Is cost management out of step with the needs of global manufacturing?

Manufacturing has changed dramatically over the last 50 years with the de-industrialization of the west and a significant shift in production towards countries such as China and India. These were once the world’s source of low-cost manufacturing capacity but are now rapidly evolving into the world’s best growth markets with McKinsey forecasting that they could account for nearly 70% of global demand for manufactured goods by 2025. (see “The $30 Trillion Decathlon”).  If western brands are going to be part of that they need to penetrate these markets fast, but with local companies such as ThaiBev quickly developing beers and spirits ideally suited to local needs to become the market leader within a decade, it could be that the window of opportunity is closing fast.

3D printer with the potential for infinite customization

Customers are also looking for more than just product and increasingly expect a bundle of ancillary services such as mobile apps, downloads and helplines. There was a good example of this on Top Gear last night when Jeremy Clarkson demonstrated that owners of the Lexus LFA supercar enjoy a direct link to a live customer services operator who personally searches for their desired destination and remotely enters it into their satnav without them having to lift a hand from the steering wheel.  Then there is a whole raft of innovations that will alter how products are designed, manufactured and sold — everything from nanotechnologies to 3D printing, which many are suggesting may shift manufacturing back to the west. Somehow I doubt it as manufacturing has always been the driver of growth and employment when nations are developing — UK back in the 19^th century, USA in the 20^th and now China in the 21^st — but becomes less important as economies become wealthier when their service sectors account for the bulk of growth and employment.

So faced with greater manufacturing capabilities, increasing customization, the bundling of service elements and shorter product lifecycles, it is hardly surprising that demand is fragmenting, both geographically and in terms of  customers segmentation with McKinsey suggesting that there are more than 20 distinct submarkets in China alone. Manufacturing techniques such as 3D printing, which create objects by combining small particles rather than by casting or stamping, open the door to mass customization needed to satisfy these sub-segments. More than 6,500 3D printers were sold in United States in 2012, and although they are mostly used to make models and prototypes, they are rapidly finding their way into production in the aerospace industry and can be expected to spread further as costs come down.

Technology is at the core of this new era of manufacturing with the power of big data essential to analyse the billions of bytes of data collected in traditional market research and from social media sites to understand what products to build right the way through to monitoring feedback from the sensors and transponders that are increasingly built into products to allow manufacturers to deliver all sorts of new after-sale services. But don’t let kid ourselves that this new age of global manufacturing will be without problems as these new opportunities come at a time when commodity prices are on the up and even labor costs are  rising rapidly in what have been regarded as low-wage locations such as coastal China and India.

The challenges of having to understand the costs and profitability of a growing portfolio of products and services for a plethora of sub-segments and markets, having to make complex choices about manufacturing locations and supply chains and struggling to prices that optimize returns over ever shorter product life-cycles suggest Finance needs to be investing in its cost management capabilities. Personally I think we should be getting cost management out of the weeds and working towards creating senior roles with titles such as VP Strategic Cost Management.  The people who staff such roles need to  be black belts in target costing, process costing and product and customer profitability reporting as well as experts in predictive cost modelling so as to be able provide the C-level and others with insight about the future. Needless to say they are going to need an arsenal of costing and profitability reporting solutions that give both instant access to highly granular data and the type of overview needed to support strategic sourcing decisions.

Somewhat ironically it appears to be the accounting organizations of India and China themselves that are at the vanguard of creating such roles with bodies such as The Cost Accountants of India with its bold  mission statement that  ”The Cost and Management Accountant professionals would ethically drive enterprises globally by creating value to stakeholders in the socio-economic context through competencies drawn from the integration of strategy, management and accounting”.

To me that sounds just what cost management needs to become in order for companies to thrive in this new era of manufacturing.  But what do you think?