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Helping industrial manufacturing companies outperform through right operating models for support functions

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Today, the Industrial Manufacturing sector faces significant challenges, including cost and margin challenges, supply-chain issues, pressure from competitors, evolving technology, and stricter …

Today, the Industrial Manufacturing sector faces significant challenges, including cost and margin challenges, supply-chain issues, pressure from competitors, evolving technology, and stricter regulatory guidelines. Though an initial response—to retrench, restructure through aggressive cost cuts, and consolidate through mergers and acquisitions—helped the industry in the last few years, these strategies in isolation may no longer create a sustainable path to future growth or profitability. Industrial Original Equipment Manufacturers (OEMs), especially from the Oil & Gas, Power Generation, Aviation, Mining, and Train industries, have explored for some time a deeper transformation of
their business models.

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  • 1. INTELLIGENT ENTERPRISE Helping industrial manufacturing companies outperform through right operating models for support functions Anil Nanduru Senior Vice President and Business Development Leader - Manufacturing and Services Gaurav Kumar Agrawal Assistant Vice President, Industrial Solutions Executive summary Today, the Industrial Manufacturing sector faces significant challenges, including cost and margin challenges, supply-chain issues, pressure from competitors, evolving technology, and stricter regulatory guidelines. Though an initial response—to retrench, restructure through aggressive cost cuts, and consolidate through mergers and acquisitions—helped the industry in the last few years, these strategies in isolation may no longer create a sustainable path to future growth or profitability. Industrial Original Equipment Manufacturers (OEMs), especially from the Oil & Gas, Power Generation, Aviation, Mining, and Train industries, have explored for some time a deeper transformation of their business models. These changes will likely need to be accompanied by an evolution in companies’ existing operating models—that is, in the way they run selling, general and administrative (SG&A) functions as well as other operation-intensive, clerical, or knowledge-based support processes such as reliability and service data analysis. Global Business Services (GBS), the evolution of shared services with a larger global footprint serving multiple functions, helps streamline processes by leveraging a unified— although not always centralized—operating entity, that collaborates effectively with the rest of the function. GBS serves as a cornerstone for any advanced target operating model and can orchestrate different sourcing structures - including those that are captive or outsourced. Decoupling business functions (combined with the advanced use of metrics, data-driven process management, specialized HR/organizational design, and effective IT) industrializes operations across the process chain and can improve scalability, lower costs, increase control, and provide a better-quality experience for the end client. If GBS is done well, organizations can enable better decisions, pursue growth, and adapt to market contractions more nimbly. This paper describes a scientific, granular approach enhanced with industry-specific experiences to adopt the best-fit target operating model for industrial manufacturers.
  • 2. Manufacturing industry faces multiple, complex challenges Multiple business challenges for industrial manufacturers are exposing them to increased volatility and risk. • Cost and margin pressure. Price-sensitive demand and a fluctuating cost for (and availability of) input materials are also adding pressure, and scalable, cost-effective talent is not always readily available. • Supply-chain issues. Supplier identification and negotiations, low-cost sourcing, and shared cost analyses are making it increasingly difficult for manufacturing companies to execute “design to cost” specifications. Moreover, strained supply chains are often expected to support equipment uptime of nearly 100 percent. • Pressure from competitors. Strong local players in new geographic regions are providing established global players with stiff competition, and this competition has drastically reduced the time available to develop new machines. • New geographies. Emerging markets infrastructure projects are driving new demand for capital equipment, and these geographies often have different regulatory and safety standards—creating new challenges for equipment reliability, robustness, and safe-failure specifications. • New technologies. Competition is forcing incumbent manufacturers to invest in new technologies that suit evolving performance standards, and the necessary adoption of new technologies further strains the engineering design of component manufacturers. Importantly, new materials and processes mean quality and reliability issues must be routinely analyzed. • Lack of in-house capabilities. Supporting innovation in equipment design without in-house capabilities is often difficult. In addition, there is a “long tail” for aftermarket service and refurbishment jobs in the equipment lifecycle. The capability gap is likely to increase as design engineering in the capital equipment industry increases. To address these challenges, the manufacturing industry is searching for future growth and profitability by incorporating new advances in scientific technology, industry-wide collaboration in R&D, innovation in engineering, and investment in highgrowth emerging markets. Existing operating models often limit a company’s choices, as legacy conflicts and inefficiencies scatter efforts, resources, and management’s attention. Often, they limit the company’s agility. An agile enterprise that can respond to market trends and implement strategic choices can be supported through a scientific understanding of GBS operating models and process performance to serve key business functions such as finance, supply chain, sales, and marketing. A solid first step for an industrial manufacturing company is to simplify complex layers of local, regional, and global functions by eliminating decision-making and production processes that have become redundant. Industrialized operations: the key to agility and resilience % already industrialized % industrialization potential R&D 9% 1% Procurement Industrialized Enterprise Ops Scope and Impact % not applicable Research support 90% 30% 10% Industrial manufacturing companies show higher propensity to share specific components of ER&D support than back office support services 60% Sourcing and procurement support F&A HR Analytics Inventory and demand forecasting Product cost accounting Manufacturing 0% 100% 0% Customer Care Industry specific Supply Chain/ Logistics/ Procurement Legal/ Marketing IT - ADM Logistics optimization 25% Distribution Customer Care Marketing & Sales 30% 25% Back-office Support 5% 5% 70% 30% 70% 50% General Management 4% 1% Source: McKinsey Research Institute, Genpact Analysis 30% 95% Contact center support 40% 20% Sales and Marketing ops and analytics support All G&A support (F&A, IT, HR) Decision and transformation support * includes transport equipment, power generationequipment etc. IT- Infrastructure Engineering Services/R&D Automotive Chemicals Consumer Electronics Source: Genpact analysis, Everest Group GIC 2013 data * - includes industrial manufacturing, aviation and energy companies CPG Industrial Manufacturing Others Figure 1. Significant potential exists for ‘industrializing’ operations within industrial manufacturing Industrialized operations help access new growth opportunities, create resilience to hostile market or regulatory conditions, and facilitate enterprise-wide product and business model innovation. They also enable faster innovation in volatile marketplaces. Increasing the size of a large operation by 20% (or strengthening business infrastructure in a new country) typically takes a year or two, but industrialized operations can often achieve this in half the time. When the scale of business process services is increased by a factor of 10, the GBS model can deliver a 50% savings in cost per transaction. (A leaner, more predictable cost structure also enables resilience and consistent global application of best practices.) Figure 1 reveals significant industrialization potential within industrial manufacturing, which has largely focused on specific components of Engineering R&D, but not enough, when it comes to industrialization and inclusion in global shared services thus far. The figure also shows up to 50% additional potential
  • 3. A closer examination of the Everest Group’s Global In-House Centers (GIC) data, further validates the point. F&A, HR, IT, and customer care functions are much less industrialized compared to ER&D and the same functions in other verticals. Moreover, most companies manage only specific components of ER&D, mainly technical documentation and CAD/CAM design, from their captives. Similar trends are evident for other manufacturers (Automotive, Chemicals, and Consumer Electronics), which show a lessthan-optimal industrialization of business support functions through their captive units. Industrial manufacturing and similar archetypes could look up to Consumer Goods at the success it has derived by industrializing back-office support and key sales and marketing activities. Above average adoption of GBS High Information services Media & Entertainment Chemicals Travel & Transportation Insurance Telecom Engineering & Construction Utilities Healthcare providers Capital Markets Banking Oil and Gas Retail Life Sciences CPG Low X Size of bubble represents the industrializable operations3 cost 35,000 30,000 555 Automotive 906 687 25,000 Opportunity in enabling business impact, beyond direct operations cost Opportunity in both direct cost and business impact 637 Hi-tech Aerospace & Defense 20,000 Pharmaceuticals 122 CPG 15,000 120 Utilities 10,000 180 TTL3 and Infra 5,000 308 Medical devices 442 Industrial manufacturing 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Source: McKinsey, Genpact Analysis % industrializable2 spend 1. Average revenues for Fortune 500 companies in relevant vertical 2. % Industrializable spend shows the cost companies pay for operations that can be “industrialized” 3. TTL – Transportation, Trucking and Logistics Figure 3: Manufacturing companies can realize significant benefits by industrializing service operations Evolving through the maturity curve GBS implementation typically follows three phases, with focus and achievements shifting over time from foundational (often cost-driven) activities to more strategic ones. A typical company’s full realization of benefits using the Global Business Services model is achieved when the company moves beyond the first two phases, which can take between five and 10 years. Hi-Tech Set Up Freight and logistics Government Below average adoption of GBS DIRECTIONAL All figures in US$ Millions 0-2 years Reduce complexity, drive efficiency Automotive Industrial manufacturing Extent of internal shared services High Source: Genpact analysis, Everest Group and SSON Survey Figure 2. Significant variance exists within industrial manufacturing on GBS adoption Different sub-verticals within industrial manufacturing display different propensities toward managing shared services operations and outsourcing. Figure 2 shows high variance overall with Oil & Gas OEMs much ahead in shared services adoption and outsourcing when compared to automotive and other industrial products. Figure 3 shows the unrealized potential that industrialized operations can help accrue to industrial manufacturers and their various sub-verticals. • Industrial manufacturing companies, on average, spend up to US$300 million on service-type operations that can be industrialized; • Other manufacturers, for example, automotive companies and medical device manufacturers can collectively industrialize up to US$1 billion average spend from service-type operations Key strategic challenge Extent of 3rd party outsourcing Healthcare payers Manufacturing companies can realize significant business impact by industrializing operations Average revenues1 to industrialize G&A support (including F&A, HR, IT), up to 25% of marketing and sales (through sales and marketing ops analytics), and up to 30% of procurement (through sourcing and direct/indirect procurement support). • Consolidate internal buy-in • Stabilize operations (people, process, technology), SLA • Sharing of processes with a cost impact of +/- 5-10% • Ad-hoc solutions with duplication of activities between corporate and GBS Growth 2-5 years Operational excellence, efficiency, variable cost • Process optimization with defined SLAs and KPIs • Target global centers with 10-25% net cost savings Maturity 5+ years Maximize effectiveness and continue to drive cost • Push standardization and advanced technology (e.g. cloud computing) with additional 10-15% cost savings • Radical expansion of scope (functional, geographic) • Clarify new business case • Aggressively explore hybrid models Figure 4. The full benefits of GBS are realized after the foundational stages are completed However, forward-looking organizations have successfully shortened the path to return on investment (ROI) with a well-defined target operating model, strategy, and execution roadmap. Further analysis of the data in Figure 5 shows that manufacturing companies are lagging behind their counterparts from Life Sciences, Consumer Goods, and Banking and Financial Services on their scope of work delivered in mature shared services—in-house or outsourced. The result is slowerthan-average progress on attaining GBS maturity and a lowerthan-expected ROI.
  • 4. Average number of processes in GBS 2.0 Industrializing high-touch support operations have enabled manufacturers achieve faster time to market, improve design specifications, improve asset availability, and realize higher service revenues. Some successful examples from Genpact include the following: Source: Everest GIC database; Genpact Analysis 1.8 1.6 1.4 1.2 a) Improved equipment uptime for a leading nacelle supplier by improving maintainability design 1.0 0.8 0.6 b) Two-month reduction in time-to-market through redesigning a combustion trapped vortex for an energy OEM 0.4 0.2 0.0 0-2 years 2-5 years 5-10 years >10 years Maturity of GBS (years) All industries Manufacturing d) US$15 million enhancement in profits for a global aviation major through contract profitability analysis Combining strategy with process delivery granularity Figure 5. Maturity of practices can enable catch up and eventual leapfrogging in the manufacturing GBS Higher-touch operations are also becoming candidates for operating model transformation Early efforts to commoditize, standardize, and outsource business processes focused on routine, repetitive back-office services such as payroll processing, help desk operations, and accounts payable tasks. Later, routine but low-touch promotional, budgeting, reporting, and information technology front-office services were added to these efforts. Now, the industrial manufacturing industry is increasingly outsourcing key components of engineering services such as fundamental research, new product development support—design, prototyping, manufacturing support, MRO and downstream engineering, procurement and supply, technical documentation and sourcing. Automotive • Engineering services • Engineering services • Industrial asset management • After market services • Supply chain analytics • Supplier analytics • Marketing analytics • Logistics analytics • Fleet management support a Boundary conditions What efficiency, effectiveness, risk, and standardization are acceptable during and after transformatiom? en ab lem Resource redirection Will resources released from transaction processing and controlled reoriented towards decision support? c Organisational choices What structure and operating model should the Finance organization have to support the emerging business model? d New delivery DNA What new process, people practices and technologies are required to achieve the desired objective Collections and customer service Inbound call center | Outbound call center | Mailroom services Enterprise technology and BI Enterprise applications | ADM and system integration services | IT vendor management | Master data management Run cost-efficiently Finance and accounting Measure, benchmark, design en t General accounting | FP&A | Closing and reporting | AP | OTC | T&E Enterprise processes IT Transform towards best-in-class • Pricing analytics A thorough analysis of the following four dimensions is critical for selecting the right target operating or delivery model. b • Network optimization • Reliability analytics Core industry operations Scientific understanding of business processes—such as Smart Enterprise Processes (SEPSM)—has significantly increased, allowing organizations to correctly estimate the end-to-end business impact of target operating model choices, hence facilitating effective design. Still, some have discovered that building out GBS capabilities can be more difficult than anticipated. This variability across scope, location, and delivery models suggests that while broad-brush strategies and comparables have a place in this process, each business case is heavily dependent on the feasibility of the operation’s DNA. Transportation, travel and logistics Create insights from data to drive decisions Industrial machinery c) US$1.2 million savings for a leading aerospace component manufacturer by optimizing product design Figure 7. Actionable choices patterns emerge by triangulating four themes Source: Genpact experience Figure 6. Manufacturing shared services is expanding in scope to include non-commoditized, core industry processes. The combination of process, analytics, and technology delivers far superior outcome than otherwise Genpact’s experience reveals that empirical experience and significant level of granularity help craft the right strategy for a target operating model. Genpact recommends a structured approach:
  • 5. 1. Review the as-is state and rationale. Understand the current state of performance, identify candidates for improvement, and review the process and sub-process practices. 2. Identify top improvement opportunities. Use best-practice metrics and frameworks to benchmark key areas, identify top areas for improvement, assess the feasibility and risk of options, and conduct a preliminary analysis of benefits such as cost, efficiency, or effectiveness. 3. Identify delivery alternatives. Assess options for consolidating processes into internal global shared operations, externally sourced operations, or a combination. 4. Determine change implications. Outline both financial and risk-related implications for each location and structuring option (e.g. various types of risk). 5. Build business case for each alternative. Compile a highlevel business case that encompasses process improvement, organizational structuring options, location choices, and change implications. 6. Develop a detailed roll-out plan. Develop a roll-out plan to reach the targeted operating model by process and by location 7. Build the final business case. Identify emerging options for each process and develop financial and implementation plans. local regulatory burden, and increased competition can actually offer opportunities for growth to companies that find ways to invest in new business models. As also discussed in a previous paper, “The Adaptive Roadmap,”1 business agility in times of unprecedented volatility is an imperative that requires a more strategic role for business operations. Additionally, embracing new operating models can create organizations that are not only more resilient, but can also compete best in times of volatility2. This paper shared Genpact’s analysis and examples of how leading organizations are transforming their operating models to create a sustainable path to growth, profitability, and innovation. For organizations looking to redefine their operating models, a significant amount of specialized knowledge is needed to navigate the continuum of design choices. In such a focused field, strategy must and can leverage the experience curve of large organizations’ journeys over the past decade. Although industrial manufacturing companies’ operations present challenges unique to the industry, they benefit from the knowledge accumulated in industries in which the transformation began earlier. Combining this experience with a clear understanding of an organization’s strategic needs, capabilities, and industry context can help craft the right strategy for a target operating model. Contact Genpact’s specialists to learn from our experience building an industrialized operating model in the last two decades, first as part of General Electric, and now as a leader in business processes and operations. Toward a viable operating model The industrial manufacturing sector is undergoing a complex, transformational change. However, the fast-evolving technology, 1. http://www.genpact.com/docs/resource-/the-adaptive-roadmap-whitepaper.pdf 2. http://www.genpact.com/docs/resource-/innovation_and_industrialized_business_operations_an_industry_specific_view.pdf?sfvrsn=4
  • 6. About Genpact About the author Genpact Limited (NYSE: G) is a global leader in transforming and running business processes and operations, including those that are complex and industryspecific. Our mission is to help clients become more competitive by making their enterprises more intelligent, meaning more adaptive, innovative, globally effective and connected to their own clients. Genpact stands for Generating Impact – visible in better management of risk, regulations, costs and growth for hundreds of long-term clients including more than 100 of the Fortune Global 500. We offer an unbiased, agile combination of smarter processes, analytics and technology, which limits upfront investments and enhances future adaptability. We have 60,000+ employees in 24 countries with key management and corporate offices in New York City. Behind our single-minded passion for process and operational excellence is the Lean and Six Sigma heritage of a former General Electric division that has served GE businesses for more than 15 years. Anil Nanduru is a Business Development Leader with over 12 years’ experience in advising companies on driving Business Process Management Initiatives. He has hands on experience with several major global companies in leading large scale transition programs as well as, driving process excellence and building end-to-end process transformation programs. For more information, visit www.genpact.com. Follow Genpact on Twitter, Facebook and LinkedIn. © 2013 Copyright Genpact. All Rights Reserved. Gaurav Kumar Agrawal has over 8+ years’ experience in shared services advisory, product innovation and marketing roles. For more information, contact: gbs.solutions@genpact.com Visit us at: http://www.genpact.com/gbs