Why Do Manufacturing Business Models Fail?
The global pandemic has revealed the vulnerability of the traditional value-capture business models for manufacturers. This article from Forbes explains how businesses can bounce back despite disruptions by adding innovative systems and technologies to the supply chain.
In the last few months, manufacturers have called some of their fundamental assumptions into question.
Nowhere is this more true than with business and operating models.
A period of unprecedented disruption has revealed new vulnerabilities, and stressed existing systems to their breaking points. Traditional methods for creating value find themselves on uncertain ground.
The question now is, “What do we do next?”
The World Economic Forum released a significant piece of research (which I contributed to through interviews). It details why existing operating models failed during the global pandemic, as well as some steps manufacturers can take to explore new business models in the future.
Here’s my “book report” with the stuff I think we should all be working on.
Why Think About Business Models Now?
It happened remarkably fast. Massive shifts in supply and demand caught manufacturing off guard. With depleted cash reserves, a workforce that couldn’t come into factories, and systems that made it difficult to retool production, operations crumpled.
What the WEF research shows us, however, is that we need to account for how technology and supply chains are part of the way manufacturers create value.
In other words, we need to look at how information systems and supply chains fit within manufacturing operating models.
Manufacturing business models depend on producing a good and selling it for more than the cost (I know, basic, but the fundamentals are important here). Manufacturing operating models – the schema and processes for executing the business model – evolved to prioritize speed over flexibility (Just-in-Time instead of Just-in-Case).
But the stakes are higher now.
As the authors summarize, “Traditional value-capture models where organizations take responsibility for large portions of the value chain may find themselves under attack from entrants that rely on different business models.”
Let’s look at this in more detail.
5 Things We’ve Learned About Business Models in Manufacturing
1.) Business Model Innovation Goes Hand-in-Hand with Technological Innovation
At the extreme end of the business-model innovation spectrum, manufacturers are starting to enter the world of data brokerage (selling or sharing the massive amounts of data they generate during production) and information services.
But for some organizations, innovation can come from updating operating models, from finding new ways of linking supply and demand. Organizations are using technology to improve operational visibility and, with that data, adjust business models as necessary.
Other opportunities arise when technology opens new revenue streams. The authors cited outfitting products with IoT sensors to monitor consumer usage or develop a new service offering as one example.
2.) But Technological Innovation Needs to Go to the Right Places
Not all technologies can help improve resilience.
The report echoed a common call that investments in tech need to be thoughtful. We see examples of this in WEF and McKinsey’s lighthouse project, which highlights factories that have succeeded in bringing digital manufacturing to scale.
Here, we get a story that’s starting to sound familiar: “Technologically advanced” organizations suffering because they invested in “fancy robots … designed to optimize ‘just-in-time’ inventories and reduce variable costs.”
Firms would be better off, the authors note, considering tools that enable “flexible production capacity.”
3.) The Era of “Rigid Integrative Systems” is Over
Before the recent crisis, manufacturing as an industry began a widespread reconsideration of rigid, monolithic systems.
Three months of disruption have convinced more people that “knowledge gaps, inflexible platforms and hierarchies … and unreliable information systems” are holding the industry back.
“Continued reliance on existing information systems,” is hampering manufacturing, especially given that “it is apparent that systems have been hardwired for maintaining the status quo rather than for the needed responses.”
The organizations that 1.) enabled collaboration, 2.) produced a data-driven view of production, 3.) quickly closed organizational knowledge gaps proved significantly more resilient than their peers who did not.
4.) Ultimately, it’s Still About People
I’ve argued before that we’re only just now realizing how essential humans are to manufacturing.
The report corroborates this observation, listing “inflexible human resources and organizational processes” as the second most important factor in business model breakdown.
This makes sense. Manufacturing is physical. If people aren’t operating equipment or assembling products, operations stop.
As the report notes, “While online communication platforms are allowing for remote team working for office-based workers, strategic workforce planning remains key.”
5.) Not All Firms Are Struggling
It’s not all doom and gloom. There are several firms that have adapted to the changing landscape.
“The firms best-positioned to adapt quickly to disruption are those that can digitally link their design and operations all the way to the manufacturing floor to create seamless customer experiences.”
Those that are succeeding are doing so through a mix of smart digitization, agile repurposing of capacity, and strategic workforce planning, among others.
Conclusions: Resilience as Competitive Advantage
We tend to frame resilience as a means of survival – as protection against worst case scenarios.
But perhaps that’s not giving it enough credit. It might be more productive to think about resilience as a differentiator.
“Manufacturing can no longer be simply regarded as a cost-centre to be optimized but rather a primary source of innovation and resilience enabled by advanced manufacturing technologies. Firms which invested in these technologies before others appear to have been able to adapt far more quickly during the crisis than those that did not. Resilience to external shocks is now a source of competitive advantage and will play a bigger role as companies transition towards the new normal.”
So here’s to building that resilience now.