Handling information and data is core to manufacturing management. Stephen Pritchard reviews 2002 and gives his outlook for manufacturing IT for the year ahead
There is no doubt that the pressures on the manufacturing sector grew last year. 2002 started under the shadow of the September 11 terrorist attacks, and the downturn in the economy, especially in the US.
Closer to home, confidence has also been affected by the pound’s continued strength against the euro, and by the decline in economic performance in euro-zone markets, especially Germany. If that were not enough, although consumer spending has held its own in the UK, business-to-business orders are down. Companies are also feeling pressure from falling share prices, either directly or in the form of growing shortfalls in pension funds.
None of this makes pleasant reading for a manufacturer’s finance director, and companies across the sector have been forced to cut back. One target for the knife has been technology spending. After the heavy cost of millennium compliance, and for many manufacturers, the need to adapt their systems to handle the euro, spending has fallen back.
The dot com boom, where companies - including manufacturers - felt obliged to invest in IT simply in order to keep up has also had its consequences. Manufacturers may well feel that they have been oversold technology, and much of that technology has yet to prove its value in terms of either reduced costs or greater output or efficiency.
Technologies such as supply chain management software and, in particular, CRM (customer relationship management) have come in for particular criticism for their high costs and low returns. Manufacturing companies have also found that the cost of installing and integrating new computer applications, and training staff to use them, is higher than they expected. Often, integration and training costs are several times higher than the cost of the software itself, wiping out much of any savings made.
IT vendors in the manufacturing space are changing their focus to concentrate on smaller incremental sales, rather than large, ‘big bang’ installations. The better vendors are also aware that they need to help their customers make more of the systems they have already bought, before they try to sell them new applications, or even upgrades with new features.
There is growing evidence that the IT industry realises that it has made mistakes, and plans to mend its ways. Early in 2002, Larry Ellison CEO of the world’s second largest software company, Oracle, admitted to a user conference that IT had failed to pay its way and needed to change.
According to analysts, IT companies will have to live up to their word, or face static or even declining sales in the coming year. For the outlook for 2003 is only a little more positive than for last year. For most leading figures in the IT industry, the projection for 2003 is more of the same. Growth, if it comes, will be in 2004.
In some ways, however, manufacturing is one of the few bright spots in what has been a dark year for the IT industry. Slim margins are nothing new to manufacturing companies in the UK, and fewer manufacturers were caught up in the exuberance of the dot com boom. And pressure on IT companies can ultimately benefit their customers.
“There has been a good hard look at where IT money is being spent,” says John Burn, a manufacturing specialist with PA Consulting. “Businesses are working harder to extract value from their existing investments in IT. Pressure on business margins has forced a more critical review of spending and the value IT delivers. And companies in difficulty will steer themselves much better, if they have a firm grasp on their business. You need good IT to do this.”
And there is still plenty of scope to gain efficiencies and to save money by improving the integration between systems. Investment in integration can deliver some of the promise manufacturers have so far failed to see from CRM or supply chain management.
“Particularly in the beginning, a lot of CRM was focused not on customers but on internal information flows,” explains Le Roux Cilliers, of Deloitte Consulting. “If the information is not available at the point of interaction with the customer you have added very little to your value chain.”
He points to successes, such as where companies have used CRM to give customers access to all their dealings with a supplier, regardless of product lines or brands. Simply putting CRM in for each manufacturing site is not sufficient, if customers still have to visit five web sites, rather than one.
However, the argument in favour of integration is also prompting manufacturers to revisit the argument between best of breed and generalist software packages. Large enterprise applications, especially Oracle and SAP, now offer much of the functionality previously restricted to specialist programs.
If this continues, consolidation will be the order of the day. “The software industry is no different to the automotive or pharmaceutical industry,” says Peter Woodward, sales consultancy manager for industrials at Oracle Corporation.
“Due to globalisation there have been numerous mergers and acquisitions, which has reduced their industry to a small number of major players and the smaller players delivering niche solutions. The software industry is following suite. There will be probably only three or four major ERP vendors by the end of 2003. The others vendors will merge, be acquired or concentrate on niche areas.”
“There is a nervousness around the best of breed packages,” says Le Roux Cilliers. Even if best of breed companies have a better offer than Oracle or SAP companies are hedging their bets back to players such as SAP and Oracle.”
Moving to an enterprise suite, however, requires serious investment and not all manufacturers can contemplate that in the existing climate. An alternative is to delay new investment in technology altogether, or to break down projects into smaller pieces, where it is easier to demonstrate the return on investment and where risks are minimised.
“The new thinking is around smaller projects focused around higher value components,” says Le Roux Cilliers. “But the risk is of losing the perspective of what happens when you connect all the parts together.”
However, a more piecemeal approach to automation in manufacturing companies is clearing the way for some new technologies and some new applications. A technology that has been on the periphery of manufacturing for some time, but which is moving into the mainstream, is wireless.
Wireless systems are already in widespread use in the warehouse, but improvements in both fixed wireless LANs and the development of GPRS mobile data services allow companies to replace or supplement wireline networks within the factory, and to integrate field teams, from sales to maintenance, with office systems. As the mainstream ERP and supply chain vendors add wireless functionality, uptake will only accelerate.
Core IT technologies such as web services will allow IT vendors to link together discrete applications over the internet, making it easier to integrate smaller, niche applications. Even very simple services, from checking a credit record to checking the date, can be handled through web services. So the technology should allow companies to build systems more quickly, and provide manufacturers with better links to suppliers and customers.
Better communications between applications will also allow more companies to invest in niche software that solves specific business problems. Of those that are set to grow in 2003, product lifecycle management and enterprise performance management (EPM) stand out.
EPM software draws on data companies often already have to improve planning and forecasting, both important skills when unsold inventory can cause a company to fail. Analysts at AMR Research EPM have highlighted software as a growth area. According to Mark Mahara, MD of EPM software company Silvon, believes that EPM will help companies bring products to market more quickly and to respond more quickly to fluctuations in demand.
Product lifecycle management technology stands to help companies handle the ongoing support and maintenance costs of their products, as well as the development and design cycle. Here, it is about taking out costs in an area that is expensive for many manufacturers. “Software improvements that improve the level of control over existing processes will prosper,” points out John Burns at PA Consulting.
During 2003, IT investments that can cut operational costs are likely to find immediate favour with finance directors. Investments that help grow businesses will be funded, if they can demonstrate that they will create a return on investment within a realistic - if not short - timescale.
“There is more focus on ROI and a better appreciation of what it is,” says Le Roux Cilliers. “Companies are now chasing ROI in smaller bundles, along a proper time line.”
However, he warns that there is a danger that companies will switch from large projects that fail to deliver the hoped-for returns to small projects that will create disruption and disjointed information flows. For this reason, many manufacturers may choose to sit out the 2003 IT investment round altogether, except for those cases - such as wireless, PLM and EPM - where there can be few doubts about the benefits
