This issue we take a look at the manufacturing industry, where a combination of technology, innovation and socio-economic factors together present this diverse sector with an array of opportunities and risks
The manufacturing sector is changing – it’s no longer just about production, but instead encompasses a much wider array of activities. The drivers for change include a combination of technology, innovation and socio-economic factors, which together present this diverse sector with an array of opportunities and risks.
The UK manufacturing sector expanded at a faster pace in January following a modest recovery in export orders. The Markit/CIPS Purchasing Managers’ Index (PMI) survey said cheaper oil – the price of which has fallen over 40% to its lowest price in almost six years – brought about a sharp drop in costs, leading to factories cutting their prices for just the second time in the past five years. Prices paid by manufacturers for raw goods fell at the fastest rate since May 2009. Meanwhile, Markit’s analysis of the Eurozone found that output charges fell for the fifth month in a row and registered the biggest fall for more than a year and a half.
This recent news may be but brief respite in the long term, however. Looking at the bigger picture, material scarcity, extreme weather events, sustainability pressures, organisational challenges and the inevitability of change together present the manufacturing sector with a vast array of roads ahead – some of them rather longer than others.
The term “manufacturing” today describes a much wider array of activities than was once the case. Of these, the largest portion encompasses industries such as chemicals, machinery and automotive. For these industries, the prohibitive costs of transporting heavy goods makes a case for producing these goods close to the customer.
According to analysis by McKinsey, the second largest portion is made up of what it calls ‘regional processing’; this includes as wide a range of activities as fabricated metals, food and publishing. Next are what the consultancy refers to as ‘energy and resource-intensive commodities’ including wood, paper and petrol; ‘innovative global technologies’ (chips, computers and medical products) comes next; and, finally, (and mostly off-shored) ‘labour-intensive tradeables’ such as textiles, clothes and toys.
Many of these industrial manufacturing companies have become quite diverse organisations, with multiple business divisions, and often operating across a number of countries and regions. These complex webs create a number of organisational challenges including slowing down decision-making, harming potential innovation, and the ability to respond quickly to market changes, among other hurdles.
One of the greatest challenges ahead, as companies and products change, is that of the new skills manufacturers will require. Better education in science, technology, engineering and mathematics will be essential in filling this gap. The UK manufacturing sector employs over two million people, contributes £140bn to the UK’s economy each year, is responsible for over 70% of UK R&D investment and accounts for over 50% of exports, underpinning the importance of adapting to new challenges.
As manufacturing continues evolving in the future, a UK government study predicts future sources of new and additional revenue for manufacturers are likely to include:
- Selling services in combination with products much more extensively;
- Using products to generate new information about consumers and the usage of products;
- Becoming ‘factoryless goods producers’, capturing value by selling technological knowledge and leaving production to someone else;
- Shifting to a ‘circular economy’ way of doing business, with end of life products remanufactured and returned to original specifications or better;
- Making use of changes in product ownership, by providing more robust products for ‘collaborative consumption’ as opposed to outright ownership of a product;
- Forming strategic alliances with manufacturers across sub-sectors, resulting in collaborative communities which may become more significant than networks dominated by lead firms;
- Using operational capabilities combined with greater entrepreneurial insight to respond rapidly to technological developments.
Recent figures point to a sector buoyed by the falling price of oil – and represent an apposite time to consider complexities of the road ahead. The future for organisations in this sector will be defined by their ability to adapt to change, and to embed a sense of resilience that will carry it throughout the journey.