Chuck PharrisManufacturing Solutions MarketingFuture of Manufacturing 20+ YearsWe should all be concerned about the future...
Future of Manufacturing?  50 years of predictions*                   Fifties                            n     Improvement...
Economics & Manufacturing   Economics = production, distribution, and consumption of goods and services.  Macro – Employme...
Micro-Economics & Manufacturing     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise©  SA...
Raw Materials - Historical     Micro Economics = Raw                         Materials + Machinery + Labor + Capital + Lan...
Raw Materials - Trends     Micro Economics = Raw                            Materials + Machinery + Labor + Capital + Land...
Raw Materials - Future     Micro Economics = Raw                      Materials + Machinery + Labor + Capital + Land + Ent...
Machinery     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise    Historical    n    Ena...
Labor  Outsourcing and offshoring     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise   ...
Labor  Productivity     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise                 ...
Labor     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise    Historical    n    Low cos...
Capital     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise  Future  n    Deleveraging ...
Land     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise    Historical    n    Drove mi...
Enterprise – (Entrepreneurism)     Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise     I...
Summary Global Parity  Shifting Competitive Differentiators         Traditional Competitive Differentiator           Futur...
Summary  New Innovation Economy                                                                                           ...
© Copyright 2009 SAP AG  All Rights Reserved  No part of this publication may be reproduced or transmitted in any form or ...
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Future of Manufacturing: Innovation Economy

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Explores how the fundamental economic determinants of materials, machinery, land, labor, and capital are neutralized over time leaving Enterprise or "Innovation" the only remaining competitive advantage resulting in an Innovation Economy.

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Future of Manufacturing: Innovation Economy

  1. 1. Chuck PharrisManufacturing Solutions MarketingFuture of Manufacturing 20+ YearsWe should all be concerned about the future because we will have to spend the rest of our lives there."-- Charles F. Kettering
  2. 2. Future of Manufacturing? 50 years of predictions* Fifties n  Improvements in mass production developed during World War II n  Computerization and quality processes are future Sixties 60’s n  Focused on automation and its limitations. n  Emphasis on globalization and the future proliferation of multinational corporations. n  ** “Automation could actually increase operating expenses due to loss of flexibility, increased risks, and time-consuming changeovers.” Seventies n  Rise of the microprocessor on shop floor. Debate - “deskill the workforce or result in more creative and complex work”. n  Labor-intensive nature of software development costs predicted to increase with absolute costs of software. n  *** Multinational firms moved manufacturing and assembly to less developed countries for lower labor costs. Eighties n  Rise of strong Europe and even stronger Japan n  Foreign competition moved from low cost labor to technology adoption and manufacturing techniques n  New materials, computerization of shop floor, computer integrated manufacturing (CIM), quality based practices Nineties n  http://www n  Race to adopt Japanese management notions into new business and product alternatives n  Technology taxonomies, manufacturing unit processes, industrial ecosystems, corporate merger strategies, outsourced/ contracted R&D, and off-shore workforce tactics. 2000’s n  Globalization, geo-political n  Low-cost competition drove technological forecasts n  New product development technologies, sustainable manufacturing, knowledge management practices, nanotechnology * Advanced Technology and the Future of U.S. Manufacturing Georgia Tech Policy Project on Industrial Modernization 2004 ** Automation: Its Impact on Business and People, Walter Buckingham (1961) *** Pavitt, Keith (1973), Technology, International Competition, and Economic Growth: Some Lessons and Perspectives, World Politics, Vol. 25, No. 2. (Jan., 1973)©  SAP AG 2009. All rights reserved. / Page 2
  3. 3. Economics & Manufacturing Economics = production, distribution, and consumption of goods and services. Macro – Employment, Interest, and Money < ------ > Micro – Economic behavior of agents Adam Smith David Ricardo John M. Keynes Milton Friedman 20+ Years Production of Income Land vs Investment Needed Shortage of Money Different Labor & Capital Agriculture Mercantile Industrial Services©  SAP AG 2009. All rights reserved. / Page 3
  4. 4. Micro-Economics & Manufacturing Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise©  SAP AG 2009. All rights reserved. / Page 4
  5. 5. Raw Materials - Historical Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Historical Perspective n  Key determinant of national wealth n  Drove colonialism, mercantilism, and wars n  Only source of wealth of undeveloped countries Economics of Raw Materials n  All new potential wealth, the foundation of all prosperity, comes from the earth. You can either harvest something or mine something to create new potential wealth. n  Human labor produces raw materials to create jobs and incomes. This consolidation of human labor producing raw materials enables the economic cycle that manifests new wealth. n  The economic cycle emerges through the structure of trade. This structure of trade must manifest a sufficient level of wealth to afford all finished goods and services or it becomes unsustainable due to growing debt. Factors of Production©  SAP AG 2009. All rights reserved. / Page 5
  6. 6. Raw Materials - Trends Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Current Trends n  Intangibles – Intangible value exceeds tangible n  Sustainability Focus n  Energy – China surpassed US (< per capita) Intangible vs Tangible Value WSJ – China Tops US in Energy – July 18, 2010 Source: Global Intangible Tracker – 2007, BrandFinance©  SAP AG 2009. All rights reserved. / Page 6
  7. 7. Raw Materials - Future Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Case for Traditional Role n  Hoarding – China acquisitions (Canada/Ven/Russia/Australia) n  Localization – Saudi Arabia diversification – naphtha, aluminum n  Money – Factor of Production? (end of mainstream economics?) Per Commodity n  Geo-politics – Afghanistan minerals Case for New Role Hoarding Self-sufficiency n  Self sufficiency Localization New materials n  New Materials Money - FOP Intangibles (+) n  Increase in non-natural resource wealth creation (services, intangibles) Conclusions: Impact on Manufacturing n  Strategic risk role of procurement n  Increased emphasis on manufacturing innovation/product design n  Drives localization of manufacturing capability vs mass transfers n  Crude oil valued as raw material vs energy furthering pressure on shift of transportation fuels©  SAP AG 2009. All rights reserved. / Page 7
  8. 8. Machinery Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Historical n  Enabled industrial revolution n  Key to increased productivity in agriculture and industry Future – Dramatic Revolution in Mfg Machinery n  Self Assembly n  Nanotechnology n  Bio-inspired manufacturing n  Opto-electronic materials n  Specialized synthetic membranes Conclusions: Impact on Manufacturing n  Multi-disciplined – not just engineering n  Reduce need for scale / micro-factories / make to order n  Manufacturing production machinery will become increasingly agile, flexible, and sophisticated. n  Need for international standards in new production machinery. Genetically Engineered Materials©  SAP AG 2009. All rights reserved. / Page 8
  9. 9. Labor Outsourcing and offshoring Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Outsourcing – Not Manufacturing Decline Productivity Increases Source: Comparisons & Analysis of U.S. & Global Economic Data and Trends, SRI Intl. - 2004©  SAP AG 2009. All rights reserved. / Page 9
  10. 10. Labor Productivity Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Productivity and GDP Comparison of labor costs in the clothing industry©  SAP AG 2009. All rights reserved. / Page 10
  11. 11. Labor Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Historical n  Low cost labor IS current key competitive differentiator of manufacturing n  Automation perceived/concerned as de-skilling n  Full employment is key economic goal Future n  Current developing countries reach relative parity n  Specialization increases as productivity increases n  Geographic diversity increases as knowledge component increases Conclusions: Impact on Manufacturing n  Increased manufacturing productivity in developing countries is correlated in increased personal income levels which drives increased education and skills n  Localization of manufacturing returns without cost advantage n  Value focused on IP vs ‘brute force make’ – shifting skills n  Outsourcing productivity benefits replicate in larger role of componentization n  Instead of deskilling, automation continues to retain productivity with shift of resource focus©  SAP AG 2009. All rights reserved. / Page 11
  12. 12. Capital Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Future n  Deleveraging – Growth in Int’l Equity -> Shifts availability to developing countries n  Equity is more fluid, but more volatile -> caps multi-national consolidation growth n  Equity capital follows innovation (Apple vs Msoft). What Are Intangibles? Human Capital n  Employees’individual professional expertise and skills, social skills, entrepreneurial engagement, ability to innovate and respond to changes Relationship n  Customer capital (brands, customer relationships, relationships with marketing and distribution partners etc.), other business partner capital Capital (supplier relationships / supplier network, contract manufacturers etc.) Structural n  Businessinfrastructure/processes, working methods, information systems, databases, intellectual property (patents, copyrights, trademarks), Capital organizational design, location advantages, corporate culture©  SAP AG 2009. All rights reserved. / Page 12
  13. 13. Land Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Historical n  Drove migration, geopolitics, and wars n  Thomas Malthius - ‘population checked by famine, disease, and widespread mortality’ Future n  Absolute scarcity of land won’t change – §  Other types of ‘land’ (e.g. frequency spectrums, orbital patterns) can be enhanced through technology and substitution (e.g. digital TV) §  Demand decreases with increased productivity and technology §  Scarcity is not in absolute terms but in secondary usage resources; water, access, environmental capacity. Conclusions: Impact on Manufacturing n  Sustainability reaches rapid adoption due to fundamental inherent scarcity n  Continued marginalization of importance of raw land due to shifts in economy (ag->ind->svcs) enabled by technology sustaining and increasing productivity levels n  Enables developing countries to accelerate parity with diminished importance on land as scarce item. Enables them to find competitive differentiator without this inherent constraint weighing on them.©  SAP AG 2009. All rights reserved. / Page 13
  14. 14. Enterprise – (Entrepreneurism) Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise Innovation 1.  There are innovations that sustain things that already exist: they make things better, they make business models stronger. 2.  Then there are innovations that disrupt what is there: they create markets that didnt exist or they transform markets that do exist by doing things fundamentally differently. Future n  Rapid pace of innovation/design n  Globalization – In innovation vs financial n  Componentization/Specialization Impact on Manufacturing Korea Patents Awarded n  Globalization (failed from financial point of view), but continues to thrive from the innovation point of view. Big push for diversity in large corporations is trying to capture this (not EEOC). n  Increased product cycle times and make to order capability n  Close integration with customer to realize innovation n  Must capture value of human, relationship, and structural capital©  SAP AG 2009. All rights reserved. / Page 14
  15. 15. Summary Global Parity Shifting Competitive Differentiators Traditional Competitive Differentiator Future Trend n  Shift to intangibles n  Raw material export for wealth creation n  Sustainability n  Consumed internally n  Machinery n  Fluid equity markets •  IP & Capital were barrier n  Manufacturing microtization •  Mass production/scale n  Make to order (mass customization) n  Educational and per capita income parity n  Low cost unskilled labor in underdeveloped n  Collaborative knowledge worker countries n  Increased specialization n  Fluid equity markets n  Capital availability n  Equity capital follows innovation (intangibles) n  Marginalization of land with technology n  Land – ultimate scarce item n  Global sustainability is required n  Globalization is now in innovation n  Globalization & multi-national consolidation n  Parity, microtization, and componentization drive localization necessary for growth n  Componentization and specialization de-emphasize scale n  Developing countries established R&D n  Innovation n  Realization of intangible value (IP/brands) n  Componentization enables de-scaling and localization of •  Restricted access to IP manufacturing n  Consumer driven innovation©  SAP AG 2009. All rights reserved. / Page 15
  16. 16. Summary New Innovation Economy Innovation Economy Agriculture Mercantile Industrial Services Characterized by n  Hybrid mix of products and services n  Hybrid manufacturing process focused on componentization n  Rapid product design, delivery, and make to order Why Humans Succeed: n  Core competency of manufacturing: To capitalize on competitive differentiation of Collective Intelligence innovation economy: n  Exploitation of Intangibles….human, relationship, and structural n  Return to physical localization of resources, labor, and manufacturing execution, but still globalized in innovation processes n  Focus on innovation and customer/consumer intimacy neutralizes dependency on efficiency of scale in corporate size and geographical consolidation of manufacturing types. WSJ – May 22, 2010 “I can make a whole lot more money skillfully For this vision,… second the successful launching of new managing intangible assets than managing business models by optimizing intangible assets at the tangible assets” maximum level; … Warren Buffet, CEO Berkshire Hwang Doo-yul Hathaway Vice Chairman & Executive Officer of SK Corporation Korean Refiner – 45B Assets, #51 of Platts Top 250©  SAP AG 2009. All rights reserved. / Page 16
  17. 17. © Copyright 2009 SAP AG All Rights Reserved No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of SAP AG. The information contained herein may be changed without prior notice. Some software products marketed by SAP AG and its distributors contain proprietary software components of other software vendors. Microsoft, Windows, Excel, Outlook, and PowerPoint are registered trademarks of Microsoft Corporation. IBM, DB2, DB2 Universal Database, System i, System i5, System p, System p5, System x, System z, System z10, System z9, z10, z9, iSeries, pSeries, xSeries, zSeries, eServer, z/VM, z/OS, i5/OS, S/390, OS/390, OS/400, AS/400, S/390 Parallel Enterprise Server, PowerVM, Power Architecture, POWER6+, POWER6, POWER5+, POWER5, POWER, OpenPower, PowerPC, BatchPipes, BladeCenter, System Storage, GPFS, HACMP, RETAIN, DB2 Connect, RACF, Redbooks, OS/2, Parallel Sysplex, MVS/ESA, AIX, Intelligent Miner, WebSphere, Netfinity, Tivoli and Informix are trademarks or registered trademarks of IBM Corporation. Linux is the registered trademark of Linus Torvalds in the U.S. and other countries. Adobe, the Adobe logo, Acrobat, PostScript, and Reader are either trademarks or registered trademarks of Adobe Systems Incorporated in the United States and/or other countries. Oracle is a registered trademark of Oracle Corporation. UNIX, X/Open, OSF/1, and Motif are registered trademarks of the Open Group. Citrix, ICA, Program Neighborhood, MetaFrame, WinFrame, VideoFrame, and MultiWin are trademarks or registered trademarks of Citrix Systems, Inc. HTML, XML, XHTML and W3C are trademarks or registered trademarks of W3C®, World Wide Web Consortium, Massachusetts Institute of Technology. Java is a registered trademark of Sun Microsystems, Inc. JavaScript is a registered trademark of Sun Microsystems, Inc., used under license for technology invented and implemented by Netscape. SAP, R/3, SAP NetWeaver, Duet, PartnerEdge, ByDesign, SAP Business ByDesign, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and other countries. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and other Business Objects products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Business Objects S.A. in the United States and in other countries. Business Objects is an SAP company. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies ("SAP Group") for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warrant.©  SAP AG 2009. All rights reserved. / Page 17

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