IDC Manufacturing Insights Community > Automotive Industry Future Blog

Could PLM Have Prevented the Toyota Catastrophe? (1 Comment)

Wed, 03 Feb 2010 01:01:45 +0000

Last week I received an email from one of the top PLM vendors with this question: "could PLM have prevented the recent recall of Toyota cars?" Earlier today, I was interviewed by a top-tier business magazine, and, perhaps not surprisingly, one of the questions was: "why wasn’t simulation able to predict the increased friction in the accelerator pedal mechanism and prevent the failure?"

My response to both was that no, I did not think that PLM could have prevented the failure altogether. It is my opinion, however, that when used effectively, PLM can reduce the likelihood of failures, expedite root-cause analysis, and the formulation of remedial steps. In the case of a recall, PLM, combined with other tools, can reduce the number of recalled cars, thereby reducing costs and damage to the brand image.

Before I discuss the rational behind my responses, I am interested to hear your opinions whether PLM could have / should have prevented this or similar product failures.

See more on this recall here http://idc-insights-community.com/posts/073f490f43

Lessons to be Learned From the Toyota Recall

Tue, 02 Feb 2010 19:00:17 +0000

Entry by Joe Barkai

Entry

The recall of 2.3 million Toyota vehicles last week to correct an unintended acceleration caused by a sticky accelerator pedal is another blow to the company's nearly unblemished reputation. Only a few months ago, Toyota recalled 4.3 million vehicles for similar concerns, blaming floor mats lodged under the accelerator pedal as the root of the problem.

In typical fashion of humility and responsibility, Toyota president Akio Toyoda apologized to customers and halted the sales and production of eight Toyota models. With annual production of roughly 6.3 million vehicles and sales of nearly 10 million units worldwide, Mr. Toyoda's action is significant. Certainly, Toyota has deep pockets and can surely survive the loss of revenue. Nevertheless, recovering from the damage to its legendary quality image will be difficult and prolonged. Indeed, last week, Toyota's stock was down 16.7% and Consumer Reports removed Toyota from its recommended vehicle list.

The impact is felt beyond the Toyota name plate. Pontiac Vibe, which is built on the same platform as the Toyota Matrix, is also subject to the recall.

According to Automotive News, a Toyota spokesman confirmed rumors that the problem is caused by premature wear on the accelerator pedal's return mechanism that can stick or cause sluggish return when released. The company that manufactures the pedal mechanism, CTS of Elkhart Ind., issued a press release on January 29 claiming that it did not make the accelerator pedals in many of the affected vehicles, and that it is not of aware of any accidents and injuries caused by pedal mechanisms it manufactured. And there are unconfirmed rumors that the cause for the unintended acceleration was related to software.

CTS' other customers include Honda, Nissan and Ford. On January 28, Ford said it was suspending production of the Ford Transit sold in China, although, according to company, no incidents have been reported in China or with the Transit model.

It appears that Toyota was aware of the problem as early as 2003. Since 2004, The National Highway Transportation Administration (NHTSA) commenced at least 5 investigations, and closed these investigations without finding a problem. Toyota's own investigation, involving several models and different suspected root causes, did not lead to a decisive remedial action.

So history repeats itself. Between the highly publicized incidents of unintended acceleration of the Audi 5000 in 1986, to the fatalities related to Ford Explorers fitted with Firestone tires, to today's Toyota's massive recall, millions of cars were recalled for safety reasons, sometomes only after public outcry and government intervention.

The call for better reporting and early warning systems isn't news. In the fall of 2000, President Clinton signed the Transportation Recall Enhancement, Accountability and Documentation (TREAD), designed to provide consistent reporting of tire-related safety issues and provide an early warning system for OEMs and tire manufacturers. The TREAD act was enacted in response to fatalities related to Ford Explorers fitted with Firestone tires, but the initiaive was never expanded to address other automibile related safety concerns.

Another highly publicized effort was launched by the Automotive Industry Action Group (AIAG) in 2005. However, OEMs participating in the Early Warning Standards initiative were unenthusiastic to share key data with their competitors and the public, and the reduced-scope version of the project appears to have lost steam.

Despite the negative publicity of massive recalls and those initiatives, automakers are still too slow to recognize and respond to quality and safety problems and are too quick to shift the blame onto their suppliers, who, without decisive evidence, may be compelled to deny or assume the blame for quality issues they are not responsible for.

Since as early as 2005, Manufacturing Insights has argued for the need for improved visibility and analysis of fielded products. Product companies must leverage all available sources to glean information about their products lifecycle, especially once a product has been placed in service. Warranty returns, field repairs, customer complaints, and similar information must be used to detect quality and safety issues and to improve current and future product design, manufacturing, and channel operations.

The fundamental challenge brand owners face is how to conduct effective analytics and decision-making across design, repair and warranty activities that are scattered between dealers, suppliers and OEMs. We see OEMs and suppliers alike grappling with:

Disconnected information systems
Inconsistent information repositories and taxonomies of structured and unstructured data
Strained OEM-supplier relationships and fragmented organizational decision-making processes

The ecosystem of the automotive industry is not going to get any simpler. Technological complexity, including new technologies pertaining to hybrid, electric and fuel cells, and the massive proliferation of electronics and software will continue to escalate. New manufactures and brand owners will attempt to enter the marketplace, bringing with them much needed innovation, but will lack experience in managing complex supply chains and global manufacturing operations.

Some of the required changes are significant and will take time and effort to implement, especially those requiring process changes. In any case, the automotive industry cannot afford to wait and must invest in technologies and systems to deal effectively with early warning signs. Software providers such as SAS and Teradata have shown that, given the right data, their tools can detect adverse quality patterns in complex data sets that provide meaningful analytics and insights that would help OEMs react swiftly.

Longer term, the automotive industry must invest in means to reduce the likelihood of performance quality and safety issues, and when they do occur, facilitate faster resolution. to The industry should achieve:

Consistent product taxonomy and data collection methods
Advanced analytics to identify patterns that should be monitored
Design and manufacturing information and traceability data that can be shared with suppliers for effective root cause analysis
Accurate manufacturing history to facilitate accurate recalls

Ideally, these insights should be communicated between OEMs and suppliers, giving suppliers a much needed broader and consistent view of their parts installed in multiple vehicles, but this may be asking for too much too soon…

ERP vs. PLM: Debating the Wrong Question?

Fri, 29 Jan 2010 10:37:50 +0000

Entry by Joe Barkai

Entry

For quite some time all was quite. So long as ERP managed enterprise data and PLM software was, for all intends and purposed, about managing CAD, everyone was content. However, over the past several years, there has been a deliberate growth in both camps. PLM vendors are going upstream to manage non-CAD activities and data such as suppliers data, compliance information and technical publications. ERP companies, most notably Oracle, claim a position at the center of the PLM, or, more importantly PDM universe, arguing for the exclusive right to manage the "single version of the truth."

So now we are debating PLM vs. ERP. Some of these discussions have a very strong, and, in my opinion, incorrect undertone of IT architecture debate: who owns what data repository, where are the boundaries, what are the integration points, and so forth. One blog discussion attempts to separate ERP as the "execution engine" from PLM, which is "innovation focused."

It's too tempting to be lured into the trap of innovation management: Is innovation a process? An engineering discipline? An art form? Can it be managed? Should it? I spoke and wrote about companies that are reckless innovators vs. those that practice deliberate, efficient and lean innovation. But independent of the question what the innovation process is, I think it incorrect to define an IT architecture for innovation. Furthermore, it's not about innovation as an orthogonal activity; it’s about making better and more effective portfolio and product-related decisions.

Therefore, I view PLM (the practice, not the software) as a strategy and a practice to making effective decisions throughout the product lifecycle. These involve all activities, from, yes, innovation, to design & engineering and manufacturing, and continuing downstream to sustainment and support to end of life.

Many of these decisions are best made early in the product lifecycle, where, admittedly, PLM software tools dominate the activity. However, better decisions are those that are informed by experience, insight and data from all lifecycle phases and from other products: manufacturing, quality, supplier performance, customer experience, and so forth; data that in most instances is managed by the ERP system, but often involves other software as well.

Another key decision activity pertains to portfolio-level decisions. For example, organizations must consider how the development and anticipated success of new innovation might impact other products still in development or already on the market. And what about optimizing engineering and manufacturing resources allocation for multiple projects? Surely this is ERP and not PLM, although in many organizations those decisions are more likely driven by an unwieldy collection of Microsoft Excel spreadsheets and Project files.

Going forward, I do not see the need for debating or defining the role and jurisdiction of PLM vs. ERP software. An effective integrated decision-making framework must be inclusive of multiple business and engineering disciplines and the associated software tools. Organizations will come to terms with the need to maintain heterogonous CAD and possibly even PLM software tools, to optimize product lifecycle decision-making.

Keywords

PLM, ERP, Innovation

Auto Industry Change: Sustainability & PLM

Tue, 26 Jan 2010 18:08:46 +0000

Entry by Joe Barkai

Entry

The pace and complexity of change the automotive industry is facing is staggering. If we look ahead 10 or 20 years, how many times will the product need to change? Kimberly Knickle and I have taken a look at just a few of the high profile announcements we've seen over the last couple months - from recent auto shows, investments in new technologies, and even the relationship between the industry's products and regulations, voluntary or involuntary. A common theme runs through many of these announcements - sustainability.

For the auto industry, sustainability isn't just about one issue or one product. It's about addressing a combination of environmental, social, and economic issues, such as customer expectations, government regulations, and financial pressures, all at the same time; knowing the risks and opportunities across every aspect of the business and across the lifecycle of every product is crucial.

Earlier in January, at Detroit's auto show, much of the conversation was about incorporating new greener technology into the products. "Green technologies are the master key to the future of the automobile," said Thomas Weber, the head of research and development at Mercedes-Benz.

A wave of technology and business innovation is upon us in the form of electric vehicles and new supporting infrastructure. In December, 40 cities around the world announced that they will focus on four key areas necessary for becoming electric vehicle ready in collaboration with BYD Auto, Mitsubishi, Nissan, Renault and the Clinton Climate Initiative. Cities in the United States include Chicago, Houston, and Los Angeles.

Better Place, an infrastructure provider for electric cars founded by former SAP executive Shai Agassi, raised $350 million in equity as part of a second round of financing. Better Place is working on creating a network of battery-swapping stations (to complement a network of battery charging spots) for plug-in electric vehicles. In September of 2009, Renault and Better Place signed an agreement to bring the infrastructure and Renault's first passenger electric vehicle to Israel.

Automakers also need to respond to the growing pressure to capture their product's environmental footprint, for their own use as well as for outside interests, including regulators and even car buyers. The Product Life Cycle Accounting and Reporting Standard is one of two new GHG Protocol standards that defines a method to account for emissions associated with individual products across their life-cycles and of corporations across their value chains. The standard was developed in 2009 and recently introduced by the World Resources Institute, which developed the standards along with the World Business Council for Sustainable Development. Ford Motor Company is one of the companies testing this new reporting standard.

We also acknowledge that it's going to be years before we have a regulated or de facto standard for green autos and a supporting green infrastructure. But this industry can't wait. It's essentially guaranteed that automakers are going to have to redesign their products over and over again in response to changing customer expectations, regulators, and the available infrastructure. For an industry that is characterized by very long engineering cycles and multiple iterations to align technology, quality, and customer adoption, this is going to pose yet another significant challenge for which it may not be ready.

We think that it's this complexity inherent in sustainability-centric decisions that makes product lifecycle management (PLM) such an important component in a company's sustainability efforts. We expect PLM to be essential for companies in the auto industry to evaluate vehicle platforms and pick the optimal design. And we expect companies to rely on PLM to be the basis for change when that design has to change once again.

Are you using PLM for your sustainability projects? Let us know.

Keywords

Automotive, PLM, Sustainability

GM Opts to Keep Opel

Mon, 16 Nov 2009 14:57:16 +0000

Entry by Benjamin Friedman

Entry

GM’s decision not to sell its Opel division to automotive-parts supplier Magna International Inc. has generated discord with workers’ unions in Germany, as well as the German and Russian governments. Union and legislative protest against GM’s decision will peak in the short term. Nevertheless, Opel’s non sale provides a glimpse of GM’s forward strategy in locations such as Eastern Europe. Moreover, the company’s choice not to divest Opel is a reflection of GM’s increasing global confidence.

We believe that GM is looking to push manufacturing to the local level. Locations where GM has significant R&D and manufacturing expertise, such as Germany--where GM/Opel maintains four facilities--will be increasingly important as GM looks to reduce supply chain latency between manufacturing locations and an emergent Eastern European market. Viewed in a broader context, Opel's non sale can be interpreted as a move to globally neutralize Chrysler/Fiat, which has recently established its presence in GM’s home territory.

Opel’s Astra model is manufactured at the company’s Rüsselsheim, Germany, location. This model and Opel’s sister brand, Vauxhall, represent considerable European market penetration. Ambitious forecasts put Astra sales at 500,000 units per annum. The significance of such projections should not be understated. They help explain GM’s warming enthusiasm for the Opel brand and the facilities that design, manufacture, and support the platform. GM’s support comes in spite of the fact that Opel has been losing money. Furthermore, GM has stated, albeit it quietly, that by the close of calendar year 2009, it will bring Opel plants online with its Global Manufacturing System (GM-GMS).

Opel’s addition into the GM-GMS, compounded by its excess manufacturing capacity, suits GM’s European plans nicely: Opel plants will be capable of producing GM models as well as the native Opel line, moving GM’s most significant European presence a step closer to achieving a flexible manufacturing posture. GM’s European footing serves the OEM’s hopes of meeting shifting European market demands, while mitigating restrictive costs related to long-distance shipments of the finished product.

Had GM sold Opel to Magna, it would be reasonable to assume that Magna--with Russian government intervention--would have expanded its capabilities to compete directly with GM’s Chevrolet platform, which GM views as being well suited for the Eastern European market. We contend that GM’s Opel and Vauxhall lines may suit this market just fine, and perhaps GM is overextending itself by expanding manufacturing and distribution of the Chevrolet brand. Whatever GM decides, it will leverage Opel’s existing infrastructure to act as both a manufacturing base and a sales channel for its brands in Europe.

GM’s decision to retain the Opel brand in its global portfolio was determined less by current economic realities and more by future product and profit opportunities. By maintaining existing Opel infrastructure and technical expertise, GM appears willing to absorb the negative blows that come from union and public-sector squabbles as costs of doing business in the global automotive space, where rules, process, and boundaries have shifted with economic and market realities.

Keywords

GM, Opel, OEM,

A Past in the Rear View, A Future in the Data View

Mon, 26 Oct 2009 14:23:56 +0000

Entry by Benjamin Friedman

Entry

I recently attended an informative event produced by Columbia University. The event "Changing Gears: Shifting the Global Auto Industry from 'Push' to 'Pull'" offered an array of speakers, ranging from UAW leadership, OEM management, Tier 1 supplier to dealership owner. This breadth of perspectives demonstrated a telling commitment by stakeholders from across the U.S. automotive industry to make fundamental changes. Animated panel discussions addressed themes around collective bargaining agreements, a lack of U.S. industrial policy and the impacts of the recently concluded Cash-for-Clunkers program. However, regardless of specific industry topic, an undercurrent of technical innovation and the place of information technologies in the U.S. automotive industry moving forward was present.

The UAW representative prudently avoided addressing topics of workforce entitlement and other gold plated benefits, choosing to focus her remarks on how U.S. automotive workers represent the vanguard of an industry forced to compete in a global market, one where protectionism in nations (Korea was cited specifically) put the U.S. automotive workforce and, by proxy, Americans at a disadvantage in a global market. While this point was inarguable, the UAW representative furthered her case when she raised the challenges of an aging workforce, and cautioned her fellow panel members concerning the inadequate numbers of incoming technical workers; a demographic challenge that is certain to further adversely impact the efficacy of the American automotive workforce.

OEM and suppliers at the Columbia University event offered similar view points on the state of the industry. Both seemingly agreed that the three U.S. automotive manufacturers had been experiencing a "Slow Goodbye" and that the re-birth of the industry and distribution networks would be formed around a notion of creating satisfied customers by delivering high quality products that the market desires. By implication, the three had -- in recent history-- ignored their customers and did not produce vehicles the market wanted. As stated by both the OEM and dealership representative, the time to concentrate on satisfied customers is now. In fact, the OEM representative contended that "satisfied customers are our greatest asset."

An important narrative emerged at the Columbia event that may be lost on the population at large. Buried in the national debate predating President Obama's bailout of the U.S. auto industry was the fact that nearly 80% of those employed by the auto industry do not work at the three OEMs; rather, are employed at suppliers. Long the backbone of the U.S. auto industry, U.S. automotive suppliers represent the future as well. Debating the pros and cons of the bailout is best left to others; nevertheless, the rolling unemployment at suppliers and supplier attrition that would have followed if a bailout had not been extended would have been profound.

Looking forward, U.S. OEMs will be well served to put increased emphasis and resources into their supply chains to meet the demands of the future. What we anticipate this means is that automotive supply networks will evolve to a point where they can approximate the long discussed 'just in time' manufacturing model, while also mitigating the dreaded lot rot that has plagued many automotive dealerships in recent history. This is best accomplished if supplier distribution networks are built atop supply chain information technology frameworks that are inclusive of stakeholders from across the ecosystem of supplier, OEM and dealership.

As a takeaway from the Columbia event, it seems that if the U.S. automobile manufacturers hope to compete with an Asian automotive industry that by 2010 will produce 60% of vehicles worldwide, U.S. OEMs and their suppliers must adopt an ethos that is predicated on being product oriented and process driven. Investment in information technology is at the forefront as a key enabler of industry transformation – in improving knowledge management for an aging workforce, in connecting with consumers, and in coordinating complex supply networks.

Keywords

Automotive OEMs, Automotive Suppliers, UAW, General Motors, Supply Chain, Knowledge Management

Creating Industrial Policy – What Governments Must Keep in Mind

Tue, 20 Oct 2009 17:39:03 +0000

Entry by Robert Parker

Entry

In the early 1980's, there was a lot of discussion about Japan's rising economic power and how western countries could better compete. One of the primary areas of discussion was the fact that Japan had a well considered and long range industrial policy. The call for other nations, particularly in the United States, to create an industrial policy was loud and clear. The premise was that industrial policy would have a positive effect on economic performance through more thoughtful and efficient allocation of resources.

The US ultimately took a different tact. By using tax policy to encourage investment and deregulating industries, the twenty year federal policy of Ronald Reagan and Bill Clinton let the market decide how to most efficiently allocate resources, not some government ministry. And it proved to be a most successful approach with tremendous growth in productivity and economic competitiveness.

However, these policies may have been taken to an extreme and unbridled markets ultimately put us in a difficult economic circumstance and left the country's manufacturing base a shadow of what it once was. The importance of a robust manufacturing is not lost on the citizens as they intuitively know that converting raw materials into products represents a greater economic contribution than, say pricing a derivative for a financial market. In fact, Deloitte and The Manufacturing Institute just released its annual index which showed that Americans believe manufacturing to be the most important factor in sustaining economic health. All of the recent financial chaos and call for a broader manufacturing base has reignited the conversation about establishing an industrial policy.

And we believe that there is a role for government in setting industrial policy to assure not just economic competitiveness, but national security as well. However, we implore would be policy makers to understand the following realities:

* Industrial policy should be about productivity, not jobs. The ability to produce more value with fewer resources – productivity – has been the economic security blanket for nations that have enjoyed growth in this area. When discussing lost jobs in the manufacturing sector, it is easy to lay the blame on low cost countries, but the fact is that more manufacturing jobs have been lost to automation than off-shoring and this is a good thing because it raises productivity. Even the citizens get this – in the aforementioned Deloitte study, only 17% of the respondents chose manufacturing as a preferred place to start a career. The lesson is plain, industrial policy should be based on goals for productivity improvements, not job creation.

* Avoid the economic zone trap. Policy makers will be tempted to direct benefit toward geographic regions that are most destitute. There is frequently talk of "economic zones" where there are specific incentives offered to businesses to invest or even direct government investment. While well intentioned, this tact is ill advised. Not only is there a long track record of failure, the new structure of manufacturing will be away from large centralized plants built for scale and toward more flexible, focused facilities as close to demand as possible. This necessary distribution of manufacturing assets means that a policy that tries to concentrate on a specific region will be counter productive.

* Enable the policy with infrastructure investment. The distribution of manufacturing assets has implications for how to think about infrastructure investments as well. The existing transportation infrastructure is in dire need of an overhaul but perhaps not as much as the $12 trillion some industry groups have suggested. The Interstate Highway System, built out under Eisenhower, enabled economic growth, but is based on large centralized production plants and cheap fuel. Since both of those underlying assumptions have changed, we must consider how to support long haul of raw materials via rail and short haul deliveries using natural gas, electric, and hydrogen powered vehicles. More efficient delivery of energy and a national wireless data backbone would also enable an industrial policy based on productivity objectives.

* Do not enable industrial policy with fiscal policy. Past attempts at industrial policy have used tax mechanisms such as investment tax credits to encourage new activity with only modest results. There are, however, two things that can be done that may lift impediments (although not necessarily enable) to productivity growth. First, policies that seek to tax foreign profits of domestic companies will not bring jobs back home and will actually have a negative effect on productivity. Secondly, a tax exemption for those companies that create real economic value (i.e. manufacturers) should be considered. This exemption will encourage more investment and remove barriers to domestic expansion.

* Focus on fair trade policies. Foreign trade policy has emphasized free trade for most governments and this in turn has fueled tremendous global growth. However, the recent recession brought some fairly aggressive sanctions and retaliation that has made trade a bit more contentious and raised fears that economic conditions could be worsened much like what happened during the great depression. Industry policy must be supported by trade policy that his based on a doctrine of fairness – encouraging the free exchange of goods but discouraging tactics like currency manipulation.

In looking at how the industry will reset for the "intelligent economy", industrial policy can be an important enabler to individual national competitiveness and contribute to a stronger global economy. Policy makers must not be dragged into the old approaches and make policy based on economic outcomes, not political ones. For manufacturers, movement toward this type of industrial policy will put a renewed importance on being connected, intelligent, and collaborative – intelligent execution for the intelligent economy.

Signs of Recovery? We'll See.

Sun, 16 Aug 2009 17:52:46 +0000

Entry by Robert Parker

Entry

The government issued data on factory output for July and the results were encouraging. Output rose 0.4% in the month, the first increase in nearly a year. Much of the credit was given to the automotive industry as the "cash for clunkers" program combined with pent up consumer demand moved vehicles off the lots. The results raise some interesting discussion.

Question number one – is the automotive industry really on the mend? The data highlights how important the automotive industry really is to the overall manufacturing sector of our economy. Assuming an average rebate of $4,000 and the fact that the billion dollars initially allocated for the program was consumed in July, a good estimate would be that 250,000 vehicles moved thanks to the program. Given that sales in the US in the first half averaged around 800,000 per month, this was a nice bump. However, according to Edmunds, June represented the most expensive month on record for incentives with an average of nearly $3,000 per vehicle. We have frequently lamented how the industry has conditioned customers to "wait for the rebate" before buying and now we have simply moved the rebate to a government program. A more long term (and less expensive) policy may be a federal mandate to overhaul state and local dealer statutes that limit how the brand owners can sell and market to consumers. The distribution system in automotive is cast in historical cement and no real progress will be made until it is transformed.

Question number two – is this part of an overall recovery? In 1984, seventy percent of the vehicles purchased in the US were produced in the US. Want to guess what the number is today? Seventy percent. The difference is that the brand owners producing in this country are not limited to the Detroit three. Also, China surpassed the US as the number one market for automobiles in the first six months of this year, helping to prop up the results of companies doing business there, most notably GM and Volkswagen. There was also optimism in China in the high tech industry where government issued vouchers provided money toward the purchase of consumer electronics, a critical part of that country's industrial base. However, one must ask if all this government stimulus in North America, China, and Western Europe is a temporary win in an attempt to shovel against the tide of the business cycle. IDC Manufacturing Insights was accused of being too optimistic in the doldrums of this recession, but we think it is wise not to get too optimistic at this stage in the recovery.

Question number three - are the jobs coming back? There is a lot of talk in the business media about a "jobless recovery" – that we'll start to see rebounding economic data, but won't see the jobs that were eliminated coming back. However, one must keep in mind that jobs always lag in a recovery. Even so, there is some truth in the permanent job loss sentiment when it comes to manufacturing. We believe that manufacturing firms, including the automotive industry, will use growing cash reserves to invest first in factory automation that will provide a level of flexibility and responsiveness to better serve the market. IT investments in customer relationship, product, and supply chain management will be favored over any overhaul or upgrade of core systems. All of this investment will deliver greater productivity gains than adding people back into the organizations. While some jobs will return, many of the absorbed losses won't be resurrected.

I'm interested in what you think about these three questions. Are there other questions we've missed? Are you optimistic or pessimistic about the recent data? Where are you seeing new investment going in anticipation of recovery? Join our community and be part of the conversation.

Keywords

automotive, PLM, SCM, Operations Technology

Welcome to the Reset Economy

Mon, 20 Jul 2009 18:12:52 +0000

Entry by Robert Parker

Entry

A term has emerged in the business press to describe our current economic situation – the Reset Economy. The term, with attribution for origination typically given to Jeff Immelt of General Electric, refers to the sense that this economic recession is more than a simple business cycle correction, but is a permanent, fundamental change to how markets will operate and be influenced moving forward. To quote Mr. Immelt:

"I believe we are going through more than a cycle. The global economy, and capitalism, will be “reset” in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner […] I think this environment presents an opportunity of a lifetime. We get a chance to reset the core of GE and focus on what we do best."

Perhaps the better term is the "Mulligan Economy" because no one needs a reset more than companies like GE who became embroiled in and paid for their involvement in the types of creative financing that initiated the current economic malaise. However, we agree that the inevitable economic recovery will be characterized by markets that look fundamentally different – more influenced by governments than the financial community, capitalized based on proven fundamentals rather than creative speculation, and serving discerning customers rather than impulsive buyers. The good news for GE and other industrial firms is that the "core of what they do best" – engineering, manufacturing, selling, and servicing products – will represent the most valuable capability in the new economic order.

The renewed appreciation for manufacturing firms is consistent with our predictions for 2009 which indicated that companies would seek to preserve capital while preparing for a 2010 recovery represented by markets that had undergone fundamental change. We were careful to emphasize capital preservation over cost cutting strategies and often point to the press releases and public statements related to layoffs at large manufacturing companies which specifically note that the moves were to preserve capital not to defend profitability. And the numbers for the first half of 2009 bear this out, according to the Bureau of Economic Analysis, United States businesses have cut inventories by almost $250 billion and capital expenditures by over $275 billion. Additionally, investors were flocking to safe corporate bonds which created a sellers' market that financially strong manufacturers have taken advantage of to restructure their debt, lower their cost of capital, and build cash to take advantage of opportunities in recovery.

Thin inventories, pent up demand for capital appropriations, and strong cash balances all translate to heightened economic activity in the manufacturing industry in the second half of 2009 and into 2010. What does this mean for the Information Technology buying? It doesn't mean a return to the pre-recession status quo, but to a reset for priorities, delivery mechanisms, and expectations for vendors.

We find it interesting to look at Information Technologies' impact on the current economic situation. Better information and decision support tools allowed companies to react faster to changing market conditions. Certainly, the rapid deceleration of activity and the nearly quarter of a trillion dollars in inventory reductions can be, at least in part, credited to the sophisticated systems companies have in place. Going forward manufacturing companies will have place a priority on three key investment areas:

Cheaper (or more variable) infrastructure costs. Manufacturing companies were able to increase investment in improved organization and use of information without increasing overall IT budgets thanks largely to technologies like virtualization which allowed a more variable cost structure. One CIO told us that virtualization was a "game changer" for his organization because it gave him greater flexibility in provisioning data center resources. Going forward, growing acceptance of software as a service (SaaS) delivery models and cloud computing will take this to the next level.
Integrated decision making. Manufacturing firms have invested heavily in the essential components of decision support – data warehousing, analytics, business intelligence, and collaboration tools. Companies will now invest to better integrate decision making. This includes better integration within a process domain (e.g. supply chain) where strategic decisions inform tactical decisions which inform operational decisions. It also includes better integration across domains such as product lifecycle decisions influencing sales and marketing decisions. Just as Enterprise Resource Planning (ERP) integrated a wide range of corporate process automation applications, integrated decision environments will unify decision support.
Autonomic operational processes. The rise of sensors, identification, and location chips and the ability to wirelessly connect them represents an opportunity to acquire data without human intervention and facilitate the remote control of processes. These smarter operational systems will overtake the accounting centric ERP platforms as the center of a manufacturers' application portfolio.

These three areas of investment are relevant across all segments of manufacturing. IDC Manufacturing Insights recommends that companies look at the "reset" vision of company operations and how IT can align with delivering key capabilities. One thing is certain in the new reality, management will increasingly be evidenced based and information technology will no longer about just keeping score for the accountants, but about driving new operational capabilities, creating resiliency to risk, and delivering more rapid responses to shifting market conditions.

No other industry has been uprooted more in this economy than the automotive industry. What do you think its "reset" look like? Will it dictate similar IT investment strategies?