2013 Industrial Equipment Industry Challenges


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Pursuing a Single Version of the Truth, From Product Creation to Service

This IDC Manufacturing Insights White Paper summarizes the critical challenges the industrial equipment industry faces today and outlines the dramatic changes the industry will encounter going forward.

The paper highlights how today's fast-paced business environment calls for industrial equipment manufacturers to increase the speed of decision making along the entire product life cycle, from concept to design, from engineering to manufacturing and to service.

IDC Manufacturing Insights suggests industrial equipment organizations modernize their IT landscape to speed up decision making, streamline business processes, and break organizational silos. To do so firms will have to create a unique platform that — supporting the entire product life-cycle process, end to end — offers a single data source from product creation to service.

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2013 Industrial Equipment Industry Challenges

  1. 1. March 2013, IDC Manufacturing Insights #IDCWP04VPursuing a Single Version of the Truth,From Product Creation to ServiceW H I T E P A P E RSponsored by: Dassault SystèmesPierfrancesco ManentiMarch 2013E X E C U T I V E S U M M A R YThis IDC Manufacturing Insights White Paper summarizes the criticalchallenges the industrial equipment industry faces today and outlinesthe dramatic changes the industry will encounter going forward.The paper highlights how todays fast-paced business environmentcalls for industrial equipment manufacturers to increase the speed ofdecision making along the entire product life cycle, from concept todesign, from engineering to manufacturing and to service.IDC Manufacturing Insights suggests industrial equipmentorganizations modernize their IT landscape to speed up decisionmaking, streamline business processes, and break organizational silos.To do so firms will have to create a unique platform that — supportingthe entire product life-cycle process, end to end — offers a single datasource from product creation to service.S I T U A T I O N O V E R V I E WThe industrial equipment industry is a capital-intensive and cyclicalsector that tends to be severely hit by downturns when there is asignificant contraction in capital expenditure. Todays difficulteconomic conditions — with many major economies in recession —are significantly impacting the industrial equipment industry as themajority of clients are adopting a wait-and-see approach and areessentially reining in capital expenditure.The industrys performance over the past 10 years is shown in Figure1, which presents IDC Manufacturing Insights benchmarking databaseGPI (Global Performance Index). Data shows that the industryrecovered quickly after the slump in net profit margins caused by the2008/2009 crisis, and that in the past couple of years net profit marginsdeclined again and revenue growth slowed down.In 2013, industrial equipment manufacturers are expected to undertakeinitiatives to react to this worsening business outlook. Industrialequipment companies will need to do more with less to maintain agood level of profitability. To this end, mere cost cutting is no longerenough. Cutting costs has been a priority over the past few years,GlobalHeadquarters:5SpeenStreetFramingham,MA01701USAP.508.988.7900F.508.988.7881www.idc-mi.com
  2. 2. Page 2 #IDCWP04V ©2013 IDC Manufacturing Insightsmaking it difficult to find new areas to cut. Whats left is to find newareas to make productivity gains.The trend toward greater productivity is clearly emerging in ourconversations with leading industrial equipment manufacturers. Theyare ready to launch transformational initiatives focused particularly onoptimizing and streamlining their most critical business process ofproduct life cycle. This process is the backbone of any industrialequipment organization and optimizing it will rapidly bring significantproductivity gains.F I G U R E 1E M E A I n d u s t r i a l M a c h i n e r y a n d E q u i p m e n t R e v e n u e a n d N e tP r o f i t T r e n d s , 1 Q 0 2 – 3 Q 1 2Note: The IDC Manufacturing Insights Global Performance Index (GPI) tracks growth metricsfrom 800+ publicly traded global firms in the manufacturing and retail industries. The GPI tracksgeneral trends in manufacturing and retail subindustries based on the performance of a sampleof companies from those subindustries. Historical data in the index may be adjusted betweenquarters based on the addition or subtraction of companies in the index or companyrestatements of historical filings. Estimates by Reuters.Source: IDC Manufacturing Insights Global Performance Index, 2013M a j o r I n d u s t r y C h a l l e n g e sIn their quest for increased productivity along the product life cycleprocess, industrial equipment companies will need to tackle a numberof challenges, including:● Effectively managing global organizations. Many industrialequipment companies have taken advantage of past crises toexpand into new and emerging markets. Many have disruptivelygrown by acquisition. Although this was an essential strategy to
  3. 3. ©2013 IDC Manufacturing Insights #IDCWP04V Page 3create a sustainable business in todays global marketplace, it alsocreated a proliferation of engineering and production centersworldwide, resulting in slow, complicated, and inefficientorganizations. In particular, this expansion impacted theeffectiveness and efficiency of the product life-cycle process.Industrial equipment manufacturers need to find ways to integratenewly acquired companies quickly, including the difficult task ofstandardizing part number coding across different divisions andfunctional groups.● Increasing product complexity. The industry manufacturescomplex, low-volume/high-mix products. The bill of materials isextensive, manufacturing routings are circuitous, and componentsare sourced from multiple suppliers located throughout the world.The sector has benefited from the explosion in new technologiesembedded into equipment, such as electrical, motion control, andautomation applications, more sophisticated sensors, and closed-loop electronics. If this helped companies sustain a robustinnovation cycle, it also increased product complexity. Companiesneed to simultaneously manage heterogeneous component families— such as mechanics, electronics, and software — with verydifferent life-cycle dynamics and lead times. Increasing complexityalso drives the need to develop more digital prototypes to cross-assess mechanical functionalities, electronics schematics, andsoftware behavior.● Rapidly fulfilling diverse customer needs. Industrial equipmentcompanies serve their clients through make-to-order (MTO) orengineering-to-order (ETO) production models. Customer ordersare typically organized around customer contract specifications.Basically no request is fully standard and the number of commonparts is often limited, making profitability an ongoing issue. In thisrespect, competitive differentiation is played on developingmodular product strategies, speeding up order configuration andquote, and reducing time to market. In the modern industrialequipment industry, time to market no longer refers to merelysingle equipment production and delivery, but extends to completeproduction line installation, making the case for profitable order-to-cash a challenge.● Effectively managing after-sale services. Capital investment hascontinuously declined over the past few years as buyers havefavored the lower risk of equipment rental rather than riskiercapital expenditure. In this context, product features — such asfunctions, quality, and design — offer no more assurance of lastingcompetitive advantage if not accompanied by a bunch of servicecapabilities. This has led industrial equipment companies into acomplete shift in their strategic focus from product to services. Inorder to capitalize on the services opportunity, however,manufacturers need to put in place new organizational structures,processes, and tools that support services-based business modelsthat significantly differ from traditional industrial equipmentbusiness practices. For example, industrial equipment companies
  4. 4. Page 4 #IDCWP04V ©2013 IDC Manufacturing Insightsneed to deliver — at a worldwide level — the right spare part, tothe right place, and at the right time, and to profitably manage 24 x7 service operations.● Designing for serviceability. The way equipment is designed andengineered has a significant impact on service effectiveness andefficiency and total cost of ownership (TCO). For example,overcomplicated equipment that doesnt lend itself to easyinspection and dismounting will require extra effort and cost to beproperly serviced, putting the overall service profitability at risk.The correlation between good design, engineering, andmaintenance costs is well recognized by leading manufacturers thatare progressively following the "design for serviceability"principle.F U T U R E O U T L O O KThe product life-cycle process is the most important process forindustrial equipment manufacturers. An effective end-to-end process— from concept to design, from engineering to manufacturing and toservice — determines the success of the entire organization.Despite its importance, most companies in the sector still lack amodern, defined process, which in todays marketplace needs to becollaborative and open to multiple functional groups. For modern,organized industrial equipment companies, this process needs tocomprise a vast array of activities spanning different organizationalgroups, including engineering, marketing, supply chain, operations,and service departments. However, in most companies today thesefunctions are not integrated and companies still have separateorganizational silos. Information silos are still a reality as well. It isstill common, for example, to have the coexistence of multiple partnumber coding.This organizational and information complexity extends the productlife-cycle process and makes it more costly, making it less effectiveand less efficient. As a consequence, industrial equipment companiesare unable to address the key challenges discussed earlier. Forexample, many firms cant easily integrate newly acquiredorganizations. They cant effectively manage the growing complexityof the bill of materials and routing. They are struggling to manageservices and are inefficient in their time to quote.Our research suggests that achieving a faster decision-makingcapability is an essential prerequisite to improving the effectivenessand efficiency of the product life-cycle process. Industrial equipmentmanufacturers acknowledge the business risk of having poor decision-making capability along the product life cycle and are keen toimplement a number of enabling initiatives, including speeding upbusiness processes, giving employees access to real-time information,and improving collaboration and breaking organizational silos (seeFigure 2).
  5. 5. ©2013 IDC Manufacturing Insights #IDCWP04V Page 5F I G U R E 2D e c i s i o n - M a k i n g C a p a b i l i t y I m p r o v e m e n t A r e a sQ. In your opinion, what could be done to improve your decision-making capability?Number of valid respondents: 87Source: IDC Manufacturing Insights, 2013T h e I m p o r t a n c e o f C r e a t i n g a U n i q u eP l a t f o r mA recent IDC Manufacturing Insights survey found that more than60% of industrial machinery respondents feel the IT systems they havein place today are ineffective or inadequate when it comes tosupporting business excellence (see Figure 3). Firms also believe ITdoes not support the business well in rapidly adapting businessprocesses to change and feel they lack accurate and timely informationthey need to quickly make informed decisions. Our research suggeststhat the primary reason for this is that information is being stored intoo many different IT systems that are poorly integrated or notintegrated at all.Industrial equipment organizations recognize that they have tomodernize their current IT systems if they want to overcome the mostcritical business challenges through faster decision making. Thischallenge is particularly evident in the IT systems used to support theproduct life-cycle process — industrial equipment manufacturersacknowledge that they need to overcome the current systemfragmentation and encourage a more collaborative environment withgreater visibility and intelligence of information.0 20 40 60 80 100Apply continuous improvementmanagementpracticesImmediate informationSimplify or automate businessprocessesImprove collaboration and breakorganizational silosAccess to real-time informationSpeed up business processes(%)
  6. 6. Page 6 #IDCWP04V ©2013 IDC Manufacturing InsightsF I G U R E 3B a r r i e r s t o I m p r o v i n g B u s i n e s s E x c e l l e n c eQ. What are the main barriers to improving business excellence that your organization hasidentified?Number of valid respondents: 87Source: IDC Manufacturing Insights, 2013To achieve this, industrial equipment manufacturers will have to createa unique platform that offers a single data source for product creationand change throughout the whole product life cycle. This platform willhave to support a customer-driven approach to the product life-cycleprocess in globally integrated organizations. It will have to providecompanies with a singular, closed-loop management of productconcept, design, engineering, manufacturing, and service.This platform will have to be a real-time, collaborative decision-making environment that is able to orchestrate the entire product life-cycle process across a number of different organizational functions.Through the platform, companies will have access to a common set ofproduct-related data that will represent the "single version of thetruth." The platform will be an essential enabler for productivity alongthe product life cycle and will offer a solution to a number of businesschallenges. Business benefits will include easier integration of newlyacquired organizations, a faster order-to-quote process thanks to thecollaborative contribution of several business functions, and moreeffective after-sales service capability. Industrial equipmentmanufacturers will look at this platform to fully standardize partnumber coding, the bill of materials, and routings.0 10 20 30 40 50 60 70Inability to accurately predictcustomer demandInability to consistently deliver ontimeManagement of complex globalsupply chainsLack of funds to implement changesDifficulty collaborating with suppliers,trading partners, and customersAvailability of skilled resourcesManagement of complexmanufacturing operationsLack of accurate and timelyinformationInability to rapidly adapt businessprocesses to changeIneffective or inadequate IT systems(%)
  7. 7. ©2013 IDC Manufacturing Insights #IDCWP04V Page 7E S S E N T I A L G U I D A N C EThe industrial equipment industry is currently in a phase of profoundtransformation, with companies redefining their business models fromproduct to service. This is happening in the context of todays difficulteconomic conditions, which are heavily impacting the industrialequipment industry, with a significant contraction in capitalexpenditure.To cope with the current difficult business conditions and to tackle thechallenges in the market, industrial equipment manufacturers need toimprove the effectiveness and efficiency of the product life-cycleprocess — a key finding of this white paper. This process is in fact thebackbone of any industrial equipment organization, and optimizing itwill rapidly bring significant productivity gains.IDC Manufacturing Insights offers the following advice to industrialequipment manufacturers:● Modernize your product life-cycle process. Most industrialequipment companies still lack a modern, defined product life-cycle process. In todays marketplace your product life-cycleprocess needs to be end to end (from concept to design, fromengineering to manufacturing and to service), collaborative, andopen to multiple functional groups.● Find new productivity gains in the product life-cycle process.Analyze your product life-cycle process to identify areas ofproductivity improvements. The majority of companies will haveto implement initiatives to speed up business processes, giveemployees access to real-time information, and improvecollaboration and break organizational silos. The end goal will beto speed up your decision-making capability.● Achieve a single version of the truth. To support thetransformation of the product life-cycle process, you will have tocreate a platform that offers a single data source for productcreation and change throughout the whole product life cycle. Thisplatform will serve the entire business as the single version of thetruth.
  8. 8. Page 8 #IDCWP04V ©2013 IDC Manufacturing InsightsC o p y r i g h t N o t i c eCopyright 2013 IDC Manufacturing Insights. Reproduction withoutwritten permission is completely forbidden. External Publication ofIDC Manufacturing Insights Information and Data: Any IDCManufacturing Insights information that is to be used in advertising,press releases, or promotional materials requires prior written approvalfrom the appropriate IDC Manufacturing Insights Vice President. Adraft of the proposed document should accompany any such request.IDC Manufacturing Insights reserves the right to deny approval ofexternal usage for any reason.