Transform to Innovate Key takeaways for engineering executives from the Oxford Economics report on manufacturing transformation
How will manufacturing transformation reshape the race for competitive advantage? PTC commissioned Oxford Economics, foremost experts in industry research, to look ahead. In this report you ll find the study s key takeaways for engineering executives. Oxford Economics Oxford Economics was founded in 1981 as a joint venture with Oxford University. Since then, they have become one of the world s foremost independent global research firms. Headquartered in Oxford, England, with offices throughout the world, Oxford Economic employs more than 80 professional macroeconomic and industry economists one of the largest teams of economists in the private sector. Get more information at oxfordeconomics.com PTC PTC s technology solutions help customers transform the way they create and service products across the entire product lifecycle from conception and design to sourcing and service to create sustained competitive advantage. Founded in 1985, PTC employs approximately 6,000 professionals, including 1,300 dedicated service professionals, serving more than 27,000 businesses in rapidly-evolving, globally distributed manufacturing industries worldwide. Get more information at PTC.com
Survey Profile Oxford Economics surveyed more than 300 manufacturing executives early in 2013. The survey covered major industries and world markets. Respondents represented a range of titles and business functions, from companies large and small. The complete findings can be found in the Manufacturing Transformation report. Click here to download. What is your firm s industry segment? Medical Devices 17 % 16% Industrial Equipment 17 % 16 % 17 % 17 % Aerospace and Defense Automotive Electronics / HighTech Consumer / Retail / Apparel In which country is your company headquartered? United States China Japan Germany South Korea Taiwan France Denmark Norway Sweden Finland 0 5 % 10 % 15 % 20 % 25 % 30 % 35 % What best describes your role? Which best describes your business function? Annual revenue 41 % 59 % Supply Chain / Manufacturing Product / Engineering IT Very large: over $5b 21 % 25 % Small: $250m $750m I am a C-level executive I report to a C-level executive Strategy Service Operations Finance Large: $1.26b $5b 29 % 25 % Medium: $751m $1.25b 0 5 % 10 % 15 % 20 % 25 %
Survey Findings What executives told us points to manufacturing industries and companies in transition. Their answers helped fulfill the survey s objectives to: ANALYZE how external market forces are transforming manufacturing strategies and competitive positioning. MEASURE the impact of strategy and planning, service, and manufacturing operations on business performance. PROVIDE INSIGHT into how manufacturing firms will drive growth, innovation, and customer satisfaction in the future. In Depth To provide additional context for the research study s findings, Oxford Economics interviewed executives from selected manufacturers in depth. You ll see mini case studies on some of these companies, plus others, inside: John Deere Emerson Climate Systems Ingersoll Rand Herman Miller Piaggio Group Rolls-Royce Boston Scientific Flip through this e-book s pages for the survey s findings most relevant to engineering executives.
External market shifts Economic realignment 66 % Technology change Talent shortages/labor costs 61 % 60 % Supplier/partner relationships 60 % Global competition Increased regulations 36 % 46 % Changing customer behavior 45 % 51 % 52 % 59 % 65 % A New Era Shifting market realities are reshaping the competitive landscape for manufacturers today. It s a new era of big opportunities and big challenges. At left you ll see the macro trends most affecting today s global manufacturing leaders. Engineering executives generally share these concerns but with some notable differences from other manufacturing executives. Technology change Engineering executives (51%) are significantly less concerned about new technology than executives overall (61%). They may be further ahead in how to best take advantage of Big Data, social and mobile media, the cloud, the Internet of Things, and more. Talent shortages / labor costs Engineering executives (65%) are somewhat more worried than executives overall (60%) about finding the right people for the right jobs. They re seeing more of a skills gap. Global competition Engineering executives (52%) feel competitive pressure, domestically and from abroad, less severely than manufacturing executives overall (59%). Could it be they ve been in the thick of global competition for longer, and are a bit more adapted to the heat? Increased regulations Regulatory requirements are of less concern to engineering executives (36%) than executives overall (46%). Compliance pressures may be greater where manufacturers interact more immediately with their customers, such as in marketing, sales, and service. 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % Engineering executives All executives
Limits Of Optimization There s room to save more. But most view optimized manufacturing operations as the price of entry. Nearly two-thirds of manufacturers now see operational optimization as the market entry price. This will exceed 70% in three years. Micro trends occurring within manufacturers own walls show where the continued focus on operational efficiencies is likely to be sharpest. Optimization and cost reduction trends Optimizing manufacturing operations has become the price of entry. 65 % 71 % Key Insights Just over half of survey respondents say they ve wrung out just about all the savings they can from manufacturing and supply chain optimization. Aerospace (41%) and consumer and retail manufacturers (44%) are behind the curve, as are very large firms (48%). Who will realize the biggest savings from operational optimization over the next three years? Survey says: automotive (72%) and industrial equipment (70%) manufacturers. Aerospace and consumer and retail manufacturers will continue to play catch-up. C-level executives (57%) believe their companies have achieved greater cost savings from optimization than their direct reports (48%). Profit pressures will drive European firms to increase their emphasis on cost savings by 39% over the next three years. That s compared to 16% in the U.S. and 25% in Asia. Most savings from manufacturing and supply chain optimization have been realized. 52 % 65 % 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % % of respondents In 3 Years Case in Point: John Deere For John Deere, continued leadership in tractors focuses on the drive train. Innovative designs aim to exceed customer expectations on all performance parameters. A further challenge has come from Deere management s commitment to shrink lead times for building a drive train from 40 50 days to one week. Efficient machining of drive-train castings and gears has become a Deere core competency and a competitive edge. Source: Manufacturing Transformation, Oxford Economics, June 2013
Transformation Required The third industrial revolution is upon us. Manufacturers must transform to compete. Nearly seven in 10 manufacturing executives expect their companies to undergo a major transformation over the next three years. Technology, globalization, and innovation are the driving forces. Here are transformation strategies they re pursuing: Design anywhere, build anywhere, service anywhere will grow 125% to 58% of surveyed companies in three years. Aerospace (67%) and emerging markets (72%) will be early adopters. Servitization will come of age. By 2016, the use of performance-based service contracts will leap to 65%. Use of remote diagnostics will rise to 56%. One result: Engineering teams will increasingly design for service. The supply chain will become more critical as a strategic asset. Manufacturers leveraging their supply chains will nearly double to 57% in three years. Smart products will see 38% growth to 53% of surveyed manufacturers. Not surprisingly, high-tech manufacturers lead, as 71% expect to adopt smart products by 2016. Very large firms (60%) are moving quickly in this direction too. 3D printing and additive manufacturing will grow in use. While still early for these technologies, manufacturers adopting them will increase by 123% to 27% in three years. In automotive, adoption will reach 40%. The third industrial revolution: The digitization of manufacturing will transform how products are made. The Economist, April 21, 2012 Case in Point: Emerson Climate Systems Over generations of new product launches and upgrades, Emerson steadily improved the core compressors in their Copeland Scroll line of refrigeration units. Design teams noted that the sensors measuring the units electrical usage were also collecting data valuable to customers for optimizing their own business operations. Sensor-based diagnostics now competitively differentiate Emerson s product offerings. The smart product rules. Source: Manufacturing Transformation, Oxford Economics, June 2013
Keys To Success Manufacturing executives identified three keys to successful transformation initiatives: 1 Strategy & Planning 2 Product as Service 3 Innovation Everywhere Survey findings on the next few pages, comprising the heart of this ebook, expand upon these specific concerns particularly from the engineering executive s perspective.
Strategy & Planning for a Competitive Edge Most important for improving competitive positioning Strategy and planning have eclipsed execution as manufacturers top competitive driver. Product innovation is paramount. Strategizing and planning for products ranks highest in importance across manufacturing industries especially among engineering executives. Conversely, engineering executives are less likely to believe that competitive advantage will come primarily from service execution and supply chain strategy. 35 % 30 % 35 % 41 % 51 % Strategy and planning for products Strategy and planning for manufacturing Manufacturing execution 26 % Case in Point: Ingersoll Rand 33 % 38 % Strategy and planning for service 18 % 27 % Service execution 16 % 14 % Supply chain execution Ingersoll Rand s heating, ventilating, and air conditioning products sold under the Trane brand name have long been known for excellence. But the company aims for more. They know that what customers care most about is a comfortable climate. Product strategy and planning thus focus on providing the best customer experience over the product s full lifecycle. Diagnostic data obtained from service helps ensure this. 13 % 23 % 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % Engineering executives % of respondents Strategy and planning for supply chain Other executives
Strategy & Planning for Coordination & Collaboration To get and stay ahead, manufacturers will increasingly coordinate on strategy and planning enterprise-wide. Coordination and collaboration across business functions Between supply chain/ manufacturing and service Feedback from service improves service planning Between engineering and supply chain/manufacturing Key Insights Manufacturers will increasingly use the product and service performance insights gained from service execution, not only to improve service planning, but also to help drive critical decisions in product development and manufacturing and supply chain management. Engineering executives told Oxford Economics how much the feedback from service can influence their products designs. This ranges from small enhancements to major innovations such as designing for service and the use of remote diagnostics to create smart products. Case in Point: Herman Miller Between engineering and service Feedback from service improves product development and quality 0 % 20 % 40 % 60 % 80 % 100 % % of respondents Engineering executives Other executives Feedback from service improves supply chain/manufacturing Herman Miller, the US-based office furniture manufacturer, developed their innovative desking design equipping extended tabletops with small screens to separate the adjoining workspaces through their overseas R&D operations. The company is now migrating this popular new concept to North America. Cross-team coordination and collaboration will be key to the product s successful rollout. Source: Manufacturing Transformation, Oxford Economics, June 2013
Strategy & Planning for Going Global Manufacturers will strategize and plan for globalization more than they already have. Manufacturing executives expect the globalization of product development to double in three years. In fact, all aspects of product lifecycle management will further globalize. Engineering executives are right in line with others on globalization. Only systems engineering, as a means to integrate smarter and more complex products, will grow faster for them. Case in Point: Piaggio Group Piaggio is a world leader in motorcycles, commercial vehicles, and scooters. Among their regional brands are Gilera, Derbi, Aprilia, and more including the Piaggio name itself. The company s globally distributed development teams and partner networks support these brands. Their challenge: to link every part, process, and person in the exchange of information needed to speed innovation across the enterprise. Piaggio relies on process lifecycle management (PLM) technology to manage the complexity and stay ahead. Growth in methods to coordinate strategy and planning Global product development 72 % Engineering executives Other executives Systems engineering 76 % Global product platform 65 % Global portfolio management 36 % 0 % 20 % 40 % 60 % 80 % 100 %
Product as Service Service isn t an afterthought to design. In fact, it s central to a product s success. For most manufacturers today, service has become a critical competitive differentiator and a major driver of profits. This trend will accelerate and further impact the product s design and engineering in the future. Key Insight Valuable data on product performance, collected through the delivery of service, will increasingly drive product design changes and enhancements. And new products will increasingly be designed, right from the outset, with service delivery in mind. Total: 64% 71% Three Years from Now Case in Point: Rolls-Royce U.S. 62% 67% Europe 75% 82% Asia 59% 66% Companies enhance services as a key way to differentiate their products. Growth 59 % 25 % 42 % Performance-based service contracts Service as a profit center Remote diagnostics Rolls-Royce is among many manufacturers now viewing the product as a service as core to their value proposition. The company no longer just sells airplane engines they sell the hours their TotalCare service plan helps keep an engine up and running. Roll-Royce thus guarantees the engine s performance by taking responsibility for its operations. This makes product reliability and uptime top concerns for both customer and manufacturer. 34 % Bring service in-house 0 % 10% 20 % 30% 40 % 50% 60 % 70% 80 % 90% 100 % % of respondents
Innovation Everywhere Transformation will drive innovation across the enterprise, for every function. Manufacturers will not only strive to make better things they ll also need to make things better. Innovation will happen everywhere especially in product strategy and engineering, but in supply chain and service optimization too. Key Insights The highest-margin firms will focus even more heavily on innovation: product innovation (81%), supply chain innovation (18%), and service innovation (75%). Manufacturers overall will focus more on innovation in product strategy and engineering processes (76%) than innovation in service and the supply chain (68% each). Greater focus on innovation Product strategy and engineering innovation 64 % 76 % Reverse innovation is growing fast. Firms will increasingly design products in emerging markets and bring them to developed regions (35% today to 50% in three years). Case in Point: Boston Scientific Supply chain innovation Service innovation 60 % 68 % 58 % 68 % 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % % of respondents Boston Scientific has maintained a small company-like spirit of open innovation even as it has grown steadily larger. The medical equipment manufacturer recently launched a web-based innovation portal allowing inventors inside and outside of the company to propose new products and enhancements. Ideas are reviewed and tested against expected outcomes and opportunities for commercialization. The portal captures, and helps systematize, the creative process of innovation that can happen anywhere, anytime. Source: Manufacturing Transformation, Oxford Economics, June 2013
Value Drivers What transformation initiatives promise to create the most value for manufacturers? How will these change in the future? What s driving manufacturing executives Growth 3.4 % 7.6 % Accelerating product innovation The differences between the top value drivers today and three years from now show manufacturing executives shifting priorities. The changing rankings also help confirm the three keys strategy and planning, product as service, and innovation everywhere to successful transformation. Notable Shifts Accelerating product innovation is already the most important value driver for engineering executives. In three years, it will rise from second most important to most important for other manufacturing executives as well. Reducing product development costs, while always the goal, will rank significantly lower in importance, compared to other value drivers, by 2016. -17.4 % -1.1 % 21.4 % -15.3 % -20 % 6.8 % Improving product quality Reducing product costs Improving global product development 7.1 % -5.4 % Streamlining product risk mitigation/regulatory compliance 0 % 0 % Reducing product development costs 0 % 10 % 20 % 30 % 40 % 50 % 60 % % of respondents Engineering executives Other executives
The pressing needs to transform and innovate will spare no manufacturers. Changing markets, technologies, and competition assure challenges for all. How, then, should engineering executives shape their priorities going forward? Findings from the Oxford Economics research suggest this basic process 1 Map market trends to strategy and planning. The new reality: Global economic headwinds over the past decade (cited by 66% of survey respondents) have combined with ongoing technological change (cited by 61%) to create a systemic rather than cyclical change in manufacturing competition. 2 Align and coordinate strategy and planning activities. Engineering leaders increasingly strategize from a company-wide perspective. Plans align across engineering, service, supply chain, and manufacturing functions. Success demands a closed loop within the organization and between the manufacturer and their partners. 3 Rely more on service data to drive product quality. Manufacturers use feedback from service execution not only to increase the customer value they provide through service, but also to help improve product performance. Within three years, over half of surveyed executives will be harnessing service data in this way. 4 Understand and tap the sources of innovation. Leading manufacturers source innovations from emerging markets, then bring them to the more developed world (50% within three years). Expanding use of smart products (60% of very large firms, 70% of high-tech firms, by 2016) adds insight into customer needs. Want to know more? Download a more detailed summary of the Oxford Economics research findings. http://www.ptc.com/topics/manufacturing-transformation/oxford-research/ 2013, PTC Inc. (PTC). All rights reserved. Information described herein is furnished for informational use only, is subject to change without notice, and should not be taken as a guarantee, commitment, condition or offer by PTC. PTC, the PTC logo, Windchill, and all other PTC product names and logos are trademarks or registered trademarks of PTC and/or its subsidiaries in the United States and other countries. All other product or company names are property of their respective owners. The timing of any product release, including any features or functionality, is subject to change at PTC s discretion. J2456-PTC-ebook-EN-0813