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The manufacturing sector in many countries is in a state of transition. Growing in emerging economies; shrinking but becoming more productive in advanced economies. The new manufacturing giants with low wage economies tend to compete on cost, the established players prefer to move up the manufacturing value chain to compete on technology and innovation. Lean manufacturing techniques which control costs and improve quality are pervasive.
Key messages
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Many policy makers in western economies argue for the need to rebalance economies from an over reliance on services, particularly financial services. Manufacturing is seen as a source of stronger and more sustainable growth. The manufacturing sector faces several significant challenges: a shortage of lending, currency volatility, fears over the sustainability of supply chains and downward pressure on prices. There has been a global shift in manufacturing from west to east. The manufacturing sector is growing rapidly in India and China and has shrunk in most advanced economies. Western companies have progressively downsized over the past decades, which has resulted in increases in manufacturing productivity. Lean manufacturing techniques are almost universally adopted. Emerging markets concentrate on mass manufacturing and competing on price. The top three countries in the Global Competitiveness Index are Asian, and G7 countries are falling down this index. Manufacturers in the west have moved up the value chain to concentrate on more technically advanced industries or products. They compete with low wage economies by competing on meeting customer needs, and on innovation and flexibility. Innovation has been identified as one of the main drivers of growth. Advanced economies concentrate on setting up the structure and systems for production and bundling products and services to provide a solution to customers. They often outsource the purely productive element. Management accounting started as a discipline to support better manufacturing decision making. Although the discipline has evolved to also support service industries and not-for-profit organisations, it has also evolved to keep pace with new developments in manufacturing technology and practices. Competition will intensify for the territory at the top of the manufacturing value chain, which may lead to protectionist measures such as tariffs, subsidies and exchange rate manipulation. But this protectionism will not seriously impede the general trend for globalised manufacturing.
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About CIMA
CIMA, the Chartered Institute of Management Accountants, founded in 1919, is the worlds leading and largest professional body of management accountants, with 172,000 members and students operating in 168 countries, working at the heart of business. CIMA members and students work in industry, commerce and not-for-profit organisations. CIMA works closely with employers and sponsors leading-edge research, constantly updating its qualification, professional experience requirements and continuing professional development to ensure it remains the employers choice when recruiting financially trained business leaders. According to independent research conducted by the University of Bath School of Management, CIMAs syllabus and examination structure are the most relevant to the needs of business of all the accountancy bodies it assessed. For more information about CIMA, please visit www.cimaglobal.com Follow us on Twitter at www.twitter.com/CIMA_News
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J.P. Morgan Global PMI: Global report on manufacturing. July 2010 World Industry Perspectives Article. IHS Global Insight. June 2010
IHS Global Insight points out that while China has a commanding lead in low tech areas such as textiles, apparel, and appliances, the US has a larger share in high tech areas such as aircraft, special industrial machinery, and medical and scientific equipment. The challenge is to move up the value chain, as the returns are much higher. There are signs that Chinese manufacturers are attempting to do this, which will put pressure on western firms to keep one step ahead. This requires a clear strategy, an understanding of customers needs demand and a workforce and facilities that are sufficiently skilled and flexible. As manufacturers have moved up the value chain, they have tended to become leaner. While thousands of jobs were lost due to the recession, firms in the west have been downsizing their operations for several decades. As a result productivity has improved markedly as fewer workers have produced higher value-added goods in sectors such as aerospace and pharmaceuticals. Between 1990 and 2002, manufacturing productivity grew at 3.9% per year in the US compared with 2.3% for businesses overall. Indeed US based technology industries consistently achieve higher productivity and wage levels than their counterparts do in China, according to IHS Global Insight. The search for operational excellence is ongoing and many firms are moving towards lean manufacturing methodologies to achieve their best performance. This will require them to increase their focus on eliminating waste or non-value added processes within their production systems. It will also require them to invest more in innovation, even at a time when their revenue streams may come under pressure from public sector spending cuts and doubts over private sector recovery.
How could this happen in an organisation with a supposed quality oriented philosophy and an investigative approach which advocated going to the source of any issue? How did defective parts enter the supply chain? Why were quality problems not identified or actioned more promptly? The consensus among commentators appears to be not that Toyota abandoned its lean approach; but that its rapid growth encouraged the company to follow the practices mechanically, rather than in the spirit of the principles. For example, the problem with the floor mats was not due to defective components from suppliers (as those met specifications); therefore it was not an engineering issue, but a design issue. This suggests that the suppliers were not working in the collaborative manner with Toyota assumed by a lean manufacturing approach, probably because the supplier network expanded so quickly. In a similar fashion, it seems likely that colleagues from the new plants did not benefit from Toyotas previous resource intensive policy of mentoring to share good practice and disseminate values. Toyotas own assessment of where it went wrong was the pace at which we have grown may have been too quick...Toyotas priority has traditionally been first: safety; second: quality and third: volume. These priorities became confused...We pursued growth over the speed at which we were able to develop our products and our organisation. The company also felt it could have handled its response to the safety issues more effectively. We must think more from a customer first perspective rather than a technical perspective when investigating complaints..we must communicate faster, better and more effectively with customers and regulators. Toyotas solutions include new regional quality officers to give regions more autonomy and decision making with regard to recalls and other safety issues. It also established a new special committee for global quality, and teams to investigate quickly reports of unintended acceleration. It reinforced its design capability by transferring one thousand engineers to focus on design of components and other quality issues. It lengthened product lifecycles by four weeks to give more time to address safety/quality issues and improved monitoring systems to better capture intelligence on quality/safety concerns from various sources (including web mentions, customer calls and government databases). It intends to equip more vehicles with the technology to diagnose problems and report faults (black boxes) and has allowed external parties to review its technology. Source: Testimonies of Akio Toyoda, President Toyota Motor Corp. and Yoshimi Inaba, President and COO Toyota North America to US Congress committee Feb 2010 The Humbling of Toyota Bloomberg Business Week, March 22 and 29
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Britain: balance and power. Groom, B. Financial Times. 22 July 2010 2010 Global Manufacturing Competitiveness Index. Council on Competitiveness. June 2010
www.globalinnovationindex.org/gii/main/home.cfm The global competitive landscape for manufacturing is undergoing a transformational shift that will reshape the drivers of economic growth, high value job creation, national prosperity, and national security, said Deborah Wince-Smith, the councils president. Pulling these factors together, it is clear that while manufacturing has emerged from recession, the market in which firms must now operate will be more competitive than before the recession. Constant downward pressure on prices due to a combination of weak demand in the rich countries and lower wage costs in emerging markets will force manufacturers in both west and east to adapt the way they do business. Emerging markets, especially those in Asia, will continue to play to their strength of price competitiveness. The Council on Competitivenesss Global Manufacturing Competitive Index (GMCI), rates China, India and Korea in the top three positions, not just for this year but also as its forecast for five years hence. These countries have moved to take over the mass manufacturing that western firms can no longer afford to carry out. It appears that China, India and Korea are aware of this and pressing their competitive advantage, the report said.
This withdrawal from mass manufacturing means that western nations will decline in terms of overall competitiveness. Only three G7 countries will be in the top ten of the GMCI by 2015. In fact over the next five years, the ten fastest rising countries in the GMCI are all emerging economies while eight of the ten fallers are from Europe or North America. Firms will need to respond by focusing on the value added and innovation areas of manufacturing. This process has been underway already. The shift away from the basic manufacturing towards technology based and value added production has encouraged manufacturers to reconsider how they operate and what they offer customers. Rather than performing all productive tasks in-house, companies are building the capabilities to design and integrate systems, while managing networks of component and subsystem suppliers. Research published in the MIT Sloan Management Review5, shows companies such as IBM, General Electric, Rolls-Royce and EDS already compete aggressively on this basis. It highlights how Rolls-Royce provides airlines with power by the hour: selling engines along with the services to maintain and upgrade them over many years. The long-term rise of consumerism in the west now seen in the east has prompted manufacturers and retailers of fast moving consumer goods (FMCG) to learn lessons from the traditional industrial sector. FMCG are products that are frequently purchased by consumers such as toiletries and cosmetics and non-durable items such as light bulbs and batteries. While this includes a range of companies from supermarkets to pharmaceuticals all have had to respond to the changing trend in consumer spending. Consumers tend to switch from luxuries to necessities during tough economic times and FMCG firms have had to respond swiftly to change their stocks and cut costs in order to make prices competitive. As with heavy industry, this has exacerbated an existing trend. WalMart is renowned for its ability to lower prices by negotiating directly with each link in its supply chains to seek cost cuts, for example. Faster recovery in emerging markets has also encouraged FMCG firms to shift their focus from west to east. Unilever recently said that the impressive demographics in the Middle East North Africa region gave it immense headroom for growth.6
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Charting a path towards integrated solutions. Davies, A . Brady, T. Hobday, M. MIT Sloan Management Review. Spring 2008. Vol 47. No 3 Unilever smiles all the way to the bank as FMCGs ride out the storm. Zawya.com. 28 May 2010 Unequal Compliance. The 6th GTA Report. Centre for Economic Policy Research. June 2010
Simon Evenett, a professor at St Gallen University in Switzerland who runs GTA, says that if trading partners are given grounds to suspect that a depreciation was deliberately induced or reinforced by a government, this may trigger retaliation in different forms. Depreciations had better appear to be market-driven or the potential for difficult commercial policy disputes will increase, he says. Public adherence to open, that is non-interference in, marketsincluding currency markets - will be important here.
Conclusion
The scale of the downturn and the outbreak of currency disputes have raised questions over the future for globalisation There is little evidence, however, that supply chains have broken down or that countries are withdrawing from the global economy. If anything global production systems have become more consolidated with a greater amount of value moving from west to east. To fund sustainable growth essential to their survival, manufacturers must focus their technical, innovative and financial skills on the activities where they can add most value in an increasingly competitive environment.
For many products, even in competitive markets, cost is not the most important dimension. Time to market is a particularly important factor for fast moving industries, or those where the majority of sales occur in the Christmas season (for example, computer peripherals). Faster product development can lead to improved returns because of a temporary ability to charge premium prices before competitors enter the market; and the possibility of consolidating an early dominance of the market into a permanent market leader niche. The management accountant can contribute to faster product development by generating cost information which supports rapid decision making, not just about products but about improving the capacity of development or production processes. They can support effective project management by ensuring that projects are properly costed, that ROI assumptions are fair, and that appropriate key performance measures are established to ensure the project remains on track. They can also provide input on pricing strategies to maximise revenues based on competitive conditions; stock control; and information of changing demographics and consumer trends. The management accountant can break down profit and cost data to identify the contribution of each profit centre, taking account of variable and controllable costs. This can inform strategies such as modularisation or standardisation, in which management seek to reduce the number of parts used by making as many components as possible common to more than one model or variant of the product. Customisation of the product for different markets happens as late as possible in the production process. Both these approaches simplify supply chains and therefore reduce costs and improve time to market. Advanced manufacturing techniques (both production technologies such as robotics and management tools such as just-in-time) have led to a reducing proportion of costs being accounted for by direct materials and direct labour. Other parts of the value chain therefore become more important than the production line, for example, relationships with suppliers and customers. Globalisation has increased the importance of supply chain management, as risk and costs increase with complexity (see Toyota case above). Management accountants can help develop a strategy to manage suppliers so that they fit in with the companys own lean production methods and pursuit of value added. Management accountants can help companies analyse their value chain in order to understand better where the most value is created; and where costs arise. Using techniques such as whole of life costing, this analysis can extend beyond point of sale to the customer.
ISBN 978-1-85971-674-8 (PDF) Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP United Kingdom T. +44 (0)20 7663 5441 E. [email protected] www.cimaglobal.com August 2010, Chartered Institute of Management Accountants PR015V0810