Breaking new ground with E&M
For engineering and manufacturing companies, the future is increasingly global and increasingly complex. Logistics contributes to master these challenges.
The E&M Sector is set to experience outstanding growth.
Two anecdotes, 130 years apart, illustrate the evolution of Engineering and Manufacturing (E&M) business models and supply chain processes. In 1879, Siemens received an order for “lighting machines” from the port of Shanghai. The German company delivered a 10-horsepower generator for port lighting, which enabled loading, unloading, and stowing operations to take place round the clock.
Today China is an incredibly important market for companies such as Siemens as for other customers in the E&M sector. And when the German port of Bremerhaven needed to increase its capacity, the new gantry cranes arrived fully assembled – from Shanghai.
The goal was the same in both cases: to maximize the competitive advantage. This comparison illustrates though, how global supply processes and relationships in the heavy machinery sector have evolved from fairly simple supply chains to complex networks – a change that is still evolving as new “management technologies” are also being developed in parallel. Up to the end of the 1990s, European and American companies in the E&M Sector mostly manufactured products and goods for customers in industrialized countries, with relatively less focus on emerging economies. By now, exactly these emerging markets have become the primary growth markets. As a consequence, the more simple supply chains of the past have been largely replaced by continuously evolving and increasingly more complex global networks.
And the next stage of evolution has already begun. As costs and risks have become ever more complex, the industry is reducing the proportion of in-house manufacturing and production. Manufacturers are now shifting more and more production (and related risks) to 1st and 2nd tier suppliers. They also depend on external third-party logistics providers (3PL), such as DHL, which support them with their supply chain expertise. Those providers who can integrate supply-chain know-how with customers’ business requirements have the possibility of becoming trusted partners when it comes to improving production processes. In addition to offering a variety of service capabilities, strong 3PL providers have the capacity to integrate downstream suppliers.
Era of truly global manufacturing
The E&M Sector is set to experience outstanding growth. According to MRSC Business Research, the turnover for aerospace and defense, construction equipment, industrial equipment, and non-energy mining is likely to soar from €5.2 trillion in 2012 to €7.7 trillion by 2015. A survey by McKinsey on the future of industrial production suggests that large and complex capital goods might make up around 17 percent of worldwide industrial production. McKinsey expects an “era of truly global manufacturing, marked by highly agile, networked enterprises.”
Against this background, supply chain operations have evolved from being merely a “necessary evil” to a key factor in achieving competitive success – being as important as the product itself or its price. “Any company that does not pay attention to its supply chain management might not survive, and it certainly won’t prosper,” says Nada R. Sanders, an advisor with consultancy Ernst&Young. Supply chain management can “lead to profitability, lower costs, and greater agility.” Mistakes are no longer allowed. Business today is going to manufacturers who are able to get the right product to the right place at the right time – with reliability, visibility, flexibility, and efficiency also viewed as essential measures of success.
Logistics as enabler for efficient processes
For logistics companies, this means evolving to meet these new changing needs. They must cope with many new interfaces and complex global processes. Supply chain service providers are now taking over more critical processes for customers, via operational tools such as control towers and order/shipment visibility and tracking. Moreover, they are in charge of the strategic positioning of both production and repair parts.
Challenges can be enormous and occur with minimal advance warning. Caterpillar, for example, had to respond quickly when a recent surge in oil prices resulted in the need for many new production sites around the world, typically in hard-to-reach locations. Within just two years the company had to double the number of its massive “797” dump trucks in operation at Canada’s Alberta oil sands (to over 200 units). That meant moving huge quantities of out-of-gauge goods (OOG) to the remote Canadian wilderness.
And the situation is still evolving. “Thanks to the strong development of emerging markets, completely new freight passageways are appearing on our world map – such as passages between Asia and Africa, between Asia and South America, and within Asia. The expected relative weight of the flow of goods between the continents will shift considerably,” confirms Heiko von der Gracht, Director of the Center for Futures Studies and Knowledge Management at the European Business School in a study for consultancy firm of PricewaterhouseCoopers.
Trends in engineering and manufacturing
In preparation for this development, companies such as DHL have started to undertake extensive research into the future needs of companies looking for strategic competitive advantage. In the E&M Sector, solutions have started to reach a high degree of consistent alignment and standardization – that is, economies of scale. This allows DHL to better anticipate the needs of customers and subsectors, such as aerospace, and to get ready for it. The company’s E&M team regards aerospace and aviation as a priority subsector. The aerospace market offers significant opportunities as it is a large-scale market which is easy to enter.
The main trend for aerospace and aviation is a rising demand for capacity in both passenger and air cargo. More complex changes in aircraft manufacturing are being implemented by both, Boeing and Airbus, as well as many of their suppliers. As the first aircraft which is largely produced and assembled by lower tier suppliers, Boeing’s new 787 Dreamliner is a challenge for the entire supply chain. Additionally, Airbus is moving some production operations to China and the USA, which also requires new logistics solutions. So, in the constant struggle of companies to improve competitiveness, outsourcing logistics is a key technique for reducing non-core management complexity.
This situation also applies to other subsectors of E&M. For example, manufacturers of industrial and construction equipment have started to evolve into business models which align with those in the aerospace subsector, as noted above.
Even though the E&M sector has come a long way, there remain some internal, non-core processes which are not always easy to standardize. Instead of building up internal logistics divisions and also having to compete for talent in this area, E&M companies can concentrate on their core products and services. Logistics operations can then be transitioned to a trusted partner-provider as soon as they have defined and agreed service requirements and terms.
The competitiveness of many E&M customers is directly impacted by both governance of internal processes and geographical alignment. An example is the US manufacturer Emerson Electric Company. In the past, each unit of the company managed its own shipping as part of a decentralized sales process. After a DHL-assisted reorganization, Emerson Electric now bundles shipments from its various production units in Asia, Europe, and the United States and transports them to a central logistics hub in Panama’s Colon Free Trade Zone. From there, finished and semi-finished goods are distributed around South America, substantially cutting the cost of warehousing, transportation, and carrying inventory.
The process was set up with a cross-divisional alignment of DHL’s business units. It draws on calculated analysis to resolve conflicting priorities related to high capital costs versus high-value stock inventories versus the need to respond quickly to customer orders. “We help customers define where they keep inventory and how much they keep,” explains President Reg Kenney. A task that is best accomplished when processing experts team up with experts in DHL’s divisions.
The result doesn’t have to be as game-changing as the installation of a generator to power light bulbs in the port of Shanghai some 130 years ago – but sometimes it can be.