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Manufacturing’s “Make or Break” Moment

Reshaping global manufacturing.

(originally published by Booz & Company)

Manufacturing is at a crossroads. In one sense, there have never been better prospects for the makers of products than there are right now. Innovation is rampant; capital is available; technological changes have enabled new materials and manufacturing processes; and the global standard of living is steadily improving, enabling billions of consumers to buy new and existing products.

Renewed political interest in manufacturing is also evident. French President Nicolas Sarkozy, upon being elected, vowed to protect his nation’s industrial base. There is a similar movement brewing in the United States, driven in part by the idea of reclaiming an American reputation for quality. But these signs of a potentially bright future coexist with an un­precedented and extremely daunting confluence of challenges. The pressures on manufacturing are so great that they threaten to drive a significant number of firms to bankruptcy — especially those that do not fully appreciate the strategic value and distinctive opportunities of manufacturing.

The uncertain future of manufacturing raises fundamental geopolitical questions: How important is industrial capacity to a nation’s well-being? Can older economies ever be great manufacturing bases again? And, if not, can they survive as global powers?

To understand the answers, we must consider the magnitude of the pressures at play, and the trade-offs that manufacturers may have to make in response. One key factor is the scarcity of raw materials. For the first time since World War II, companies face worsening shortages in steel, aluminum, gold, silver, copper, platinum, and even recycled materials. Mining and processing facilities cannot keep up with ballooning economic growth worldwide. According to a Yale University study, every last bit of copper still unmined, plus all the copper currently in use, would be needed simply to bring the developing world to parity with industrial na­tions in quality of life. Silver, increasingly needed for such innovations as solar cell production, faces a similar shortfall.

Meanwhile, order backlogs for new factory machines have skyrocketed since 2004 as developing countries have significantly increased demand. These factors add urgency to the challenge of developing new processes and equipment.

Labor shortages provide another challenge. By 2020, according to the U.S. Census Bureau’s International Data Base, there will be only two workers to support the pensions of each retiree in Japan, Germany, the United Kingdom, and France — down from three and a half workers per retiree in 2000. And as unemployment shrinks, manufacturing will have to find ways to attract motivated and capable employees. To­day’s companies are already being affected. A tube and fitting manufacturer in northern Italy had enjoyed double-digit revenue gains from expanding sales in China. But when product de­mand jumped, the company could not find enough trained welders in the region. Eventually it imported a contingent of Romanian workers, but unless conditions change, even those welders may soon prefer to work for Starbucks.

And who can blame them? In most plants, industrial relations and treatment of the workforce are reminiscent of the 19th century. From 1999 to 2004, there were more strikes in most Western European countries than occurred between 1950 and 1975, when labor unions were at the peak of their influence. And the success rate of programs that are in part implemented to engage the workforce in sweeping bottom-up reforms — programs such as total quality management, Six Sigma, and Continuous Improvement — is mixed at best.

Manufacturers have also been hit by their own success in providing product variety. Even such simple products as plastic tubes have proliferated. For decades, only one type of tubing was sold for plumbing installations such as floor heating systems. Now, some tubes bend; others keep a rigid shape. Some are lined with recycled composites, others with aluminum. And al­though most will be buried under flooring, they come in black, white, gray, and yellow. Such complexity is often the single biggest cost driver in factories, but few companies calculate its impact or reorganize to meet it. In the auto industry, only one in five production lines can accommodate multiple types of cars, and this industry is said to be the front-runner in the race toward flexible manufacturing.

Regulatory and competitive constraints also take a toll. Indus­trial production is responsible for 15 to 20 percent of worldwide greenhouse gas emissions. As measures to control carbon and other pollutants are mandated, manufacturers will have to find ways to minimize tra­ditional energy use, develop renewable energy sources and grids, protect local water supplies, and meet stricter and stricter regulatory re­porting requirements. They will do this while struggling against new rivals emerging from low-cost countries and while dealing with their own senior management, who often treat manufacturing as a “cost cash cow” — a candidate for reaping another 5 or 10 percent in cost savings.

Because of the complexity of these interrelated threats, it is pos­sible that whole industries will continue to disappear from developed regions such as the United States and Europe.

But there is also the counter­example of leading manufacturing companies, farsighted enough to view their factories, supply chains, logistics and procurement programs, inventory cycles, and labor management as strategic assets. These include Tetra Pak (the packaging giant), Novartis, Lego, Procter & Gamble, Boeing, Toyota, and a significant number of others, large and small. Perhaps the most striking characteristic of such companies is their persistence as attentive innovators of operations. They treat manufacturing experimentation as a source of knowledge for improvement, and their solutions interact in a virtuous circle that reinforces its own impact. For example, to overcome shortages of silver, the solar cell industry has been working to advance its products in a way that relies on more abundantly available materials. These breakthroughs require entirely new designs in process technology. But if they can succeed, then they will not just reduce energy costs but make plant siting more flexible — factories will be freed from having to be near dwindling raw materials — and that in turn could enable supply chain innovations that make it far more possible to manage labor force shifts.

How then can national leaders foster a revitalized manufacturing base? By encouraging the development of more companies with the vision to invest wisely. To be sure, it will never be easy. Even enlightened manufacturing companies must work extremely hard to keep their edge. But with any luck, in the next few years, we’ll see remarkable tools and ideas emerging that break the boundaries of conventional practices. Old, fossilized plant footprints can become nimble networks; confrontational labor relationships can evolve into constellations of joint interest; outmoded supply chains can be transformed into clearly defined, mutually beneficial partnerships; and stolid aging factories can be retrofitted into showcases of lean manufacturing. Only those companies that appreciate manufacturing, invest in technology, and innovate in this field are likely to prosper. The challenge for governments is to figure out how to support them — for they are carrying the future.

Author profiles:

Kaj Grichnik ( is a vice president with Booz Allen Hamilton based in Munich. As a leader of research and practice in manufac­turing, he has visited more than 350 factories and plants in the past 10 years. He focuses on the pharmaceutical, food, aerospace, and automotive industries.
Conrad Winkler ( is a vice president with Booz Allen based in Chicago. He advises companies across industries on supply chain management improvement and manufacturing strategies, with a focus on the automotive and aerospace sectors.
This article is adapted from Grichnik and Winkler’s forthcoming book, Make or Break: The Future of Manufacturing (McGraw-Hill, 2008).

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