Global Manufacturing Outlook Relationships, Risk and Reach Global research commissioned by KPMG International from theEcon...
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independ...
About the Survey                                           A total of 196 senior manufacturing executives participated in ...
Foreword                                                                                                                  ...
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independ...
Executive Summary                                                                                                         ...
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independ...
6   G LOBAL MANUFACTURING OUTLOOK© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firm...
Introduction                                          The downturn was a sharp one for manufacturing: global industrial pr...
Survey respondents certainly recognize that current arrangements have                                                     ...
Yet how businesses think about cost makes a big difference. By focusing too                                               ...
1 0   GLOBAL MANUFACTURING OUTLOOK© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member fir...
Supplier Relationships that Bring Value                                                          The most discernable way ...
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independ...
Companies expecting to shift responsibility for, or collaborate more closely                                              ...
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
Global Manufacturing Outlook: Relationships, risk and reach
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Global Manufacturing Outlook: Relationships, risk and reach

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Global Manufacturing Outlook is a KPMG International report that investigates how industrial manufacturers are adapting their business models and supply chain tactics to address the ever-changing global economic context. This report was produced in co-operation with The Economist Intelligence Unit, which also executed the online survey and conducted the interviews on behalf of KPMG.

A total of 196 senior manufacturing executives participated in the survey, all of whom are responsible for, or significantly involved in, supply chain strategy. Respondents were drawn from the aerospace, metals, engineering and conglomerates sectors, and 40% were C-suite executives or above. Thirty-six percent were based in Western Europe, 32% in North America, and 23% in the Asia-Pacific region, with the remainder coming from across the rest of the world. All participants represent companies with more than US$1bn in annual revenue; 42% work for firms with more than US$5bn.

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Global Manufacturing Outlook: Relationships, risk and reach

  1. 1. Global Manufacturing Outlook Relationships, Risk and Reach Global research commissioned by KPMG International from theEconomist Intelligence UnitK P M G I NT E R N AT I O N A L
  2. 2. © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Global Manufacturing Outlook is a KPMG International report that investigates how industrial manufacturers are adapting their business models and supply chain tactics to address the ever-changing global economic context. This report was produced in co-operation with The Economist Intelligence Unit, which also executed the online survey and conducted the interviews on behalf of KPMG. We would like to thank all the executives who participated in the survey and interviews for their valuable time and insight. Interviewees (Listed alphabetically by organization name) Bill Frame Steve Churchhouse President Executive Vice-President of Supply Chain Jacob Holz Company Rolls-Royce Peter Connelly PK Ghose Chief Procurement Officer Chief Financial Officer Leggett & Platt Tata Chemicals Maarten de Vries Timothy Lynch Global Head of Purchasing General Manager of Procurement Philips U.S. Steel
  3. 3. About the Survey A total of 196 senior manufacturing executives participated in the survey, all of whom are responsible for, or significantly involved in, supply chain strategy. Respondents were drawn from the aerospace, metals, engineering and conglomerates sectors, and 40 percent were C-suite executives or above. Thirty-six percent were based in Western Europe, 32 percent in North America, and 23 percent in the Asia-Pacific © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. region, with the remainder coming from across the rest of the world. All participants represent companies with more than US$1 billion in annual revenue; 42 percent work for firms with more than US$5 billion. What are your organization’s global annual revenues in US dollars? $1bn to $5bn 18% $6bn to $10bn $11bn to $25bn 11% 58% More than $25bn 13% Which of the following best describes your job title? 1% 1% 3% Board member Senior VP/VP/Director 15% 12% CEO/President/Managing director Head of business unit 3% 5% CFO, Treasurer, Comptroller or equivalent Head of department 12% COO Manager 8% 17% CIO/Technology director Other 24% Other C-level executive or equivalent In which region are you personally based? 3% 1% Western Europe 5% North America 36% 23% Asia-Pacific Middle East and Africa Latin America 32% Eastern Europe What is your primary industry? Engineering and industrial products 21% Metals 37% Aerospace and defense ConglomeratesAll graphs in this report are sourced 19%from research conducted by theEconomist Intelligence Unit on behalf ofKPMG International. Due to rounding, 22%graphs may not equal 100 percent.
  4. 4. Foreword When we initiated this research paper, chain design and layout has become light manufacturing experts or logistics the world seemed to be returning to far more complex. Leading strategies hubs, while others will serve as centers normal. The reality has been anything now involve detailed scenario modeling for innovation. but, as the stock market recovered then to determine where and what to© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Manufacturers will also become more fell, production improved to replenish source, the optimal number and size resourceful in how they manage risk. inventories and then declined, and of distribution centers, and which Some will reduce exposures in the employment figures remained anemic. suppliers will make the best long-term supply chain by making products closer Globally, business attitudes vacillated partnerships. to point of sale, clustering plants and between confidence and caution, jarred While early outsourcing programs suppliers near key markets. Others, by surprises such as the European were focused on the lower costs of with diverse products across global sovereign debt crisis, relief at better- production in emerging economies, markets, may choose to put than-expected consumer spending then today’s location equation is far more management closer to the supply base, disappointment over sagging consumer layered. In an industry characterized by and engage more directly in developing confidence. All of this showed us that intense pricing pressures, determining and managing key partners. the manufacturing environment has not the most favorable tax regimes, the returned to normal. For DI companies, the new normal most attractive labor markets, and the may offer exceptional opportunities to Our survey findings suggest that impact of currency volatility as well as those willing to create new supply uncertainty is holding companies back the most stable geographies from a chain models that appropriately balance from executing bold changes to their political and regulatory point of view, agility, sensitivity to risk, quality and supply chain structures. Still, with is central to forging competitive cost. While the financial crisis revealed uncertainty showing little sign of advantage. key vulnerabilities in our interconnected abating, organizations may be Given the accelerating pace of global economy, it may also have compelled to reassess their strategy innovation, companies across the sector provided a needed catalyst in helping and operations. Sustained instability in will improve collaboration, trimming organizations create more dynamic, such things as currency, commodity and their supply base in some cases in resilient and responsive supply chains. fuel prices marks a new era in which order to deepen relationships across As the survey results show, the volatility is likely to remain a permanent the board. Ownership and supplier sector is well-poised to leverage that feature of the operating landscape. In models will also become more diverse. opportunity for its continued growth this environment, the advantage will Some functions, once managed by a and success. go to those organizations best able to single company and its sourcing partner, anticipate and respond to changing may become inter-company and business conditions. managed jointly, as a way to spread This has direct implications for supply risk, share development costs, and chains, the central nervous system for accelerate time-to-market. Diversified Industrials (DI) companies. Geographies, like skill sets, have their Traditionally supply chain decisions own maturity curve. Across Europe, rested on routine considerations: who Asia and the Americas, we’ll continue could make the best component for the to see pockets of excellence emerge. Jeff Dobbs best price. But as their role has evolved Some areas may gain prominence as KPMG’s Global Head of from the tactical to the strategic, supply Diversified Industrials
  5. 5. © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Rethinking Risk Introduction ConclusionTable of Contents Supplier Relationships Executive Summary Chain Geography? Changing Supply that Bring Value
  6. 6. Executive Summary As a result of the downturn, manufacturers experienced a relatively short, very sharp shock, followed by a quick rebound in demand aided by substantial government spending worldwide. Despite cautious optimism for a lasting recovery, significant uncertainty about the future remains, especially as stimulus programs tail off. Recent leading indicators point to a slackening in demand –© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. and perhaps worse. This study, produced in collaboration with the Economist Intelligence Unit, surveyed 196 senior executives worldwide to understand how the supply chains of industrial manufacturing firms are shifting as a result. The overall picture is not one of revolutionary change toward a commonly accepted, new set of best practices. Rather, many companies are experimenting with a range of approaches. Some of these may not stand the test of time. Given, however, the standing of the companies studied – all have annual revenues of over US$1billion – those innovations that prove their value are likely to shape the sector’s supply chain strategies in the years to come. Among the survey’s key findings are: Strategic suppliers are increasingly becoming partners rather than purveyors of goods and services. Many companies are looking for fewer, longer-term supplier relationships, and more than half plan either to collaborate more closely with suppliers on – or give responsibility to them for – product innovation, product development, research and development (R&D), cost reduction, and supply chain agility. Interviewees suggest that building closer relationships was worth the price of helping suppliers financially during the downturn. Management of supplier risk has become more hands-on as a result of the downturn, but by avoiding certain risks, companies may be losing out. The recession has also caused companies, as one interviewee puts it, “to sharpen our pencils” on supplier risk. In some areas, however, the tendency seems to be to avoid potential problems altogether, or diversify around them, rather than to understand the risk. This can mean companies lose out on opportunities, such as tapping into the research potential of China. The geography of sourcing, a combination of the global and the local, is in flux as companies consider the appropriate link between customer and supply chain location. Low-cost country sourcing remains the priority for most supply chains, with China as the big beneficiary. While expected geographic shifts within supply chains are largely cost-driven, a significant minority of companies expect them to more closely reflect consumer markets in the future. 4   G LOBAL MANUFACTURING OUTLOOK
  7. 7. © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. G L O B A L M A N U F A C T U R I N G OU T L O O K  5
  8. 8. 6   G LOBAL MANUFACTURING OUTLOOK© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  9. 9. Introduction The downturn was a sharp one for manufacturing: global industrial production dropped 9.2 percent in 2009 after rising just 0.1 percent in 2008, according to Economist Intelligence Unit data. A full recovery to 2007 levels is not expected until 2011, underscoring continued market uncertainty. These annual figures tell only part of the whole story, however, as rapid shifts occurred within each year. JP © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Morgan’s Global Manufacturing Purchasing Managers Index (PMI), as well as most national PMIs, show a sharp drop in output beginning in mid 2008 as companies slashed inventory. The decline briefly touched bottom in January 2009, followed by a surprisingly rapid improvement. By the middle of last year, manufacturing output had even begun to increase. The survey data reflects cautious hope: 78 percent of respondents are either optimistic or very optimistic about the next twelve to twenty-four months only 2 percent are pessimistic. According to the latest economic indicators, though, the outlook is far from clear. PMIs released around the world throughout this summer have suggested that growth is moderating, especially in Asia, which may mean either a blip on the road to recovery, or the beginning of a second dip to the current recession. In such an unpredictable environment, weakening of demand for manufactured goods will naturally make for sustained pressure on manufacturers’ supply chains. This study looks at how industrial manufacturers are adjusting. How optimistic are you about your company’s business outlook for the next 12 to 24 months? Very optimistic 27% Optimistic 51% Neither optimistic nor pessimistic 21% Pessimistic 2% Very pessimistic 0% 0 10 20 30 40 50 60 Source: KPMG International, 2010 G L O B A L M A N U F A C T U R I N G OU T L O O K  7
  10. 10. Survey respondents certainly recognize that current arrangements have weaknesses. At its most basic, supply chain management has always been about obtaining necessary inputs and distributing outputs at the lowest possible cost. Difficult financial times only magnify the importance of value for money. More survey respondents list cost (66 percent) as the leading attribute of their supply chain than any other, and cost uncertainty is the most common concern about© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. suppliers (cited by 48 percent). Regarding your supply chain as a whole, which of the following are the most important attributes? Cost 66% Quality 57% Reliability 49% Flexibility 41% Access to technology/R&D 16% Working with companies where trust has been developed 14% Access to talent 11% Proximity to final manufacturing or assembly plant 10% Ability to co-create on new products orcomponents for products 9% Other 2% Don’t know 1% 0 10 20 30 40 50 60 70 80 90 100 Respondents were allowed up to three selections Source: KPMG International, 2010 In considering your supplier relationships, which of the following are currently your company’s biggest concerns, and which do you expect to be most important in the next two years? 40% Labor cost 36% Cost uncertainties 48% (transport/fuel costs, currency fluctuations, etc) 44% 39% Supplier ability to deliver according to contract 26% 46% Quality 42% Distance of supplier from location of next stage 16% in supply chain/end consumer 23% 22% IP protection 26% 21% Responsiveness 18% Reliability of transportationroute/predictability of 12% travel time 17% Rule of law/return of goods/contract enforcement 9% issues 12% 7% Tax issues 14% 10% Supplier suddenly closes down 11% 0 10 20 30 40 50 Top concerns today Top concerns next 2 years Respondents were allowed up to three selections. Source: KPMG International, 2010 8   G LOBAL MANUFACTURING OUTLOOK
  11. 11. Yet how businesses think about cost makes a big difference. By focusing too narrowly on immediate financial concerns, they may lose sight of the bigger picture. For example, 63 percent say that their company needs to pay more attention to the non-financial elements of supply chain resilience, and 38 percent report that excessive focus on costs during the downturn has damaged relationships with suppliers. © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Do you agree or disagree with the following statements? My company needs to pay more attention to thenon-financial elements of supply chain resilience (e.g., 63% 37%natural disasters, upheaval, infrastructure bottlenecks) The economic downturn damaged long-term relations with our suppliers by forcing us to focus exclusively 38% 62% on cost at the expense of other considerations 0 20 40 60 80 100 Agree Disagree Source: KPMG International, 2010 Despite these misgivings, supply chains are not seeing many broad, revolutionary shifts, whether because of overall uncertainty following the global downturn, widespread satisfaction with current arrangements despite their drawbacks, or simple complacency. This does not mean that nothing is happening. Instead, various companies are looking at a range of changes that, should they prove their value, could become the new supply chain norms as the economy recovers. Three particular areas of interest are supplier relationships, risk management and the distribution of the supply chain itself. G L O B A L M A N U F A C T U R I N G OU T L O O K  9
  12. 12. 1 0   GLOBAL MANUFACTURING OUTLOOK© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  13. 13. Supplier Relationships that Bring Value The most discernable way that companies are strengthening supply chains is by developing closer, longer-term relationships with a select group of suppliers. For example, 41 percent of respondents expect to move toward longer-term contracts, the most common change they foresee over the next two years. This is particularly true for respondents who rank their companies as above average in both supply © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. chain efficiency and reliability. For them, 53 percent expect more long-term contracts, compared with 35 percent of other respondents. At the same time, 39 percent of respondents overall foresee fewer suppliers – the second leading change they expect. These reductions can be dramatic: Leggett & Platt, an American diversified manufacturer, for example, has reduced its suppliers from 60,000 to 17 ,000 overall in recent years, and a typical program at Rolls-Royce, the UK-based global power systems provider, now has 50 to 100 suppliers per program rather than several hundred in the past. Over the next two years, how do you expect your company’s supply chain strategy to change? Over the next two years my company will:Enter into more long-term contracts with its suppliers 41% Decrease the number of its suppliers globally 39% Strategically select suppliers that are located in or near its target markets 37% Integrate its supply chain management IT with its supplier IT systems 30% Cluster its supply chain regionally around areas with greatest expected demand 28% Bring more of the supply chain in-house 24% Cluster its supply chain around its final manufacturing or assembly plants 19% Dont know 3% 0 10 20 30 40 50 Respondents were allowed multiple selections. Source: KPMG International, 2010 As relationships lengthen, they are also deepening. Most survey respondents are engaged in what Philips, the Netherlands-based global electronics firm, describes as “an emerging shift from competing industries to competing networks. 1 ” 1 http://www.philips.com/about/company/businesses/suppliers/aboutsupplymanagement.page G L O B A L M A N U F A C T U R I N G O U T L O O K  1 1
  14. 14. © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Over the next two years, how do you expect your relationship with suppliers to change in the following areas? Product innovation 8% 48% 40% 4% 1% Product development 11% 43% 39% 4% 3% R&D 15% 37% 40% 5% 3% Cost reduction 14% 55% 23% 4% 3% Supply chain agility 9% 54% 30% 3% 4% Product manufacturing 11% 36% 47% 4% 2% 0 10 20 30 40 50 60 70 80 90 100 Shifting this activity to suppliers Collaborating more closely with suppliers No change Less collaboration with suppliers Don’t know Source: KPMG International, 2010 More than half of respondents expect to collaborate more closely with suppliers on, or give responsibility to them for, product innovation, product development, and research and development (R&D). That figure rises to more than 60 percent for cost reduction and supply chain agility. Furthermore, one-third of respondents report that their companies are increasingly becoming assemblers of parts from top-tier suppliers that in effect are managing what once would have been the lead manufacturer’s supply chain. Those with above-average supply chains are even more likely to pursue such collaboration (see chart on following page). They are also more likely to integrate their supply chain IT systems with those of their suppliers (39 percent compared with 25 percent for other respondents). 1 2   GLOBAL MANUFACTURING OUTLOOK
  15. 15. Companies expecting to shift responsibility for, or collaborate more closely with suppliers on aspects of supply chain in the next two years Above-Average Supply Chain Other Companies Product innovation 67% 50% © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Product development 67% 49% R&D 69% 44% Cost reduction 75% 68% Supply chain agility 74% 58% Product manufacturing 59% 41% Source: KPMG International, 2010 The main driver of this collaboration is cost reduction (cited by 44 percent of all respondents). While this might seem counter-intuitive – such a strategy impedes frequent switching of suppliers on price – the shift is a sign of an increasingly widespread appreciation that promiscuity is false economy. Closer, longer-term relationships can help both with price and the overall cost of supplies to the company. On the former, PK Ghose, CFO of India-based Tata Chemicals, points to one of his firm’s leading suppliers, which provided coal to Tata Chemicals on the best possible terms even when prices in India shot up dramatically. More recently, the company has shifted from annual to quarterly pricing reviews for some commodities in order to take advantage of falling prices. “This can happen only if you have excellent relations with your suppliers, he says. “Cost is definitely a ” driver, but you need long-term suppliers that stick by you. ” If you have asked, or are considering asking, your suppliers to increase their involvement in any of the above, what is the biggest driver for your company in doing so? Reduce overall cost 44% Increase access to specialized skills/resources 14% Increase access to specialized technology 13% Reduce overall risk 12% Improve ability to manage regional regulation/legal restrictions 9% Allows company to focus more on other areas 3% We have not asked, nor are considering asking, oursuppliers to increase their involvement in any of the above 3% Dont know 2% 0 10 20 30 40 50 Source: KPMG International, 2010 G L O B A L M A N U F A C T U R I N G O U T L O O K  1 3

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