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IntegrationNew Opportunities fo Experienced Manufa turers

By John R. Bran

and

George Taninec



In their efforts to meet the rapid and continuously changing demands of customers in

the past quarter century, manufacturers have reconfigured nearly every aspect of thei

businesses. After repeatedly asking themselves a difficult question — “What value does

the production of a product bring to the business of manufacturing?” — many had to

face the stark reality: Production represents an ever diminishing share.

Controlling production and making products are no longer the heart of manufacturing

— and haven’t been for some time. Instead, leading organizations now work with

a team of partner companies, each of which brings its own expertise to meet the

needs of a particular customer group. As manufacturers adapt to this new realitythey optimize their business strategies and processes to create greater value for thei

customer — who promptly ask for more!

This new paradigm extends to the shopfloors of manufacturers themselves, as savvy

executives realize that their own suppliers — manufacturers of high-tech production

equipment and third-party line integrators — are often better at planning, designing

and installing new production lines and upgrades than they are.

How did this come to pass? Why do manufacturers now seek outside expertise to

execute a process so fundamental to their business successes or failures? A quick

review of recent structural changes in manufacturing offers insights in this growing

trend — and practical advice on how to profit from it.

From Mass Production to

On-Demand SatisfactionOnce upon a time, a single imperative drove North American manufacturers: Create

production lines that churn out products as fast as the machinery would allow and

then run every machine at full capacity — accepting as “unavoidable” the resulting piles

of inventory both in the plant and throughout the distribution system. Manufacturers

sought to maximize their machines’ output, thereby justifying (absorbing) the cos

of both equipment and labor. A good manufacturing facility was one that ran long

efficient production runs — without much focus on customization or demand

variation.

Today that world seems as ancient as the industrial dinosaurs that once stood astride it.

Customer Line Integration: New Opportunities for Experienced Manufacturers



A combination of heightened global competition,

shortened product development cycle times and

increased demand for customized products means that

manufacturing executives now face a far more complex

supply chain and production environment. Managers

must now optimize their production, assembly, test,

and packaging lines to coordinate precisely with

fluctuating customer demand. This requires that each

machine or process within a production line be tuned

to deliver a component to the next stage when — and

only when — it is needed: The right product at the right

time in the right quantity. Why? Because in today’s lean

environment, the end of the line must deliver only what

has been ordered — no more and no less. Managing an

on-demand production line requires new skills, leaving

manufacturers with a key question: Where will it be

most effective to procure that expertise?

From Vertical Integration to Supply-Chain ManagementWhere once manufacturers assumed that they must

master and control each part of the production process,

they now understand that they must focus on what

they do best — no more and no less.

Savvy execs realize that mastering each part of the

production process is not only impossible, it impedes

productivity and profits. And while outsourcing may

have started with such non-core activities as human

resources, accounting, and information technology,

leaders are increasingly comfortable outsourcing

functions traditionally associated with manufacturing

excellence, including product design, engineering,

logistics, and delivery. For some, the decision to

outsource the entire production process gave rise toentirely new businesses — contract manufacturing and

contract design — and suggested that manufacturers

no longer needed to own or run an assembly line, or to

design the products that run on them.

Many other manufacturers, however, made a different

choice. For those who believe that making a product

creates a competitive advantage, hiring manufacturing

specialists to improve the effectiveness of the

production process became a path toward increased

profitability. First came consultants, who taught lean

principles, six sigma, and the like, which primarily

concentrate on optimizing the links between processes

and production equipment. Is it any surprise that

manufacturers see the next step in production process

improvement as focusing on the equipment itself?

From Products to SolutionsAnother trend driving line integration is the realization

by manufacturers that customer value no longer resides

primarily in the product itself, but in many other non-product factors, including:

• Quality/reliability/timeliness of delivery and

services;

• Total cost of ownership/procurement/business

relationship;

• Provision of solution bundles, of which the core

product or service may be a small part;

• Transparent access to information that serves the

end-customer and supports the product orservice; and

• Provision of valuable business expertise, even if

unrelated to the core product or service.

Yet as manufacturers turn their attention to providing

these non-product attributes, someone still needs to

focus on optimizing product production. Who within

the supply chain has the expertise to take on this

responsibility?



Use of Inventory-Management Practices(% of U.S. and Canada Plants)

ource: IW MPI 2006 U.S. Census of Manufacturers, 2006 Canada Manufacturing Study

Manufacturers Are Suppliers And CustomersAs supply-chain manufacturing has taken hold, a

vendor community is developing to provide the

products and services that manufacturers still need, but

find unprofitable to maintain in-house. Manufacturers

are becoming these suppliers’ customers, and, like their

own customers, they demand total solutions instead

of products. For example, an increasing number

of winners of the ndustryWeek Best Plants Award

are demanding from their suppliers—and providing

to their customers—non-product customer value

attributes such as just-in-time and point-of-use

delivery, as well as on-site inventory management.1

Similarly, manufacturers who report the most progress

toward “world-class” manufacturing status are more

likely to be receiving and offering such value services

(see chart ), according to data from the IW/MPI 2006

U.S. Census of Manufacturers and the 2006 Canada

Manufacturing Study. For example, 59% of U.S. and

Canada plants that have made significant progress

toward or fully achieved world-class manufacturing

status receive just-in-time supplier deliveries vs. just

31% of plants that have made no progress toward

world-class.2 With the success that world-class

anufacturers have experienced by partnering with

component and material suppliers, is it any wonde

that manufacturers now seek similar success in line

integration by partnering with the vendors who provide

their production equipment?

Together, these structural changes, accelerated by new

technology and globalization, have forced manufacturers

to reinvent the production process. They’ve reduced

eadcount by implementing increasingly complex

roduction technologies that require integration

among a vast array of mechanical, electrical and

electronic components. And they’ve succeeded in

roducing more goods than ever while delivering them

at lower prices within ever tighter timeframes. Yet

these gains have been won at considerable risk, as the

ARC Advisory Group notes, “Engineering expertise onceaintained by manufacturers has shrunk to critically

ow levels. Many of the automation services that are

equired throughout the lifecycle of a plant or factory

can no longer be performed in-house. Users are

ooking to the next logical choice for these services—

the suppliers that provide them with the automation

roducts, systems, and software that keep their plants

unning.”

1 IndustryWeek Best Plants awardcompetition, IndustryWeek magazine, www.industryweek.com.

2 IndustryWeek ManufacturingPerformance Institute 2006U.S. Census of Manufacturers andthe 2006 Canada ManufacturingStudy, sponsored by dvancedManufacturing and theManufacturing PerformanceInstitute.

3 ”Supplier-Provided Automation

Services Worldwide Outlook,”ARC Advisory Group, 2004.



Capturing the OpportunityManufacturers who are ready to take the next

step—outsourcing their line integration activities and

upgrades to experts—first must select an integrator.

They should evaluate integrators based on five key

factors:

• Project similarity: Look for integrators who have

successfully designed and installed projects similar to

the proposed project. First, consider the scope of the

project. Some integrators excel at complete line and

complex assembly jobs. Others are best at stand-alone

work cells. Still others focus on integrating particular

lines, such as conveyor systems or packaging lines.

Next, consider whether to partner with a specialist

or a generalist. Manufacturers in industries that arelarge enough, such as pharmaceutical, food, and

oil/gas industries, can find numerous integrators

who specialize in their particular industry, nearly

guaranteeing that the integrator will understand

the subtleties of the business. Other manufacturers

may prefer to choose an integrator with experience

installing a particular type of line in a variety of

industries, to ensure the project gets the benefit of

new perspectives.

• Product variety and partner preference: Decide

whether to partner with an equipment vendor or

a third-party integrator. Manufacturers who have

decided to purchase a particular brand of equipment

might opt to have the vendor integrate the line, to

take advantage of the vendor’s in-depth knowledge

of the equipment. Manufacturers who would rather

hire third-party integrators tend to want to tap the

integrators’ familiarity with a variety of products,

seeking the best overall solution. However, many

equipment vendors say they are willing to integrate

other vendors’ products, and are designing products

that can integrate with third-party systems.

• Project team type: Ask if the line integration

will be staffed by subcontractors or in-house

experts. Generally, subcontractors could provide the

benefit of increased specialization, but too many

subcontractors could needlessly increase the price

and complexity of managing the project. The use

of in-house staff could make managing the project

more cost-efficient and easier to implement.

Integration process plan: Explore how the

integrator works with its clients, including initial

project specification requirements, project changes

or updates, cost and timeline estimates, and on-going service and support. Will

the integrator help to create the

design document that describes the

present system and the proposed

improvements, or require that the

manufacturer provide it? Does the

integrator work on a time-and-

material basis, or fixed-quote? Will

the integrator allow for updates and changes to the

project? Is there a formal or informal process forhandling changes? And finally, does the integrator

offer ongoing service and support?

• Due diligence: Verify the integrator’s financial

stability by reviewing public documents and the

integrator’s reliability by interviewing customer

references. Ask how — and how quickly — the

integrator solves problems and whether the

integration project met expectations, stayed on time

and on budget.



Once the partnership is established, manufacturers

need to manage six key partnership elements to ensure

its ongoing success. They include :

• Clarity of roles: Each participant must understand

how its contribution allows the production line to

perform at an optimum level. Manufacturers should

expect to share detailed information about customer

needs, as well as the particular competitive advantage

they hope to achieve with the new

line integration or upgrade. Long-

term partnerships require that each

participant agree on a roadmap that

unites current and expected customer

requirements with the hardware,

software, and services that will deliver

on those requirements.

• End-user focus: The manufacturer should expect

the machine equipment vendor/integrator to

understand end-user needs. The best illustration of this

comes from a 2003 IndustryWeek Best Plant winner:

“We not only try to partner with the best suppliers in

the industry, but with the best customers,” the plant

manager declares. “Not only are we taking business

from our competition, but our customers are taking

business from their competition. That’s resulting inadditional sales volume for us.” By knowing the end-

user’s needs as well as his customer does, the supplier

wins an increasing share of its customers’ increasing

share of the arket.

• Trust: In addition to the leap of trust required

to share the end-user information necessary

to forge a successful partnership, the

manufacturer and equipment vendor/

integrator must come to an understandingregarding the degree to which the

partnership’s line configurations are

proprietary. Non-compete agreements must

delineate which industries and to what

extent the vendor/integrator may sell the

new technology, processes, and expertise

that derive from the partnership. In particular,

successful partnerships acknowledge that the

equipment vendor cannot be held hostage to

unending, all-encompassing non-compete

agreements. Many agreements set a length of time

during which the equipment vendor cannot sell the

solution to a competitor, with the understanding

that by the time the vendor is free to resell solutions

the partnership will have begun implementing the

next project. No time limit — or a shorter time limit

— should be granted for resale to non-competitors

Ultimately, the manufacturer must feel confident

that the implementation will not be sold to a

competitor, while the vendor/integrator must be able

to capitalize on the knowledge gained from a new

implementation.

• Shared goals: In collaboration, parties mus

agree to production standards and benchmark

metrics. They must work in tandem to maximize

overall competitiveness, including joint efforts toimprove quality and delivery.

• Flexibility: Both parties must understand the

need to quickly change course to meet inevitable

changes in the marketplace. Use of common

information technology systems, as well as proactive

periodic, and systematic assessment and analysis o

the partnership, can facilitate such flexibility.

• Win-win thinking: A stable, long-term partner-ship requires that both the manufacturer and the

equipment provider/integrator profit from the

relationship.

_____________________________________

List adapted from: DavidDrickhamer, “Envisioning theIdeal Value Chain,”IndustryWeek , May 21, 2001.

George Taninecz, “In GoodCompany,” ndustryWeek ,October 2003.



A Win-Win Collaboration

Within every challenge lies an opportunity. In their customers’ new demands for line integration and upgrade

services, smart machine equipment vendors are finding opportunities to grow their businesses, while

increasing both margins and customer retention rates. Indeed, service is the fastest growing segment of theautomation market today, according to the ARC Advisory Group. Their research shows that the worldwide

market for supplier-provided automation services is expected to grow at a 9.1% compound annual growth

rate over the next five years (see chart ).

Equipment vendors face the same

challenges as their customers.

Manufacturers no longer want to buy

machines; they, too, are looking to buy

solutions to their production problems.

The hardware that equipment providers

deliver no longer provides a competitive

differentiator for either the equipment

manufacturer that sells it or the

customer who buys it. ARC’s report notes,

“As manufacturers adopted standard,

commercial-off-the-shelf (COTS)

products and components to reduce the

cost of hardware they eliminated most

of the proprietary competitive advantage that automation suppliers could build into their hardware. With

hardware no longer a competitive differentiator, suppliers looked to their software and service offerings as

well as vertical industry expertise to make up for the losses experienced in the hardware business.”7

As manufacturers outsource elements of l ine design and implementation or upgrades, they do so at different

levels, creating opportunities for machine equipment makers of all sizes. Not all vendors will have the capacity

to deliver complete solutions, and not all customers will be able to invest in turnkey integration services.

Larger equipment manufacturers will work to capture the opportunities to provide full-line integration and

contract partnerships that provide continuous line integration and upgrade services.

Smaller equipment vendors will want to capture their share of this lucrative market by creating alliances

that offer extensive integration services, either with larger, full-service integrators, or with a group of small

manufacturers who, together, combine specialized expertise. In addition, there are significant opportunities to

provide line integration at each step of the integration or upgrade process, from consulting and engineering

and design through to spare-parts management and replacement. These opportunities also include installation

and training, system and device maintenance, and performance management.

________________________________________________________________________________6 “Supplier-Provided Automation Services Worldwide Outlook,” ARC Advisory Group, 2004.7 “Supplier-Provided Automation Services Worldwide Outlook,” ARC Advisory Group, 2004.



Today, experienced manufacturers understand the

need for continuous, rapid change, as well as the

resulting need to question every business practice. They

understand and expect new strategies that provide

competitive advantage to be copied quickly and to

become standard business practices. And they know

that within each new strategy lie the seeds of the next

change. Companies that recognize early the need for

change will be first to capitalize on new opportunities.

The common theme throughout any industry’s

estructuring is the imperative to shift specific process

esponsibility to that link in the supply chain that can

ost effectively meet it in terms of cost, quality, speed

and expertise. Savvy manufacturers will recognize

that line integration and upgrades are the next

ogical processes that require the specialization tha

outsourcing can bring.

“Customer Line Integration: New Opportunities for Experienced Manufacturers” is brought to you by

the Italian Institute for Foreign Trade (I.C.E.) and its U.S.-based Italian Trade Commission as part of their

Machines Italia promotional program. This program is designed to promote capital goods trade between

Italian machinery manufacturers and U.S. companies. Participating Italian machinery manufacturers’

associations include Agriculture/Farm Machinery; Ceramics; Earthmoving Machinery; Food Technology;

Footwear, Leathergoods and Tanning; Foundry and Metallurgical Machinery; Glass; Marble and Stone;

Metalworking; Packaging; Plastics and Rubber Printing; Graphics and Converting; Textile Machinery; and

Wood.

______________________________________________________________________________________

John R. Brandt is CEO of the Manufacturing Performance Institute and the former editor of both Chief Executive

and ndustryWeek .

George Taninecz is Vice President, Research, of the Manufacturing Performance Institute and the former managingeditor of IndustryWeek .

______________________________________________________________________________________

If your company would like to increase productivity and improve yields while being cost-efficient at the same time

then Italian machinery and technology should be a consideration in your upcoming capital purchases.

Contact Machines Italia c/o the Italian Trade Commission at 1-888-ITALTRADE, or visi

us at www.machinesitalia.org for more information on how Italian companies and

technologies are providing North American companies with the expertise to produce the

right product at the righ time in the right quantity and to help them grow their businesseswhile increasing both margins and customer retention rates.

ACHINES ITALIA C/O ITALIAN TRADE COMMISSION

1-888-ITALTRADE

www.machinesitalia.org

NEW UPDATES AND INFORMATION ADDED PERIODICALLY!

© 2006 Manufacturing Performance Institute. This document was developed exclusively for the Italian Trade Commission and its partner associations.No use or extracts of this material may be reproduced and/or distributed without the written consent of the Italian Trade Commission. All rights reserved.

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