Manufacturing has gone through significant changes in the past 30 years. The Just in Time (JIT) and Total Quality Management (TQM) movements led to standardization and documentation of processes (ISO 9000). The result was high quality manufacturing that could be replicated in low cost production zones like China. Ultimately, logistics costs came to dominate labor and we’ve seen a manufacturing return to the US enabled by more extensive use of automation.
If something is easily replicated, it is by definition a commodity. Commodities are subject to price wars, which indicate that the consumer does not see much value in the product or process. Recent events have demonstrated that manufacturing processes are being devalued in the supply chain. Manufacturers must now focus on design and supporting their brand to capture value. The other value adding place in the supply chain is distribution.
This environment leads to supply chain conflicts. Manufacturers will seek to gain control of distribution to protect their brand and facilitate new product introductions. Distributors will pursue services instead of products as commoditization takes over and, in some cases, will turn to private labeling. Manufacturers will become more and more dependent on powerful distributors like Amazon and Grainger.
Fortunately, things are never that simple. Manufacturers don’t want to be caught in a commodity game, distributors don’t want to lose their supplier relationships, and consumers want differentiation.
Differentiation versus Commoditization
In Dongguan, China, a highly specialized firm exemplifies how to differentiate. This American-owned firm hosts mid-sized retailers that bring with them designs for new products . . . sometimes in a full engineering design, sometimes scratched out on a napkin. The company then brings in Chinese engineers or marketing specialists to get to a final design, marketing materials, and packaging for retail sale. Finally, the firm selects a manufacturing plant out of the hundreds they have vetted to make the products for the retailer.
The reason the retailers create these designs is to differentiate. You can’t out “Walmart” Walmart, or out “Amazon” Amazon. The trick is to specialize based on your region, market segment, or just new ideas. The American consumer has seen their cost of living decline due to standardization of life’s basic essentials. Once basic needs are satisfied, people look for unique products and services. This search for special products provides an opportunity for manufacturers and distributors to once again collaborate. The differentiated supply chain needs creative designs working in real time therefore it must hear the “voice of the customer.” We must link distribution to design.
This link is much more difficult than it sounds. First, the distribution system must capture not only what the customer is currently buying; it must identify what the customer might be interested in next. This implies advanced information analysis tools like data mining and a better-managed link to human customer contact systems. As information technology continues to advance, the former is a given and subject to commoditization over time, the latter is not and, therefore, is likely to be a source of competitive advantage.
Don’t Look Back, They are Probably Gaining on You
As fast as these creativity efforts move, the standardizing elements will be hot on their heels. We can expect Walmart and Amazon to adopt creative products as fast as they can and even try to differentiate as well. The differentiation process will have to be very agile to remain a competitive advantage. For the manufacturing community, just what “agile” means is key.
This interconnectivity of design and distribution requires a community. Distribution firms that share information with manufacturers (as in our Dongguan example) will have to be transparent and, more importantly, able to assimilate and synthesize market information before sharing it with suppliers. When a community of manufacturers and distributors collaborate and compete with full support from other service providers, we call it an industry cluster.
Famous clusters include Silicon Valley and Detroit but clusters are everywhere. South Texas has been developing a significant energy cluster driven by the Eagle Ford oil and gas exploration and production. This cluster brings together all the elements of an advanced supply chain with products, services, and new technologies being developed in real time. These capabilities will be sold to other regions, like China and Mexico, as they develop their resources.
Clusters bring together entire supply chains with all the support mechanisms necessary to compete. In many ways, national competitiveness comes from cluster development, which drives productivity. The community of businesses competes and collaborates to create new technologies and fill gaps in the supply chain.
This is all fine and well for groups of firms and communities but what does it mean for the average manufacturing firm? Manufacturers must control their channel to market. This means taking ownership over distribution. The manufacturer needs a strong alliance with their distributor partners for their differentiated products and a well thought through strategy for when products go to commodity status.
Manufacturing Processes Make a Comeback
Manufacturers have their own internal supply chain that is very complex. As information enters the manufacturing firm, it has to be quickly assimilated into design. New designs require changes in process capabilities. These changes involve a great deal more than just flexible manufacturing systems. They require nothing less than a constant reexamination of equipment investment (financial capital), design for manufacturability (information capital), human resource capabilities (human capital), and change management (organizational capital). The truly agile firm will link seamlessly to the supply chain, listen, and change fast.
Oh sure, 3D printing will turn us all into micro-manufacturers living in a Star Trek world where we only have to ask for products to be made exactly the way we like. Maybe, but it is far more likely that the complex design, manufacture, distribute processes will simply become more complex and just absorb micro-manufacturing. Products will be designed to capture volume efficiencies at the beginning of the supply chain, configured for higher level capability at the traditional manufacturing operations, receive further value add in the distribution channel, and given its final character in your home or on Main Street at your favorite retailer.
Many products, coffee for example, already have supply chains that operate this way. High volume production at plantations, packaging and flavoring at manufacturing sites, marketing and preparation for retail utilization in the distribution channel, and final differentiation at your local Starbucks. Automobiles follow the same pattern: frames and tires at high volume manufacturing, assembly at major manufacturing plants, leather seats and specialized electronics in the distribution channel, and, coming soon, programming your dashboard from your home network.
Note, that in this world, the classic manufacturing operation is no longer a commodity but the controlling nexus of the product/design supply chain. It is time for a Manufacturing Renaissance to bring us the differentiated products the world hungers for.
F. Barry Lawrence, Ph.D., is the Director of the Global Supply Chain Laboratory at the Industrial Distribution Department at Texas A&M University. V. Jorge Leon, Ph. D. is a Professor in Industrial & Systems Engineering at Texas A&M; and Esther Rodriguez Silva, Ph. D. is an Assistant Professor in the Industrial Distribution Program at Texas A&M.
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