Product Value Management

I met recently a senior executive of a multinational automotive manufacturing company. I took the opportunity to get a practitioner’s point of view on much dreaded exodus of manufacturing jobs. The pragmatic nature of the problem makes it very trivial in the eyes of a manufacturing company executive. What was more interesting to me is the increasing importance of PLM in global manufacturing shift. That insight I want to share. Let me try to reconstruct the discussion as close to the actual, but since this a non-authorized piece, to preserve the confidentiality, real names will not be used. I don’t think it changes the message a single bit though, you will most likely agree if you read through to the end.

VD (Vasco Drecun): Bob, your company recently announced moving another large manufacturing operation overseas. Where does the buck stop?

Bob: We are in fact not moving as much as adding. Our customers are moving their manufacturing operations at a much faster rate than we are. I’d say that most of our established competition has been operating in new markets ahead of us. However, many local competitors are new to all of us and there are many surprises waiting in new markets even as we mostly do business with already established customers… We do expect to have over 50% of our manufacturing capacity worldwide in Eastern Europe, China and India within next seven years. Mind you, a larger portion of it will come through growth of local markets rather then just by relocation.

VD: Does that mean that your current “Great Lakes” manufacturing base will grow, too?

Bob: Most likely not nearly as much, rather maybe decline somewhat. However, there is significant growth potential here in areas other than manufacturing, primarily in research and development and value added services.

VD: You will have most manufacturing operations spread in new markets and low labour cost countries, while growing research and development in a completely different time zone? Please, explain that to me.

Bob: There is something very fundamental here at play. Many people get very emotional about globalization, and fail to recognize the basics of what is going on, although it is very simple. Let me explain. For many decades, as a society, we have been mastering and evolving cost based manufacturing capitalism. In that system, the cost equation drives your choices more than any other consideration. Simply, when everything else is equal or very similar (quality, service, taxes, cost of assets, ownership structure, etc.), lower cost drives your decision. And there is simply no way escaping that fact. The entire manufacturing economy today functions based on that principle. With the expansion of the system boundaries, the same equation still applies. Trade and other regulations are being normalized on an accelerated rate, making cost factor come forward as obvious as ever before. As soon as one of the competitors starts taking advantage of that others have to follow.

VD: So, you say it is inevitable. But, how far reaching is this trend? Does that mean that for as long as you can lower the cost, you have to pursue the opportunity?

Bob: That is a very interesting issue. Today, the world has adopted, more or less, a unified system of economy, and we are now witnessing the pinnacle of cost based manufacturing capitalism. However, we know that if we simply keep playing the game of cost on a long run, we are going to loose many other aspects of value, to our customers primarily, then to our company, to our employees, and to the society as a whole. Consequently, the system needs to evolve, and in a fundamentally different conceptual way. For example, our company is already investigating various for us completely new technologies and alliances that will put us much firmer into integrated telematics. And we never played in that space before. Just within few years of pursuing that opportunity we are on the verge of a major transformation in our business model. What I am trying to describe is how we all have to look at ways to increase value from our products and services to be able to differentiate in an increasingly cost based arena. Rather then focusing on cost, we are trying to define new value and establish much more sustainable competitive advantage to our company.

VD: Well, the technology also has its curve of maturing. Eventually every innovation that gets adopted becomes a commodity over time. In that case you would need to constantly innovate to extend your competitive edge. How does that happen? What changes do you need to go through as a company to execute on that vision?

Bob: This is where we have to apply very sharp focus as a company, with our industry groups and even if you wish, as a society. We are witnessing the dawn of the value based manufacturing capitalism. The system where constant increase in value over much shorter periods of time ties your customers and end users of your products to the brand and life style that your products are resembling. However, to get there our business models need to fundamentally change. For example, we have started our value chain vision exercise several months ago. Among seven areas of strategic focus for change were the profile of our engineers and fundamentally new, dynamic product development system.

VD: You are looking for new engineers across the globe?

Bob: No, the opposite. When we say “engineer profile” we are not considering where to hire more engineers like ones that we have today, but what should an engineer “look like” in order to get us to the value chain vision. And, just in that category the change is very dramatic. For example, we identified that the new breed of engineers needs to have a mixture of technical skills in various disciplines at a higher conceptual level, yet much more refined thinking skills about customer and social trends in general. That is almost directly opposite from having them to focus on details and excel at engineering quality thinking, what we have been mostly pursuing up until very recently. One of our executives called this a “socio-technical” set of skills. We know we cannot develop this profile alone. Educational institutions, government, industry groups, everyone needs to pitch in.

VD: Wow, you are looking many years ahead for sure. This value based capitalism is going to be quite a journey beyond our lives. What about other of the seven areas you identified, is there anything more immediate to be done?

Bob. It seems far fetched but it really is right here around us in many aspects. As I said, another area of strategic focus is our new dynamic product development system. Looking into the value chain that we need to master, we concluded not only that we do not have a very formal development system, that even the one we have documented is rather static, not very useful when it comes to metrics based planning and fast, very dynamic decisions making. In order to reduce the time it takes to plan and execute on innovation, we need much more dynamic planning and execution system tying together requirements, resources and deliverables across all programs. Planning visibility, portfolio balancing and knowledge capture and reuse are big determinants of the success of our new system. We need to increase throughput of new features. Our goals are 50% increase of new features and products over same period of time, and not more than 15% variance on projected program schedule and budget. Suffice to say, we do not want to do that by increasing cost and reducing quality. Thus, scaling our research and development organization to achieve these objectives is what we are focused on right now. And dynamic product development system is a big part of that agenda.

VD: Where are you going to get people to do all of this? Is this something you are trying to do globally as well?

Bob: All seven strategic focus themes are related. We have looked at many different staffing arrangements and ideas and concluded that the best possible option is to develop our base for this part of the transformation right here in Canada. The transformation will be global in nature, of course. However, we believe that the best chance of evolving this agenda is to develop a closely bound group of professionals working on the new DNA for the new type of competition. We are not looking for short term here, although some advancements were surprisingly beneficial and are already being deployed globally. We have also selected strategic transformation partners, and are looking for ways to speed up the transformation with innovative use of information systems and technology.

VD: This is all very interesting. You concluded that the fundamental shift is at play, you then worked out your own vision and transformation roadmap for the new economy and are already contemplating changes. How confident you are that you have guessed this shift right?

Bob: We are practitioners. We have no time to wait for anyone to figure things out for us. Even if we had in the past, the answers were coming as “to little too late”. The changes we are going through have global reach, the speed of changes is much more dramatic than ever before, and the accelerated complexity we are facing can literally freeze us out if we do not act now. We have to figure out our choices quickly and decisively. When we call it value based manufacturing capitalism, it is not to coin a new phrase, it is simply to embed into our heads that we are going to have to compete on a fundamentally different plane going forward. And that new competitive plateau is something that yet needs to be fully defined. Yet, we do feel we have an edge. Constant drive for innovation had been the basic advantage of North American manufacturing for many years. Not being satisfied with status quo, seeking new ways and developing new things, from simple to paradigm shifting innovations. If we reach new grounds faster, we will have more advantage in the global economy and take some of that advantage as profits to our shareholders sooner rather then later.

VD: So, PLM and product development are strategically critical for the new era?

Bob: New approach to product development is the corner stone of our vision. We are actively engaged in transforming our research and development into fast, highly effective operation. The range of possible improvements in this area are much higher than in manufacturing and supply chain right now. And what is more important, these improvements will give us much more boost from the strategic point of view than simply playing the cost game. Many of the tools you are writing about have been considered and few selected in aiding the transformation. The new competitive battleground will shift away from cost based manufacturing into value based manufacturing and we want to be one of first companies to arrive at that destination.

…It is always interesting to talk to practitioners. Their insights come from dealing with daily competitive pressures. It is also encouraging to realize that global shift has been comprehended. Companies coming out with new vision, and particularly those that can execute, establish the trend for many years to come. Looks like we have an interesting road ahead of us when it comes to new product development methods, tools and processes.