-chains and to drive innovation. This will require better cross-functional and cross-geography collabortation.
The way footprint decisions have been made in the past, especially the herd-like reflex to chase low cost labor, needs to be replaced with more nuanced multi-factor analyses. Companies must look beyond simple labor-cost arbitrage to consider total factor performance across the full range of factor inputs and other forces that determine what it costs to build and sell products - including labor, transportation, materials, energy, capital, regulation, and trade policy. In doing so, the answers to key questions will often shift: for example, where to locate plants, or whether to automate. For example, the cost of automation relative to labor has fallen by 40 to 50 percent in advanced economies since 1990. In addition, advances in resource efficiency promise to cut the use of materials and energy. The use of big data will enable substantial improvements in how companies respond to customer needs and how they run their machinery and operations.
After years of focusing on optimizing their value chains for low cost, many manufacturing companies are being forced to reassess the balance between efficiency gains from globally optimized value chains and the resilience of less fragmented and dispersed operations. Companies will need to develop a more granular view of markets and customer segments to identify and tailor products and supply-chain strategies to specific subsegments of markets.
Manufacturers need to continue the relentless drive for productivity improvements. The pursuit of “lean” manufacturing processes is not finished. There continues to be a wide variation among the most and least productive players within industries, and the process of simplifying, consolidating, and removing inefficiencies from operations is extending to new areas, such as resource productivity.
To remain competitive in the new era of global manufacturing and take advantage of emerging opportunities, manufacturing companies will be challenged to organize and operate in fundamentally different ways - an organization that more seamlessly collaborates globally to design, build, and sell products and services to an increasingly diverse customer base. These organizations will be intelligent and agile enterprises that harness big data and analytics, and collaborate in ecosystems of partners along the value-chain, to drive decision making, enhance performance, and manage complexity.