I’ve already written multiple posts on the changes expected to impact industry and manufacturing, but what is one more on such a dense topic, particularly when the information backs up my previous statements? The highly acclaimed McKinsey Global Institute generated their Manufacturing the Future: The Next Era of Global Growth and Innovation report in 2012 and shed a lot of light on the changes to come.
Manufacturing’s role is changing
The McKinsey report claims that by 2025, “a new global consuming class will have emerged, and the majority of consumption will take place in developing economies,” which in turn will “create rich new market opportunities.” These are the people in developing countries (which I discussed in past posts) who are advancing and are becoming a consuming class as the wages in these low income areas rise and the technological advancement spurs more development, innovation, and an ability to compete within the manufacturing markets. Within established markets, however, this new consuming class will fragment demand, as customers within established markets “ask for greater variation and more types of after-sales service” (McKinsey). This comes back to the shift towards services that I discussed in a previous post and will touch on again a little later in this post.
Furthermore, advancement in technology such as a “rich pipeline of innovations in materials and processes – from nanomaterials to 3D printing to advanced robotics” promise to “create fresh demand and drive further productivity gains across manufacturing industries and geographies” (McKinsey). This development will in turn, along with shifts in manufacturing operations and production processes, give manufacturers “the opportunity to design and build new kinds of products, reinvent existing ones, and bring renewed dynamism to the sector” (McKinsey). So, to sum this up, technological advancement will offer opportunity to create new products and more efficient production methods, while emerging markets will create the opportunity to cater to entirely new consumer markets.
That is a lot of information all thrown in at once, but it highlights the areas within which manufacturing and industrial production are changing. Demand is shifting to emerging markets as they grow and develop, which in turn shifts the entire dynamic of the manufacturing industry. Where a location was once a cheap manufacturing hub, there will now be a shift to cater to this market as a well of new consumer capital. What needs to be addressed regarding emerging markets, however, is that these new consumers in emerging economies will “require very different products to meet their needs, with different features and price points,” that manufacturers must meet (McKinsey). Meanwhile, customers in established markets are “demanding more variety and faster product cycles, driving additional fragmentation” (McKinsey). This differentiation, then, will require new processes and policies to emerge.
Manufacturing and Services
One way that manufacturing continues to evolve is through the increasing importance and integration of services. Service inputs, “everything from logistics to advertising,” are making up an increasing amount of manufacturing activity (McKinsey). Services such as “R&D, marketing and sales, and customer support” have over time become “a larger share of what manufacturing companies do” (McKinsey). In fact, the McKinsey report estimates that “30 to 55 percent of manufacturing jobs in advanced economies are service-type functions, and service inputs make up 20 to 25 percent of manufacturing output.” Moreover, the role that services play in the production of manufactured goods are become so engrained that manufacturing companies rely on them to produce and distribute their goods; these include: “telecom and travel services to connect workers in global production networks, logistics providers, banks, and IT service providers” (McKinsey) and supply chain services.
A New Approach to Manufacturing Policy
Manufacturers and policy makers need new approaches and capabilities: “neither business leaders nor policy makers can rely on old responses in the new manufacturing environment” (McKinsey). With rising wages in developing countries, many manufacturers will be forced to move their production elsewhere, or perhaps begin to rethink their strategy. As manufacturing innovates and becomes less labor-intensive and more technologically driven and complex, other factors become prevalent: manufacturers “with more complex needs, must weigh factors such as access to low-cost transportation, to consumer insights, or skilled employees” (McKinsey).
Rethinking policy and procedure could result in what McKinsey has termed “a new kind of global manufacturing company,” which is an organization that
more seamlessly collaborates around the world to design, build, and sell products and services to increasingly diverse customer bases; a networked enterprise that uses ‘big data’ and analytics to respond quickly and decisively to changing conditions and can also pursue long-term opportunities. (McKinsey)
I will not get into Big Data here, as it will be the discussion of the next blog post, but this shift in how to think about production and manufacturing policy is significant. “After years of focusing on optimizing their value chains for low cost,” the McKinsey report suggests that “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.” Furthermore, as these new markets with their diverse demographics come into play, “companies will be challenged to make location trade-offs in a highly sophisticated, agile way. They will need to weigh proximity to markets and sources of customer insights against the costs and risks in each region or country” (McKinsey).
A main challenge will be companies trying to cater to such a wide and diverse customer base. Some of these emerging markets are not only exceedingly large, but they are also not monolithic, meaning that they are “made up of extraordinarily diverse regional, ethnic, income, and cultural segments, most of which can be large enough to compare to entire developed-nation markets” (McKinsey).
What is the solution to this challenge? Enter multi-shored corporations and multimodal plants.
Multi-Modal Manufacturing offers a key advantage of being able to “produce different product lines within the same factory, thereby maintaining economies scale despite demand fluctuations for each individual product” (The Economist, “The Factory”). Taking things a step further from being onshore in multiple places, allowing the manufacturing company to be able to produce quickly, reduce transportation costs, and cater to the local demographic, this multi-modal production also allows them to produce multiple commodities alongside each other, making use that much more of the same production space. Why create only one thing where you can create two or more? As market taste diversifies, so should production methods.
The Economist takes this a step further, noting that “[b]rilliant factories will also change the process of innovation,” incorporating things like “[v]irtual reality test labs,” which will “enable designers to connect remotely with engineers, suppliers and technicians and collaboratively create, test and troubleshoot prototypes” (Economist). This not only changes what is produced and how it is produced, but changes the entire manufacturing processes behind this innovated production: the corporate policies and the services and R&D sectors. The adoption of “[c]rowd-sourcing will allow manufacturers to leverage an extended workforce, often through intermediaries such as Kaggle, a platform that enables companies to submit problems to a network of global data scientists for solutions (The Economist, “The Factory”). This will become particularly significant for large North American companies that have offshored the majority of their manufacturing and thus rely almost entirely on creative innovation, R&D, and manufacturing services.
A Needed Shift in Education & Training
As factories and manufacturing processes change, so do the skills required of the labour force, therefore these shifts in manufacturing will also spur a need for a shift in Education & Training.
As it currently stands, the Economist predicts the emergence of a significant skills gap that will pose a very difficult problem: by “2020, the global economy could have a 90-95m oversupply of low-skilled workers (those without university training in developed economies and without secondary training in emerging ones)” do to the shift towards automation and the use of more intricate technology, or “smarter machines,” both of which are making “routine and simple administrative tasks obsolete, leading, in turn, to the need for better-trained workers” (The Economist, “Blue”).
This shift in manufacturing towards technological advancement in “robotics, automation of knowledge work and new materials” can potentially generate $12.3trn of value per year for the global economy by 2020” (The Economist, “The Factory”). It is also an obvious shift because it offers “greater intelligence in product design and manufacturing […] boost[s] resource efficiency and track[s] activity in supply chains” (McKinsey). However, new “information technologies and new methods will require new tools, talent, and mindsets. To respond quickly to changes in market requirements and meet the demand for faster product cycles, companies will need to build integrated ecosystems of suppliers, researchers, and partners” (McKinsey). All of this advancement sounds immensely profitable; however, if the manufacturing talent pool doesn’t advance with it, these technological advances will only generate “a growing scarcity of technical talent to develop and run manufacturing tools and systems” (McKinsey).
One way to ensure that this skills gap is bridged is to make sure that education and skills development is a key policy priority. As companies need to “build R&D capabilities as well as expertise in data analytics and product design,” there remains a need for “qualified, computer-savvy factory workers and agile managers for complex global supply chains” (McKinsey). In order to safeguard access to a diverse and well-trained talent pool, policy makers need to invest in “efforts to improve public education, particularly in teaching math and analytical skills” and they need to “work with industry and educational institutions to ensure that skills learned in school fit the needs of employers” (McKinsey).
One possible solution to this shift in policy is to incorporate Vocational and Technical Education (VTE) programs concurrent with scholastic studies, which will help to develop the necessary skill-set that the industry is in need of, as well as reduce youth unemployment rates post-graduation. Ultimately, the answer is for manufacturing companies to “invest in their organizations. Manufacturers have to fight hard to win the war for talent – everything from experts in big data, to executives with deep understanding of emerging markets, to skilled production workers” (McKinsey).
“Blue is the new white: Upgraded vocational skills are changing the future of work and economies,” The Economist, Aug 3rd 2014.
“Manufacturing the future: The next era of global growth and innovation,” McKinsey Global Institute, Nov 2012.
“The Factory of the 21st century: Why the factory matters and how it will transform,” The Economist, Aug 6th 2014.