A View From INSEAD

Why Does Manufacturing Matter?

Risk management today is like quality management two decades ago

Professor Enver Yücesan

Professor Enver Yücesan
Programme Director of the Supply Chain Management  programme

March 2013

Professor Enver Yücesan, Supply Chain Management and Manufacturing in a Global Network Programme Director, explains why manufacturing does matter and how risk management today is like quality management two decades ago.

Why does manufacturing matter?

Following a fall of 0.1% in the third quarter of 2012, economies in the Euro zone contracted by another 0.6% in the fourth quarter. German exports fell by 4.5% in 2012 compared to 2011. Similarly, French exports fell by 4.6%. In fact, French exports were off by 8% compared to their level in 2008 (Floyd Norris, IHT, 16.02.13). It is not a pure coincidence that, since 2009, France has seen the closure of more than 1000 factories, leading to the loss of 120 000 jobs -with 24 000 in 2012 alone (Les Echos, 5.02.2013). A recent study byMcKinsey Global Institute shows that manufacturing accounts for 70% of global exports, drives 77% of R&D expenditures in the private sector, and contributes 37% to growth in productivity. These statistics clearly show why manufacturing still matters.

How much does manufacturing contribute to a nation’s prosperity?

It is increasingly difficult to speak of manufacturing and service sectors independently from one another. One does not buy a product, but a product-service bundle. Think of a washing machine and the three-year warranty you buy with it. Or buying a car along with its financing. No services can exist without manufacturing. A healthy manufacturing base, however, is a pre-requisite for a healthy economy, as manufacturing is the engine of value creation.

What are the drivers of manufacturing competitiveness?

There is a set of prerequisites: an efficient logistical infrastructure, including transportation, information and communication technologies, a stable regulatory and tax environment, access to reasonably-priced energy and raw materials, etc. These are necessary criteria to participate in the game. However, the depth of the talent pool is rapidly becoming the key criteria to get ahead in the game. Educational programs coupled with apprenticeship initiatives are therefore becoming crucial for the sustainability of manufacturing.

How has manufacturing evolved in the last few decades?

The impact of globalisation has probably been felt in the strongest way within low-end manufacturing. In industries like textiles, manufacturing bases have been migrating from Turkey to Egypt, from China to Vietnam, dynamically reconfiguring the global supply chains as the drive for lower cost is intensifying.  For industries with much higher IP content such as pharmaceuticals, specialty chemicals, high-end electronics, however, industry has stuck with regions which satisfy the above criteria for competitiveness.

Talented human capital is one of the most important resources in manufacturing and SCM today. How do the programmes at INSEAD help nurture talent?

We nurture manufacturing management talent along two dimensions. The first dimension is the process view. We emphasise excellence in three key processes, namely new product and process development, process development, and supply chain management. We reinforce this process excellence by management quality, including delegation, integration, communication, participation, people development, and performance management, that is needed for direction setting and strategy deployment.

Do you help companies and individuals innovate?

We help companies to innovate by pushing the participants out of their comfort zone, by questioning traditional practices, by bringing success and failure stories from other organisations, industries or geographies, and by engaging in constructive discussions. We show that innovation is not limited to products or processes; one can also innovate one’s business model. My favorite example here is from Syngenta, which offers integrated crop solutions instead of selling seeds and chemicals to farmers. In an initiative called Tegra, Syngenta is selling rice on a tray that can be cultivated in the field like English grass!

How do you help companies and individuals make sense of complicated supply chains?

Supply chains are indeed getting increasingly complex. However, the basic drivers of value creation, value capture, and sustainability are universal. We therefore focus on the key building blocks to build a strong foundation. We then guide our participants build on this platform by taking their specific requirements. It is like training a basketball player on shooting, rebounding, and dribbling. Once the fundamentals are in place, one can then deploy the game plan and execute it much better.

How do you help participants manage risk in their supply chains?

Our first challenge is to put risk on their radar screen. Risk management today, in my view, is like quality management two decades ago. There is a designated person in the organisation whose job is to manage risk. Our objective is for our participants to internalise risk by promoting risk-based thinking in all design and execution decisions they take. We offer them a framework, tools to measure the impact of various sources of risk as well as the cost and benefit of various mitigation strategies. We provide them with best-in-class examples. And, in certain cases, we are even willing to run some pilot initiatives with them to show the rest of the organisation the importance of risk-based thinking.

Traditionally SCM is seen as one block in the manufacturing process, but you aim to teach that SCM should be seen as a value creator. Could you please explain?

If we view Operations, Manufacturing, and Supply Chain Management as a cost driver to be minimised, we would be missing out on significant opportunities.  Instead of this myopic perspective, we must adopt a value perspective. To this end, we should view SCM as the deployment and execution of an organisation’s go-to-market strategy. There is always a cost-service trade-off; however, SCM is all about mitigating this trade-off by concurrently designing superior products, effective processes, and high-performance supply chains. Mitigating the cost service trade-off is a pre-requisite of value creation. Supply chain alignment is necessary for value capture. This value (not cost) thinking ultimately gives us the key to sustainability, which is really the ability to design and assemble assets, organisations, skill sets, and competencies for a series of competitive advantages, rather than a set of activities held together by low transaction costs.

What do you think 2013 holds for SCM and global manufacturing?

Highlighted by the latest food safety concerns, deadly fires at subcontractors, and natural disasters, risk management should take the front seat in 2013. Consumers are watching supply chain practices more carefully than ever before. Visibility, traceability, social responsibility will all become key drivers shaping consumer choice. We also have to revisit the environmental impact of global supply chains. For example, we should be considering the impact on the environment of producing in a lower-cost region like China to get the economies of scale in manufacturing and then shipping goods to the four corners of the globe.

Interested in one of our operations programmes? Consult our Supply Chain Management webpage.

 

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