Manufacturing and Retail Supply Chains in Flux

When Gartner’s 2013 Supply Chain Top 25 came out last May, it signaled a shift in “demand-driven leadership” with a handful of new multinationals moving up in the rankings. Further evidence that significant changes are taking place in our industry surfaced with two new reports demonstrating disruption in global linkage in the manufacturing and retail sectors.

The first comes from IDC Manufacturing Insights, which recently released “Business Strategy: The Journey Toward the People-Intensive Factory of the Future.” This report notes that for the last 15 years, the manufacturing industry was essentially neglected with respect to other industries and was not considered a good industry for local investors and investors from the world’s most advanced economies. However, the situation is rapidly changing, maintain analysts.

IDC says that governments worldwide now better understand that an economy based on service alone cannot survive in the long run. Manufacturers themselves are going back to basics and putting a renewed premium on production knowledge driven by the need to protect and enhance their technology. They realize now that the direct involvement in production operations fosters innovation and improves customer service.

All of these factors have combined with the rise in transportation costs as a consequence of oil price developments and the need to produce closer to clients for better flexibility and service. The net result: in several developed countries, including the U.S. and U.K., some manufacturers are favoring insourcing initiatives.

“The manufacturing industry is back onstage in developed countries worldwide. Governments, media, manufacturers themselves, and their people are all changing their mindset with a stronger focus on production,” says Pierfrancesco Manenti, Head of IDC Manufacturing Insights, EMEA, and Practice Director, Operations Technology Strategies.

Avoiding Future Shock

This trend is confirmed by IDC survey results, where more than 43 percent of global manufacturers declared they have a formal process in place to look at how factories and plants will be organized in the near term. This highlights how manufacturers are starting to design their factory of the future now to get ready for a massive change that will last for the next generation.

It’s important to note that for more than 56 percent of respondents, the factory of the future will be measured according to its production capability and flexibility, not merely efficiency and production capacity. Furthermore, the survey indicates that over the next five years about 10 percent of Western enterprises will give up to make-to-stock (MTS) heading toward make-to-individual (MTI).

Another key takeaway, say IDC analysts, is that in five years, 47 percent of manufacturers will produce modular platforms centrally while using local small factories, suppliers, and distributors to tailor final products for local demand. This means that manufacturers will have to build a “global plant floor,” harmonizing, supervising, and coordinating execution activities across the company’s and suppliers’ network of manufacturing operations.

Despite growing plant automation, people—and the flexibility and decision-making capabilities they provide—will be at the center of the factory of the future. Finding skilled workers will prove to be a key issue in the industry, analysts conclude. They point to the fact that 64 percent of respondents expect their production processes to be largely or completely digitized in the next five years.

Finally, more than one fourth of manufacturers will invest over 25 percent of their total ICT (information and communications technology) budget for plant-floor IT.

“We are about to witness a new generation of manufacturing enterprises where operational processes on the plant floor—at the very heart of the enterprise—are considered the centerpiece of this transformation,” Manenti concludes.

Retail Shake Up

And while the global manufacturing industry is passing through probably one of the most complex market contexts ever, a similar supply chain story is unfolding in the retail sector.

According to Jones Lang LaSalle, omni-channel selling and consumer demands are raising the bar, as retailers must compete on service to stay in the game. Demands, such as same-day delivery or ship-from-store, require retailers to adapt their supply chain network and store formats sooner rather than later. This transformation means that in five years, the retail supply chain may be unrecognizable from the infrastructure that exists today.

“Brick-and-mortar stores are becoming more than just a point of sale—they’re an essential component of the supply chain as pick-up /drop-off locations for e-commerce orders,” said Kris Bjorson, International Director and leader of Jones Lang LaSalle’s Retail/e-commerce Distribution group. “This additional role offers the retail store another sales opportunity to entice customers to add to their order, or to try new products.”
Analysts have identified five key retail supply chain movers:

1. Omni-channel” distribution strategy has become a reality for retailers, and it means seamlessly serving customers via all available channels such as web, mobile, in-store, catalogue and so on, typically fulfilling same-day and next-day delivery promises. These individual shipments to customers are vastly different from replenishing the weekly inventory in a store on a weekly basis. In short, online and mobile delivery has turned every customer into a point of sale, and every distribution center into an individual customer service location.

2. Leveling the playing field between brick-and-mortar stores and internet-based retailers is the goal of the Marketplace Fairness Act, the proposed federal legislation that expands the collection of sales tax by online retailers and is overwhelmingly popular in the Senate. Even though it means new taxes for online retailers, it actually focuses on tax collection, not the new taxes themselves. While the industry knows the changes that result from the final legislation will be profound, the jury is out on how the specific implications will play out—and who the winners and losers will be.

3. 3D printing is beginning to have a real impact on manufacturing, the supply chain, retail, and ecommerce. The breadth of creative possibilities are staggering, as new products become cheaper to bring to market, me-tail-driven consumers get to design more of their own uber-customized products. At the same time, some brick-and-mortar stores now offer walk-in customers tools to create precisely the product they want.

4. The convenience of digital devices and advancement of internet speeds enable books, music, computer games and other entertainment to be download-only purchases. This transforms the retail supply chain in a unique way.

5. The rise in pop-up temporary stores where large brand retailers may showcase a new product or a guest designer to create buzz and drive sales. We see former retail space being used by schools, churches, clinics, fitness centers, and dental offices. As the sector changes, retailers and retail landlords must be creative.

“Never has change come so fast, and so furious, in the history of retail,” says Greg Maloney, Americas CEO and President of Jones Lang LaSalle Retail. “The good news is that both retailers and their supply chain partners are responding, evolving to rise to the challenges and opportunities posed by the omni-channel paradigm, the advent of 3D manufacturing, changes to tax law, and being creative with remaining retail space.”

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