Turning the Periscope on Manufacturing

How Excellence in Manufacturing Can Boost Corporate Growth

Improving manufacturing performance and growing the top line? For business leaders, these terms create an oxymoron on par with giant shrimp or military intelligence. Improving manufacturing has traditionally been thought of as a sturdy route to cost reduction, but today it is being rediscovered as a way to fuel top-line growth. Across industries, companies such as Dell, Procter & Gamble and Toyota are finding that excellence in manufacturing can be a key enabler for strategic revenue growth.

The search for manufacturing excellence generally starts with the assumption that manufacturing is a cost center. Through manufacturing improvement initiatives, companies focus on reducing inventory, lowering labor or raw material costs and utilizing assets more effectively.

Turning the periscope to view manufacturing as a growth engine, not just a cost center, entails understanding customer needs and redirecting manufacturing improvement initiatives in a way that can help sales and marketing units boost the top line.

This approach is sometimes difficult to implement because of conflicts between departments or a prevailing view that manufacturing can only generate costs. In fact, sales and marketing teams are often guilty of viewing manufacturing as a major constraint to executing strategic growth initiatives, particularly when they face the following typical issues:

• My big customer wants an order expedited. If the plant doesn’t come through, we’re in trouble.
• We have a promotion coming up. We need the plant to run overtime and build up inventory.
• The competition is beating us with new products and features. Will our plants be able to retool quickly and deliver on these new models?

Improving the Top and Bottom Lines
Most companies can cut manufacturing costs. Most companies can also boost revenue through corporate-driven customer initiatives. But few companies can do both well. We’ve found that top companies often drive improved performance by recognizing the elusive link between manufacturing and customer needs. Dell and Toyota have done just this.

Dell specializes in tailoring computers to the specific needs of each customer. A customer who buys a Dell computer knows that it was put together with exactly the features and software ordered. Dell’s flexible manufacturing lines give it the ability to quickly react to orders. The result: Dell has increased sales by 50 percent over the past four years, while at the same time boosting the company’s operating margin from 7.3 percent to 8.4 percent of sales.

Toyota has focused on state-of-the-art quality-control systems on its production lines. Its plants support multiple vehicle lines, which gives the company flexibility to meet increased customer demand for a particular vehicle type without having to invest in new plants. Delivering high quality products while offering good product availability has boosted demand for Toyota vehicles by more than 60 percent over the past four years. The company also increased its operating margin from 7.6 percent to 8.9 percent of sales.

Figure 2: Competitive effects of market and financial power

As these examples show, companies that refocus their manufacturing approach to meet customer demands can benefit from top-line growth. To accomplish this, however, a company must challenge the traditional manufacturing priorities and understand the revenue and profit impact of select cost-reduction initiatives. For example, eliminating defects through manufacturing improvements can have a bigger impact on profitability than traditional cost-reduction techniques (see figure).

How Manufacturing Can Drive Increased Sales
So what are other ways in which manufacturing can drive growth? The following examples from various industries illustrate the possibilities:

Consumer goods. Procter & Gamble focuses on delivering “perfect orders” to its retail customers— orders that are on time, and contain the right products in the right quantity. Research indicates that, among other things, P&G emphasizes schedule compliance and optimizes inventories to reduce out of stocks. This helps increase revenue and positions the company as a strategic partner to retailers, not just another supplier. P&G also aggressively markets its operations excellence at industry conferences and works with retailers to pilot new initiatives. This creates a tight bond between P&G and its partners and further drives increased sales.

In another example, one of A.T. Kearney’s consumer goods clients is developing a modular manufacturing approach. The company plans to make its manufacturing lines more flexible and lower labor costs by reducing change-over times. This flexibility will also increase sales by allowing the company to tailor packaging and ingredients and provide its key customers with products designed specifically for them. This will make the company more competitive on an ongoing basis, and will allow it to react quickly to changes in demand and exploit promotional sales opportunities.

Automotive suppliers. Auto-parts suppliers are finding that OEMs such as DCX are shifting their purchase decision-making away from cost alone. Auto suppliers can become more attractive to OEMs and also lower their costs by exploiting the following:

• Inherent structural efficiencies. OEMs increasingly look for partners that have long-term structural efficiencies in their cost base, such as limited union restrictions or operations in low-cost countries.
• Tool-and-die expertise. OEMs have stricter design requirements, so they want suppliers that are capable of handling complex parts and have tool layouts designed for speed and efficiency.
• Quick ramp-up from design to manufacture. Suppliers that can support new product designs and ramp-up quickly for production are valuable to OEMs that want to reduce time to market.
• Flexible manufacturing. Flexibility is increasingly attractive to OEMs that need to make changes with short lead times.

OEM suppliers are finding it tougher to compete merely on cost. A supplier with these manufacturing advantages, however, can have low costs and also be attractive to OEMs on many other dimensions. This may ultimately allow the company to be awarded high-volume part sales for the five- to eight-year life of a vehicle and even capture business from competitors mid-program.

Utilities. An A.T. Kearney utilities client in the natural gas liquids processing industry is also taking a customer-centric approach to its operations, despite being in an industry that is very cost focused. Our client recently adopted a series of programs to improve throughput and increase reliability. The company also redesigned its manufacturing footprint to optimize its geographic positioning and compete more effectively against other natural gas liquids processing companies. As a result, the company was able to cut costs and, therefore, prices. Customers began shifting purchases away from competitors, which caused the competitors’ costs to escalate. Eventually some of our client’s competitors lost so much business that they exited select markets, leaving the firm in a very favorable competitive position. This led to significant increases in sales, despite lower prices.

Best Practices for Revenue Growth
Working with companies across multiple industries and locations, we’ve found that there are specific best practices that can help build revenue growth through manufacturing excellence:

• Increase product offerings via manufacturing flexibility. Look for opportunities to increase your product offering while keeping costs down through greater manufacturing flexibility or investments in technology.
• Differentiate your company through solid manufacturing performance. Explore ways in which your manufacturing unit can help the company differentiate its business in non-traditional ways, such as in out-of-stock reductions, decreases in lead times, or quicker time to market for new product introductions.
• Identify strategic ways to reduce costs. Look for cost-reduction initiatives that not only increase your margins, but also allow your company to secure long-term contracts with key customers.
• Align manufacturing with sales and marketing plans. Don’t let manufacturing be seen as just another improvement initiative; coordinate with other departments.
• Increase manufacturing’s role in strategic planning. Manufacturing has a special role to play in defining how the company differentiates its position in the marketplace. This participation needs to go beyond the traditional sales and operations planning, and should include direct involvement in developing the corporate strategy and vision.

Achieving Excellence in Manufacturing
Clearly, changing the way companies view their manufacturing function can be difficult. Manufacturing initiatives are likely to face organizational resistance. Departmental rivalries may jeopardize joint efforts between sales and operations. Even the use of traditional performance metrics and incentives can be detrimental if they focus on reducing costs, rather than encouraging manufacturing to support revenue growth.

Overcoming these difficulties can result in significant rewards such as new sources of revenue growth and a stronger competitive position. Companies that recognize that excellence in manufacturing can stretch far beyond mere cost reductions have a competitive advantage. And after consistently applying key strategies over time, they will be rewarded with significant improvements in top- and bottom-line performance.

Consulting Authors

Sean Monahan is a vice president in A.T. Kearney’s New York office.

Sumit Chandra is a principal in A.T. Kearney’s Chicago office.

Claudio Knizek is a consultant in A.T. Kearney’s Alexandria office.

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