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Contents
Contents 4 5
Foreword by Terry Scuoler Executive Summary
6-13
Economy, government & policy – Survey & analysis
14-27
Finance – Survey & analysis
28-37
Purchasing, procurement & logistics – Survey & analysis
38-46
IT – Survey & analysis
47
Manufacturers’ Opinions: What can the Government do?
Editor - Tim Brown t.brown@sayonemedia.com
Neither The Manufacturer nor SayOne Media can accept responsibility for omissions or errors.
Sub-Editor - Edward Machin e.machin@sayonemedia.com
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Art Editors Alex Cole a.cole@sayonemedia.com Martin Mitchell m.mitchell@sayonemedia.com Research Manager - Dennis Frize d.frize@sayonemedia.com Publisher - Henry Anson h.anson@sayonemedia.com
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3
Foreword whilst the risks to growth in the United States remain. Despite this however, as the survey also shows there are reasons to be optimistic. Terry Scuoler Manufacturers have made Chief Executive, considerable improvements EEF, the manufacturers’ organisation in their performance in recent years and are looking to grow their business, especially in emerging markets This year has seen the and growth sectors such as low carbon manufacturing sector rebound technologies. There have also been strong strongly from the historic lows seen positive statements from the Prime Minister, during the recession to the historic the Chancellor and the Secretary of State for Business about the need to promote growth highs seen in EEF’s surveys. in the private sector and manufacturing in particular. We now need to see them deliver a he recovery in world trade has been a national framework which will encourage the strong factor as manufacturers have taken vital private sector investment which will enable advantage of overseas markets and, growth manufacturers to invest with confidence and prospects in emerging markets remain particularly create jobs. strong. This performance has been even better At a regional level, the survey also points when viewed against a range of uncertainties to a lack of confidence in local and regional including fears around the strength of the global government. Regional growth will be an recovery, a change of government and, how the important factor in delivering a re-balanced UK’s public finances would be tackled. economy and government has chosen to The new government has moved at a rapid replace the Regional Development Agencies with pace to remove some of the uncertainty with an Local Enterprise Partnerships. It is now vital that emergency Budget and Spending Review. But, they pick up the baton as quickly as possible to as the recovery continues, looking ahead into develop a vision for their area, and demonstrate next year significant uncertainties still remain a greater improvement in engagement with and it is no surprise that this is reflected in the business than we have seen so far. views of companies in the survey. Domestically, Considerable challenges remain for our cuts in public spending will impact on some sector. But, there is much to be positive about, areas of manufacturing and consumer spending. especially when manufacturing is at the centre Overseas, fears remain about the impact of of the debate as to how we build a new and debt and austerity programmes in the Eurozone, stronger economy for the future.
T
4
Welcome to the Annual Manufacturing Report 2010 sponsored by Barclays Corporate.
I
n the last 12 months there has been a perceived improvement in the fortunes of UK manufacturers although the after effects of the recession are still proving influential. However manufacturers remain somewhat pessimistic about the state of the economy and industry. Although the change in government has largely been welcomed, the recent announcements of the Comprehensive Spending Review and Strategic Defence and Security Review have proved not to be as severe as many expected. Although the reviews focused greatly on cost cutting, many of the strategic decisions such as those assisting the low carbon economy, education and science are likely to prove beneficial for manufacturing sector. The global downturn resulted in severe destocking across all sectors of industry. In comparison, sales this year have begun to return to normal and stock levels have required replenishing. This improvement has assisted greatly with the recovery but manufacturers are now very aware of this risk and remain cautious of their stocking levels. As a result many have invested heavily in improving supply chain integration and are attempting to form better paths of communication with their respective suppliers to ensure continued supply and demand. As was the case last year manufacturers are continuing to seek the advice of industry experts and, of all the agencies, the Carbon Trust was again contacted by the most number of respondents. While the commencement of the CRC has meant an even greater level of focus has been placed on environmental issues, the continued focus by manufacturers on this area is important and encouraging. The pressures associated with recession in 2008 and 2009 resulted in manufacturers desiring a much faster return on investment for any capital expenditure. In 2010, the attitude of manufacturers reporting that they
require ROI in two to four years has increased and returned to 2007 levels and investment decisions are now being considered for the longer term. More than half of respondents to this year’s survey indicated that they would be investing £100,000 or more in machine tools. This is typical of a recovery situation where manufacturers of capital goods, who are hit hardest during recession, tend to benefit particularly swiftly as the outlook starts improving.
Executive Summary
Executive Summary
Other findings from the survey this year reveal:
A continued focus on new product innovations to assist with growth Increase in the number of companies whose primary financial management focus is on exchange rate fluctuation The majority of companies have increased their investment expenditure in the last year The number of companies reporting that funding has been easier to obtain has risen by 19% over the last two years Almost a third more manufacturers believe that the current Government will have a more positive impact on industry compared to last year when Gordon Brown was in power
Alongside the data, you’ll find expert analysis from:
Barry Evans, Senior Research Associate in Lean Enterprise Research Centre (Cardiff Business School) Graeme Allinson, Head of Manufacturing Transport and Logistics, Barclays Corporate Malcolm Wheatley, contributing IT editor, Sayone Media
From all at The Manufacturer magazine, we hope you enjoy the Annual Manufacturing Report, 2010.
5
Survey results & analysis
Section one The economy, government & policy Analysis by Barry Evans Senior Research Associate Lean Enterprise Research Centre (Cardiff Business School)
The Lean Enterprise Research Centre (LERC) is one of the Cardiff University Business School’s major research centres. The Centre was founded by Professor Peter Hines and Daniel T Jones in 1994 and focuses on identifying new sectors which are suitable for pioneering lean thinking research programmes. Barry Evans has worked on research projects for a range of clients related to Lean Thinking, Value Stream and Value Chain Analysis including DEFRA, Food Chain Centre, UK Retailers and Manufacturers. He has also done work relating to Lean Systems Thinking in the public sector and worked as the lean process manager in Tesco Supply Chain Development. www.leanenterprise.org.uk
1
How optimistic are you about the UK economy and the effect the general economic situation will have on UK manufacturing over the next 12 months or so?
2010 2009 Very optimistic 2% 0% Quite optimistic 31% 40% Quite pessimitic 50% 52% Very pessimistic 14% 2% Don’t know 3% 6%
2010
6
2008 0% 18% 64% 14% 4%
2009
2008
2a
How well do you think the Government will manage the economy? Firstly with regard to the country as a whole.
2009 2010
0% 0% 6%
40%
75%
28% 13%
24%
4% 8% 2%
2b
And secondly with regard to the specific impact on UK manufacturing.
Section one The Economy, Government and Policy
0%
2009 2010
0% 0% 0% 6%
20%
36% 30%
33%
30%
19% 20%
4% 0% 0% 0% 2%
7
3a
Whilst under the coalition, what impact will the Government have on the fortunes of the UK manufacturing industry?
3b
Significant improvement Moderate improvement No Change Moderate deterioration Significant deterioration
2% 38% 31% 22% 7%
(2009 result) Whilst under Gordon Brown, what impact will the Government have on the fortunes of the UK manufacturing industry?
Significant improvement Moderate improvement No Change Moderate deterioration Significant deterioration
0% 8% 28% 46% 18%
The combination of the recession, fears for the UK economy and concerns over the outcomes of the CSR have undoubtedly led to certain sense of pessimism regarding the government and the economy. Similar to last year, half of respondents consider themselves quite pessimistic regarding the economic outlook for the next 12 months. Despite this, 32% more manufacturers believe that the current government will have a positive impact on industry compared to last year when Gordon Brown was in power. Despite this increase, the majority of respondents believe the Government only has the capacity to manage the economy ‘moderately well’ rather than ‘very well’ or ‘exceptionally well’. The extent to which the coalition is able to reduce the budget deficit whilst still providing adequate support to industry will undoubtedly be reflected in these figures in 2011.
8
4
How advanced is your company in adopting the following low carbon initiatives?
26%
49%
40%
33%
35% 21%
14%
32% 29%
8%
13% 11% 8%
10%
Section one The Economy, Government and Policy
Planned Complete
10% 6% 4% 6%
According to the majority of manufacturers, it appears that when it comes to low carbon initiatives, there is a focus on internal resource utilisation. The gap at supply chain level was a feature of last year’s commentary and has disappointingly been repeated this year. This is despite almost 60% of respondents last year reporting that they may implement or were currently researching a greater level of supply chain involvement in low carbon. Collaborative investigation and action is needed to identify the hotspots (and non hotspots) so as to avoid wasted effort. To avoid unintended consequences companies need to focus on root cause removal and this can only be completed effectively if it involves the entire supply chain.
9
5
Has your company had contact with any of the following agencies or organisations? % of total respondents that made contact with agency/organisation % of total respondents that made contact and found agency/organisation useful
67% 52.26%
63%
36.54%
61% 42.7%
57% 41.4%
55% 46.75%
47%
40.89%
33%
27.06% 24% 18% 24% 17.04%
Compared to last year, there has been a significant growth in the numbers of manufactures making contact with agencies and organisations. As with last year, the Carbon Trust remains the most contacted organisation and has experienced a 27% increase in interest from manufacturers since last year. Business Secretary Vince Cable has said that the government intends to scrap regional development agencies and replace them with smaller local enterprise partnerships (LEPs) bringing together local councils and businesses. The Government has already given the go-ahead for 24 of these to progress. Whilst there has been a nearly 40% jump in manufacturers making contact with RDAs over the last 12 months, the poor level of satisfaction (58% - the lowest ratio of all groups and a large drop since last year) indicates that a revamp of these organisations may be the right decision. As with 2009, the relatively high levels of satisfaction for all other groups is encouraging and shows a continued interest in the manufacturing sector.
10
6
Thinking now about manufacturing in this region as opposed to nationally, how helpful and supportive do you find your local/regional government?
2010
2009
Despite a small and consistent improvement over the past three years, there has not been a significant shift in those respondents finding local/regional government supportive. Still over half of manufacturers indicate that they find local/regional government unhelpful. Given the vital need for a strong manufacturing base for the UK (jobs, economy, balance of payments etc), one has to speculate as to why this should be. Perhaps the constant dialogue that ‘UK manufacturing is dead’ has been accepted as fact by local/regional government. If so, a major effort is needed to change this perception.
7a
Section one The Economy, Government and Policy
2010 2009 2007 Not at all helpful/supportive 13% 25% 24% Not very helpful/supportive 40% 30% 36% Quite helpful/supportive 40% 39% 34% Very helpful/supportive 7% 6% 6%
2007
Which if any of the following initiatives have been a key business focus for this company during the last 12 months? 2009 2010 Supply chain integration and partner collaboration Better management of customer relationship and exploitation of sales opportunities
Exploitation of e-business and web-based opportunities The application of lean manufacturing principles Change management activity in key business areas New product development and innovation Micro and/or nanotechnology
38% 38%
69% 63%
28% 13%
69% 60% 49%
58% 67% 60%
2% 4%
11
7b
Which if any of the following initiatives are a planned priority within the next 12 months?
Supply chain integration and partner collaboration Better management of customer relationship and exploitation of sales opportunities Exploitation of e-business and web-based opportunities The application of lean manufacturing principles Change management activity in key business areas New product development and innovation Micro and/or nanotechnology
2009 2010
33% 33%
48% 56% 19%
33%
54% 60% 52% 43% 73% 60%
4% 3%
As with last year, there has been a continued focus on innovation and lean thinking but apparently at company level rather than in the extended value stream. This, as last year, remains a concerning gap in thinking. There has been a considerable decline in interest in e-business and web based opportunities which respondents are reporting will continue in 2011.
8
What are the main business drivers for your company? That is to say which of the following do you regard as important performance measures to gauge company success? Customer satisfaction / retention Operational efficiencies and cost control Quality reputation Profits growth Revenue growth Market share Innovation and technology leadership Market leadership Growth through acquisition
Application of leading edge IT/comms technology Share performance
93% 92% 87% 87% 89% 81% 80% 75% 48% 45% 34% 43% 49% 38% 38% 34% 2009 15% 2010 6% 11% 9% 13% 8%
These drivers in red are all outcomes of actions taken – successful and sustainable improvement has very strong links to obsessive focus on delivering against customer-centric objectives. Therefore it is disappointing to see that both “customer satisfaction” and “quality reputation” have declined in importance. An increased focus on market share is unlikely to result in successful accomplishment if quality and customer satisfaction are not maintained.
12
9
100 percent organic Mainly organic 100 percent acquisition Mainly acquisition A mixture of both
32% 40% 0% 2% 26%
10
How significant is developing international trade for your future growth strategy? 2010
11
2010 2009 2008 Important or vital concern 74% 74% 58% Secondary or prospective concern 16% 18% 39% No concern 10% 8% 4% 2009
Please rate the following statements on a scale from 1 to 5 where 5 is strongly agree and 1 is strongly disagree.
2008
Section one The Economy, Government and Policy
How do you plan to achieve future growth within your company?
Strongly disagree 1 Disagree 2 Neither agree or disagree 3 Agree 4 Strongly agree 5
All business parts act as an integrated business with one agenda The company is trying to achieve improvements in speed and efficiency Lean manufacturing techniques are being actively applied Too much time is spent reacting to events rather than pursuing plans
As with previous years the primary focus is revealed to be “efficiency� (87% agree or strongly agree). This has been the obsession for many years but has it yet delivered sustainable competitive advantage? Surely a definition of lunacy would be doing what we’ve always done and expecting a different outcome. Try something different. Focus on effective delivery of customer value and efficiency will follow. The likes of Toyota and Tesco have already proved that such an approach can reap dividends.
13
Section two Finance Analysis by Graeme Allinson Head of Manufacturing Transport and Logistics, Barclays Corporate With a clear focus on client relationships, Barclays Corporate provides integrated banking solutions to businesses with an annual turnover of more than ÂŁ5 million or its currency equivalent. We serve our clients via a global network of relationship, industry sector and product specialist managers, who provide tailored solutions to meet their needs. These include lending, risk management, trade, cash and liquidity management, and specialist asset and sales financing. Additionally, clients are offered access to the products and expertise of other businesses in the Group, particularly the investment banking solutions of Barclays Capital and the private wealth management expertise of Barclays Wealth. www.barclayscorporate.com
1
What area of financial management is your company currently most focussed on?
2010
2010 2009 2008 Increasing cash flow 29% 29% 44% Reducing costs generally 33% 45% 22% Coping with inflation 0% 0% 8% Exchange rate fluctuations 19% 10% 11% Raising money for investment 0% 4% 0% Reducing debt 19% 4% 15% Don’t know 0% 8% 0% In line with 2009’s findings, manufacturers have continued to focus on reducing costs with a reluctance to take on new debt. Similarly, none of those polled indicated a desire to raise money for investment, suggesting a cautious approach to the emergence from recession. However, as later questions in the report indicate there is a feeling of optimism within the sector. The evidence suggests that companies are now looking to find ways to reinvest any spare capital that is generated through day to day operations, and this is a positive sign. With the current historically low base rates, total financing costs remain extremely competitive so manufacturers with a strong strategic focus in the midterm could be in a position to take advantage. It is worth remembering that very often in the longer term cost reductions can only be made following capital investment in process improvements. Additionally, since last year there has been a 9% increase in the number of companies whose primary financial management focus is on exchange rate fluctuation. This increase in focus suggests not only a recognition of the volatility of sterling as it has continued to weaken over the past two or three years, but suggests that manufacturers perceive that there are export opportunities in the coming year. Again, a positive sign.
14
2009
2008
2
Which of the following areas will you be investing in within the current financial year? 47%
56%
2009 2010
55%
65%
15%
30%
47%
60%
Section two Finance
37%
35%
47%
75%
0% 5%
The focus on cost cutting and debt reduction seen in question 1 is not preventing manufacturers from looking to make investments using surplus cash to grow their businesses, which is very positive. The heightened uptake in machine tools is an indicator of market strength and is particularly pleasing to see. The only small area of decrease was in handling and storage equipment which remained relatively flat, but overall it would appear that the sector is combining its cautious approach to debt with a step towards infrastructure or plant improvements which will ensure it is capable of fully taking advantage of the recovery as it begins to gather pace.
3
In broad terms, what is the likely level of capital investment in the following areas during this current financial year?
Under £10,000 £10,000 - £50,000 £50,000 - £100,000 £100,000-£500,000 Over £500,000
In line with question 2, 60% of respondents indicated that they would be investing £100,000 or more in machine tools. This is typical of recovery situations where manufacturers of capital goods, who are hit hardest during recession, tend to benefit particularly swiftly as the outlook starts improving.
15
4a
Are your investments levels in the following areas this year more, less or about the same as last year?
Less
4b
Same
More
Don’t know
Do you anticipate investment to be more, less or about the same in the following areas next year?
Less
Same
More
Don’t know
Question 4a shows that the majority of companies have increased their investment expenditure in the last year and this looks set to increase in 2011. 46% of those surveyed have spent more in 2010 on machinery than in the previous year and 26% anticipate spending more in the coming 12 months. IT equipment has also experienced a considerable increase in investment. These figures reinforce the message revealed by the forecast expenditure on new product development (NPD). Manufacturers are planning to increase next year’s expenditure in NPD by 11% — a very strong message which demonstrates that they see the importance of investment in this area. This bodes well for the future as UK manufacturing is focused on high value-added products. Continued investment in NPD is the lifeblood of the industry.
16
5
Now thinking ahead for the next five years, what do you anticipate being the major areas of capital investment for this company? Medium
Section two Finance
Minor
Major
The same investment pattern seen in questions 4 and 5 looks set to continue in the medium term with most companies anticipating a continued focus on machine tools and NPD. Interestingly, almost 60% of companies expect investment in property/buildings to be of a significant focus in the next five years. This again indicates an underlying optimism and shows a significant level of planned expansion. It is important that manufacturers still heed the lessons of the recession and ensure expansion is both manageable and sustainable and not overstretch their capabilities. Strategic planning alongside a financial advisor will help ensure that any expansion is economically viable.
6
How feasible has it been for your company to obtain any necessary funding in 2010, as opposed to previous years?
Funding inaccessible Funding difficult to obtain No change Funding obtained easier Not applicable - no funding sought Don’t know
2010 2009 5% 0% 24% 26% 33% 35% 19% 7% 19% 28% 0% 4%
2008 0% 11% 53% 0% 26% 10%
It is pleasing to note that the number of companies reporting that funding has been easier to obtain than in previous years has risen by 19% since 2008. However, for some companies receiving finance is clearly still difficult. Those businesses that have taken the right actions during the past two years are finding it easier. Bankers have a responsibility to get close to clients and to understand their businesses but there is also a need for manufacturers to engage with their finance providers earlier. Communication is key to improving these statistics – only through open and frequent discussions and the joint formation of robust business plans can more manufacturers gain access to the funding they would like.
2010
2009
2008
17
7a
Which of the following ways of raising capital has this company used within the past two years?
45%
50%
15%
55%
5%
0%
5%
Manufacturers have done well to get through arguably the worst recession in 65 years, and these findings suggest they are now starting to look for ways to grow their businesses. Despite the cost control concerns highlighted in responses to question 1 it is interesting to note that 95% of respondents have looked to banks for funding in the last two years. Likewise in question 9, 88% of those polled will look to banks for funding before 2012. With base rates still at an all time low, the cost of this funding makes it an attractive proposition. It is also encouraging to note the increase in venture capital interest, which demonstrates the attractiveness of the sector.
7b
Which of the following ways of raising capital is the company likely to use over the next two years? (Mark as many as apply.)
37%
53%
5%
0%
0%
18
15%
58%
8
How do you rate the level of service/ advice provided by your current lender?
Section two Finance
Excellent 5% Good 47% Average 19% Poor 5% Not applicable 24%
Compared to last year there has been a marked improvement in manufacturers’ perception of finance and service, with more than half of respondents reporting they are happy with the level of service received from their lender. This highlights a greater comprehension by banks of the manufacturing sector and its particular needs and bodes well for the future; however with 19% rating service as average there is still scope for improved understanding on all sides.
9
How satisfied are you with the trade funding options available from your bank? Very unsatisfied Moderately unsatisfied Indifferent Moderately satisfied Very satisfied
11% 11% 37% 42% 0%
Although a majority of manufacturers reported good levels of service from lenders, a significant proportion of companies reported dissatisfaction with the trade funding options that are available to them. Again, communication is vital. To assist in improving this situation, manufacturers and their financial partners should engage in detailed dialogue so as to facilitate a better level of understanding by the lender as to the needs of the company.
19
10
To what extent are you typically able to monitor and measure return on major capital investment projects?
2010 2009 Full financial ROI (return on investment) 14% 34% quantification on all investments Most benefits are quantified financially, 42% 31% but not all Some ROI quantification 38% 22% Mainly operate qualitative assessments 5% 11% Don’t know 0% 2%
2010
2009
Most notably there has been considerable reduction in companies that are able to measure full ROI quantification on all investments. On the surface it is somewhat concerning that companies are not ensuring a solid ROI on all large expenditure. However as the economy emerges from recession, and stocking levels pick up, companies need to respond to the rising demand and this may result in the need for further capital investments. If profit margins are generally good, investment may therefore be driven by requirement rather than a strict return on investment. Other areas that may be difficult to justify in terms of a full ROI are investments that are made to satisfy regulations as well as investments made to assist with quality monitoring, which while undoubtedly improving an end product, are difficult to accurately quantify. In 2009 there was a closer monitoring of investments and full ROI was seemingly of greater importance. As we move into recovery it is important to take heed of the lessons learned in the downturn and ensure that outgoings can be justified by future income.
20
11
What is the typical required payback period for a return on a major capital investment project?
Section two Finance
2010 0%
29%
52%
5% 0%
10% 4%
7% 5%
2009 2008 2007
0% 16% 23%
47%
38% 46% 4 4%
9%
11% 18%
2% 0% 3% 2%
11% 7%
0% 0% 0%
The number of manufacturers requiring payback on major capital investment projects in less than two years has seen a promising decrease since last year. The proportion of manufacturers reporting that they require ROI in two to four years has increased and returned to 2007 levels. As the economic situation has settled, these figures indicate a more relaxed, realistic and longer term expectation by manufacturers for ROI. While this is positive, many manufacturers still appear cautious about allowing ROI to extend further than four years. As was reported last year, obtaining a payback on investment in four to five years means a 20% per annum compound return — this represents a substantial return. Manufacturers need to ensure that long term gains are not sacrificed for short term financials.
21
12
In broad terms what percentage of capital investment is strategic as opposed to replacement? (Strategic being investment to support the forward vision of the company) 2010
2010 2009 2008 100 percent 0% 0% 0% 75-99 percent 24% 16% 18% 50-74 percent 33% 51% 18% 25-49 percent 29% 11% 36% 1-24 percent 14% 18% 22% None 0% 4% 6%
2009
2008
Understandably, investment in strategy is more likely to happen when companies are feeling positive about economic stability. In the last year there has been an 8% increase in the number of companies attributing the majority of their capital investments to strategic decisions and since 2008 there has been a considerable increase in the number of manufacturers justifying at least 50% of their capital investment on a strategic basis. This is all positive and points to growing long term confidence in the sector. However this is tempered by a minority of manufacturers who are allocating smaller percentages of their investments to strategic development. This would suggest that these respondents are still cautious about the strength of their operations and perhaps do not currently have the capital available to make strategic investments.
22
13
Very significant Quite significant Not significant Don’t know
2010 2009 5% 11% 57% 57% 38% 27% 0% 5%
2010
14
Section two Finance
How concerned are you about the cost of insurance (eg. employee liability) incurred at your facility? Please answer in terms of the impact you feel the costs will have on your profitability.
2009
Have you undergone any downsizing/right sizing in the last 12 months?
2010 2009 Yes 43% 78% No 57% 22%
2010
2009
23
15
2010
If Yes, by what percentage have you downsized/right sized?
0-10 percent 10-20 percent 20-30 percent 30-40 percent More than 40 percent
2010 2009 49% 40% 26% 37% 11% 11% 5% 9% 9% 3%
2009
As seen in question 14, the level of downsizing this year has decreased substantially: from 78% in 2009 to 43% in 2010. This is an important reduction, and demonstrates that businesses are beginning to stabilise. It is encouraging to note that the number of companies reporting downsizing/rightsizing has decreased and furthermore for those that have had to rightsize, the scope of that activity has reduced – almost half only having to downsize by less than 10%. However, there has been an increase in the number of companies that have undergone significant reductions of more than 40%. It is reasonable to surmise that the impact of the recession may have been delayed for some companies which had to continue rationalisation in to 2010. One would hope to see these downsizing statistics reduce next year as the industry moves away from strategies of survival to a greater emphasis on growth.
24
16
0-10 percent 10-20 percent 20-30 percent 30-40 percent More than 40 percent Don’t know
17
66% 5% 4% 0% 19% 6%
Section two Finance
What percentage of your business is conducted offshore?
Is your level of offshore activity likely to increase or decrease over the next 12 months?
Increase 33% Decrease 0% Stay the same 52% Don’t know 15%
The majority of manufacturing respondents have reported a minimal amount of offshore operation within their business. However 19% of companies report that in excess of 40% of their business is conducted overseas. The number of manufacturers planning to increase their offshore activity follows the same high pattern as last year so it appears that the cheaper operating costs and availability of skilled workforces in China and Eastern Europe still appeal to the sector. Again, as was reported last year, no companies are intending to decrease their offshore activities. This suggests that nearshoring is not a common occurrence and is happening only on a modest basis.
25
18
What percentage of your production is outsourced?
0-10 percent 10-20 percent 20-30 percent 30-40 percent More than 40 percent
19
Is your level of outsourcing likely to increase or decrease over the next 12 months?
Increase 19% Decrease 5% Stay the same 76%
26
61% 10% 10% 5% 14%
20
Over the last 12 months, how has your spending changed in the following areas?
Stay the same
Decrease
Marketing Advertising
Section two Finance
Increase
Travel Conferences Social HR Perks Employee Bonuses
Overall the trend appears to be that far fewer respondents are reducing spend across all areas, which is a sign of the cautious optimism that is starting to emerge in the manufacturing industry. As with last year’s report, manufacturers’ marketing spend is again looking high which supports the new product development that companies are undertaking. Barclays Corporate is delighted to be associated with this survey for the 4th consecutive year. The Survey is a useful pointer as to how UK Manufacturing has responded to the challenges of the last 12 months and more importantly to the opportunities which the growing global economy is presenting. The commentary provided by Barclays Bank PLC is intended to be used as information only. Whilst Barclays and its employees take every care to ensure that the content is accurate, Barclays will accept no responsibility or liability in respect of any errors, inaccuracies and losses which may arise from its use.
27
Section three Purchasing, procurement & logistics Analysis by Barry Evans Senior Research Associate Lean Enterprise Research Centre (Cardiff Business School) The Lean Enterprise Research Centre (LERC) is one of the Cardiff University Business School’s major research centres. The Centre was founded by Professor Peter Hines and Daniel T Jones in 1994 and focuses on identifying new sectors which are suitable for pioneering lean thinking research programmes. Barry Evans has worked on research projects for a range of clients related to Lean Thinking, Value Stream and Value Chain Analysis including DEFRA, Food Chain Centre, UK Retailers and Manufacturers. He has also done work relating to Lean Systems Thinking in the public sector and worked as the lean process manager in Tesco Supply Chain Development. www.leanenterprise.org.uk
1
What proportion of the raw materials used in your company’s UK based manufacturing production sites are imported? 95-100 percent 75-95 percent 50-74 percent 25-49 percent 1-24 percent None Don’t know
2010
28
2010 2009 0% 2% 15% 13% 28% 28% 12% 20% 33% 33% 3% 0% 9% 4%
2009
2
What proportion of bought-in components or sub-assemblies used in your UK production sites are imported? 2010 2009 0% 0% 15% 7% 15% 9% 24% 17% 37% 50% 9% 10% 0% 7%
2010
2009
3
How, if at all, do you anticipate these proportions changing over the next 12 months? 2010
Section three Purchasing, procurement and logistics
95-100 percent 75-95 percent 50-74 percent 25-49 percent 1-24 percent None Don’t know
2009
Significant increase Small increase Stay the same Small decrease Significant decrease Don’t know
2010 2009 3% 4% 15% 20% 73% 54% 6% 11% 0% 2% 3% 9%
Almost half of those responding indicate that 50% or more of their raw material is imported and almost a third say that 50% or more of bought-in components or sub-assemblies are imported. These proportions are an increase over the results published in 2009 – as respondents last year indicated they were planning. Almost three quarters of replies see no change in their level of imported supplies over the next twelve months – but almost 20% are planning an increase in their imports of components or sub-assemblies.
29
4
Right now, from which of the following regions do you source any materials or components? Mark as many as apply.
Non-EU western Europe 2009: 26% 2010: 15%
North America 2009: 40% 2010: 55%
Non-EU eastern Europe 2009: 14% 2010: 15% EU 2009: 100% 2010: 97% Asia incl. Japan and China 2009: 70% 2010: 64%
North Africa 2009: 2% 2010: 3% India/sub continent 2009: 30% 2010: 15%
Australasia 2009: 2% 2010: 0%
5
Come 2011, from which of the following regions do you think you will be sourcing any materials or components? Mark as many as apply.
Non-EU western Europe 2009: 26% 2010: 22%
North America 2009: 40% 2010: 50%
Non-EU eastern Europe 2009: 26% 2010: 28% EU 2009: 98% 2010: 91% Asia incl. Japan and China 2009: 70% 2010: 75%
North Africa 2009: 0% 2010: 3% India/sub continent 2009: 44% 2010: 28%
Dont know 2009: 0% 2010: 3%
30
Australasia 2009: 5% 2010: 3%
6
When choosing to outsource offshore, what are the most important criteria affecting that decision? Rank from 1 to 10. Least important
1
2
3
4
5
6
7
8
9
10
Product quality
44%
28%
6%
3%
0%
0%
0%
0%
6%
13%
Cost savings
31%
41%
0%
0%
9%
0%
0%
6%
9%
3%
Environmental management/ being green
3%
3%
19%
3%
0%
19%
16%
16%
6%
16%
Identifying/locating an appropriate supplier
6%
3%
19%
13%
22%
9%
13%
9%
6%
0%
Speed of response
0%
3%
9%
41%
6%
22%
9%
3%
3%
3%
Ease of partner/ relationship management
0%
9%
16%
13%
34%
13%
9%
3%
0%
3%
Design capability
3%
0%
3%
16%
22%
6%
19%
16%
6%
9%
Language issues
0%
3%
16%
3%
3%
13%
13%
16%
19%
16%
Cultural issues
3%
6%
9%
3%
0%
0%
6%
28%
28%
16%
Distance of supplier from your plant
9%
3%
3%
6%
3%
19%
16%
3%
16%
22%
Section three Purchasing, procurement and logistics
Most important
For the third year in a row Product Quality and Cost Savings emerge as by far the most significant criteria. One has to wonder why there is so little indication of organisations moving beyond transactional (adversarial?) relationships with suppliers. There is plenty of evidence of the gains to be realised from sustained activity in building long-term relationships with suppliers based on trust, joint learning and mutual benefit. The evidence from three years of data in the AMR survey indicates this is not even on the radar of most UK organisations.
7 2010
What proportion of your manufactured end product is currently exported?
2009
95-100 percent 75-95 percent 50-74 percent 25-49 percent 1-24 percent None
2010 2009 6% 2% 31% 13% 9% 17% 15% 17% 33% 44% 6% 7%
31
8
How, if at all, do you anticipate this proportion changing over the next 12 months?
Significant increase Small increase Stay the same Small decrease Significant decrease Don’t know
2010 2009 7% 0% 45% 54% 45% 38% 3% 4% 0% 0% 0% 4%
2010
9
2009
Where are your main export markets? Mark as many as apply
Non-EU western Europe 2009: 15% 2010: 25%
North America 2009: 33% 2010: 53%
Non-EU eastern Europe 2009: 20% 2010: 28% EU 2009: 89% 2010: 94% Asia incl. Japan and China 2009: 37% 2010: 31%
North Africa 2009: 7% 2010: 16% India/sub continent 2009: 14% 2010: 28%
Australasia 2009: 15% 2010: 22%
32
10
Do you anticipate positive opportunities arising from ‘new’ consumer markets like China and India? 2010 2009 49% 39% 45% 54% 6% 7%
2010
2009
The indications for the current level of exports show organisations becoming more successful at exporting their end product? Given the state of the UK economy and the CSR plans to reduce the number of public sector jobs, this could be an early indication that a positive environment may be developing. A significantly decreased sterling exchange rate has undoubtedly had a positive contribution to the net increase in UK product exports. This level of confidence is likely to continue with 52% of respondents expecting to increase their exports next year. The number of companies reporting an anticipated increase in opportunities from new consumer markets in Asia has increased to nearly half.
11
Section three Purchasing, procurement and logistics
Yes No Don’t know
What is the likelihood of part of your manufacturing production moving to a low cost economy over the next 12 or 24 months?
2010 2009 Very likely 9% 15% Quite likely 15% 9% Not very likely 27% 22% Not at all likely 45% 54% Don’t know 4% 0% 2010
2009
33
12
What is the likelihood of part of your manufacturing production returning to the UK over the next 12 or 24 months?
Very likely Quite likely Not very likely Not at all likely Don’t know Not applicable (don’t have an overseas operation)
13
0% 6% 30% 15% 4% 45%
Where are your main export markets? Mark as many as apply
Non-EU eastern Europe: 28%
Far east and China: 44% South East Asia: 0% India/sub continent: 11%
Mexico/ South America: 17%
Don’t know: 28%
34
Other: 6%
14
If you outsource any of your processes overseas, how would you rate your level of satisfaction with your outsourcing decision.
Very satisfied
17%
Satisfied
44%
Indifferent
13%
Unsatisfied
26%
Very unsatisfied
0%
Sub Total 2010
Last year 2009 4%
61%
61%
13%
28% 4%
26%
3%
Sub Total 2009 65% 28% 7%
Last year’s AMR commented that satisfaction with outsourced overseas work had grown from 47% Very satisfied or satisfied in 2008 to 65% in 2009. The report stated, ‘We can now verify that offshore suppliers are doing a good job.’ The 2010 results shows that this could be reversing with less saying very satisfied or satisfied and a major increase in unsatisfied or very unsatisfied (7% to 26%). However there has been a 13% increase in the number of companies reporting to be very satisfied with their overseas outsourced work. Despite the increasing level of dissatisfaction, only 6% of companies reported that any part of their manufacturing process was likely to return to the UK. This may be an indication that the barriers involved in near-shoring an operation are too great to make it viable despite a poor level of service or quality from overseas suppliers.
15
How much information do you currently receive from your channel partners?
Very detailed Quite detailed Not very detailed Minimal/none Don’t know
2010
Section three Purchasing, Procurement and Logistics
This year 2010
2010 2009 3% 5% 49% 42% 25% 33% 6% 10% 17% 10%
2009
35
16
How much information do you currently share with your channel partners?
Very detailed Quite detailed Not very detailed Minimal/none Don’t know
17
3% 55% 21% 3% 18%
Overall, which of the following phrases best describes the current degree of supply chain integration within this company?
Highly sophisticated, based on real time sharing of detailed 3% information including production schedules, design collaboration and detailed customer and supplier channel data A degree of electronic transactional communication including 67% sales and purchase orders but no real collaboration Functional systems and processes in place but not really 18% working effectively No supply chain integration and minimal data exchange 12%
36
18
Significantly increase Slightly increase Stay the same Slightly decrease Significantly decrease Don’t know
0% 55% 42% 0% 0% 3%
World class organisations participate in long-term, collaborative relationships (with customers and suppliers) based on trust and mutual benefit. The poor level of engagement with channel partners and the lack of engagement with sophisticated data collection shows little effort to move beyond transactional, adversarial relationships. A more comprehensive engagement is needed throughout the supply chain of manufacturers to improve the standard of operation. However, there is evidence that some work has been made to improve in this area with 55% of respondents forecasting a slight increase in investment in supply chain integration.
Section three Purchasing, procurement and logistics
How will your level of investment in supply chain integration change over the next 12 months.
37
Section four IT Analysis by Malcolm Wheatley Contributing IT Editor SayOne Media Malcolm Wheatley has worked in engineering and electronics manufacturing businesses, and spent several years as a specialist manufacturing and supply chain management consultant with two of the world’s largest consulting firms. A former senior contributing editor on a major US-based manufacturing title, he has been writing about IT in manufacturing for over twenty years. www.sayonemedia.com
1
Comparing to this year, was your expenditure from last financial year less, more or the same? 2009 2010
14%
Less
33%
More
29%
13%
The Same
57%
53%
2
Comparing to this year, will your proposed expenditure for next financial year be less, more or the same? 14%
2009 2010
Less 6%
32%
More 47%
The Same
47%
38
54%
Section four IT
Last year manufacturers reported a significant drop in IT expenditure. This year 87% of companies reported that they had maintained or increased their IT expenditure over the last 12 months. This increase matches the proposed 2010 expenditure that manufacturers reported last year. In 2011 almost 50% of manufacturers expect to increase their level of expenditure on IT while only 6% of customers expect to spend less. This indicates a growing confidence among manufacturers and a re-engagement with those IT projects that might have been cancelled or postponed during the recession. Furthermore, this supports anecdotal evidence from the marketplace that IT sales budgets are being met – and in some cases, exceeded.
3
Which of the following IT and technology-based initiatives are currently high priority strategies within the company, in the sense that there is a current project or that one is planned to start in the next 12 months. (Mark as many as apply) 2009 Upgrading IT infrastructures Financial or accounting software Manufacturing Execution System (MES) or Management Information System (MIS) Use of internet for sales and marketing Systems integration
50%
60%
42%
Enterprise resource planning (ERP)
25% 21% 18%
25%
39%
10%
Intranet development Warehouse management systems
14% 10%
Business analytics and reporting software
7%
Wireless technology E-business
10% 7%
Use of public or private web exchange(s) Enterprise application integration (EAI)
39%
Introduce RFID/wireless technology to any part of your operations Supply chain management and integration (SCM) Product engineering data management (PDM) Customer relationship management (CRM)
75%
3% 10%
Product lifecycle management (PLM) Application service provision (ASP)
0%
Don’t know
0%
39
2010
Upgrading IT infrastructures Financial or accounting software
Manufacturing Execution System (MES) or Management Information System (MIS)
27%
Use of internet for sales and marketing
13%
Systems integration
13%
Introduce RFID/wireless technology to any part of your operations Enterprise resource planning (ERP) Supply chain management and integration (SCM) Product engineering data management (PDM) Customer relationship management (CRM)
67%
47%
7%
20%
33%
0%
20% 13%
Intranet development 6%
Warehouse management systems Business analytics and reporting software
0%
Wireless technology
0%
E-business
0%
Use of public or private web exchange(s)
0%
Enterprise application integration (EAI)
0%
Product lifecycle management (PLM)
0%
Application service provision (ASP)
0%
Don’t know
0%
Despite manufacturers reporting an overall static or increase in IT spend this year and next, there has been an overall reduction in involvement in IT projects across most areas. The larger areas of investment such as IT infrastructure, accounting software, MES/MIS and ERP software have remained relatively static but there have been falls in most other areas. The only area of increase is in supply chain management and integration which might be a reflection of negative supply chain experiences by manufacturers over the course of the recession. The strength in the areas of MES and supply chain management reflect a continued interest in reducing internal costs which can be assisted by the implementation of these types of software applications. From past results, the continued interest in upgrading IT infrastructure can be attributed to regular budgeting for hardware, software and communications which occurs every year. However, interest in IT infrastructure is at its lowest rate since 2007 when it was 71%. Last year there was a considerable increase in internet sales and marketing which this year has dropped by 47%. Last year much of that increase was attributed to companies moving elements of their sales to an online format which may now have been largely completed. It is likely that engagement in these areas is almost certain to increase next year if manufacturers follow through with their proposed increase in IT spend. That said the reduced impetus to implement technologies such as RFID and PDM points to the extent to which IT expenditure is being driven by projects with a hard – and very discernible – ROI.
40
4
Section four IT
Over the past 12 months, have you made any new IT investments to improve your company’s performance in any of the following business processes? Mark as many as apply. 2009 2010 Product design and development To manage the Supply chain Improving energy/resource efficiency Planning and scheduling operational processes Analytics and reporting (e.g. to monitor sales and other financial and non-financial information) Forecasting demand
Developing new business models Financial management Plant and asset maintenance None of these
36%
14%
36 %
17%
21%
32% 29%
14%
14%
43%
0% 7%
Customising offers and services to customers Managing customer relationships
32%
7%
29% 21%
0% 7%
21%
7% 7% 7%
21%
21%
Interest in product design and development has continued over the last 12 months. This is encouraging and demonstrates companies are engaged with innovation and investment for the future. As with the previous question the figures here demonstrate the respondents have increased their focus on supply chain management. There has been a strong decline over the last 12 months in analytics and reporting software as well as financial management related IT which have both decreased by around two-thirds. Interest in planning and scheduling IT investments have remained strong over the last two years. Planning and scheduling drives better customer service levels by ensuring the plant is producing what the customer wants, when they want it. This improves lead time and throughput and the continued investment in this area indicates manufacturers are conscientiously looking after the needs of their current customers.
41
5
Have your new ICT initiatives been focused primarily on improving existing processes and ways of working or have they focused on meeting new challenges and requirements faced by the company? Mark as many as apply.
2010 2009 Improving existing processes 57% 72% and ways of working Meeting new challenges and 43% 22% requirements Don’t know 0% 6%
Whilst the majority of manufacturers’ ICT initiatives are focused on improving existing ways of operating, since last year there has been a significant increase in the number of respondents using IT to meet new challenges. As a result of the downturn, companies have been trying to improve operations using fewer resources which is evidenced by a focus on improving existing processes. However the increase in using IT to meet new challenges again represents a growing level of confidence.
42
2010
2009
6
What challenges that have resulted in the introduction of new ICT initiatives? Mark as many as apply
Heightened competition from low cost competitors Innovation / product development
Service More geographically dispersed customer base Regulatory and compliance issues Reducing environmental impact of business Increasing price competitiveness Customer pressure to adopt new processes Raising innovation performance i.e. development of new products or processes Don’t know
2009 2010
4% 0%
18%
15%
Section four IT
Offshoring manufacturing functions (inc - relocation; outsourcing and new investment abroad)
42%
15%
42%
38% 4%
8%
21% 8%
18%
15% 39% 31%
18%
0%
29%
38% 7% 31%
Service challenges and increasing price competitiveness have remained the core challenges that have resulted in the introduction of ICT initiatives. The decrease in innovation and product development has been balanced by an increase in raising innovation performance. This indicates not that there has been a decrease in innovation driven IT initiatives but rather a greater interest in improving the methodology around innovation. Arguably, too, the vast increase in respondents indicating that they don’t know what challenges have lead to the introduction of ICT indicates a lack of strategic investment or at least a poor understanding of links between actions and objectives within the company. This is a further reflection of a decrease in firm ROI requirements for investment.
43
7
To what extent did the introduction of ICT lead to an improvement in the following?
A significant improvement A moderate improvement No improvement
Productivity
Profitability
Energy/resource efficiency
Competitiveness/efficiency
Inventory/stock levels
Manufacturing costs
Required downtime
Customer satisfaction
According to the above results, the majority of respondents indicate that the introduction of ICT has led to some level of improvement in many different categories. Over the past three years there has been a significant increase in IT related to energy and resource efficiency. Whilst 70% of respondents indicated some improvement, 30% indicated that such IT implementation resulted in no improvement. As a large amount of energy and resource efficiency IT is related to the measurement and collection of data around energy use, improvement can only come from acting on those results. It is likely that the companies experiencing no improvement are not introducing using the collected data effectively so as to facilitate improvements. There is also often a difficulty in relating efficiency improvements directly to IT as changes are often greatly interrelated with other factors. Finally, a number of manufacturers reported that ICT allowed the most significant improvements in customer satisfaction. This is indicative of the continued high uptake of planning and scheduling IT investments, in particular APS systems. Significantly, many APS vendors reported strong interest in their solutions during the recession, and are seeing a high level of conversions now.
44
8
Which of the following phrases best describes the nature of your IT deployment at this company?
2010
Section four IT
2010 2009 Company-wide strategy 63% 67% Departmental strategy 28% 3% Tactical rather than strategic 9% 30%
As with last year, companies primarily employ a companywide strategy. This year more companies indicated a greater use of departmental strategies. Although the high-level of companywide strategies reported by manufacturers indicates a good level of integration, the one-third of companies reporting departmental strategies indicates that a considerable number of companies continue to fail to be properly integrated. It could be that a number of companies are operating different systems in different areas of the business. In this age however with well integrated holistic IT offerings readily available, this disjointed strategy is, for the most part, obsolete. That said, it may be that companies consider department-centric applications such as maintenance and rapid prototyping to have a low integration priority. They wouldn’t be entirely wrong, but it is still less than best practice.
2009
9
Thinking about your company’s customer relations management, have you (or will you) implemented new software solutions to achieve any of the following? Mark as many as apply. Improved marketing of new products and services Drive development of new products and services
28%
14%
Deliver higher levels of customer service
43%
Improve/maintain customer loyalty
43%
Target new market segments / increase market share
Deliver service support to customers
Improve distribution/delivery times Increase sales productivity Don’t know
30% 29% 21%
57%
29%
45
With respondents having already indicated that they have a considerable focus on improving and maintaining customer relationships, these results contained few surprises. There has been a significant uptake of software to assist with the delivery of high levels of customer service, and to assist with improving and maintaining customer service. The systems being used to do so are likely to be CRM software packages as well as planning and scheduling software. Cost-to-serve remains paramount, though, with SFA applications such as Salesforce.com continuing to see strong levels of adoption.
10
What do you believe are the current major barriers to investment and implementation of IT within your organisation? Mark as many as apply. 2009 2010
Lack of skills required to implement and maintain IT solutions Insufficient management buy-in Lack of confidence / understanding in the potential return on investment Employee attitudes/resistance to change Cost of investment Overall risk of such a project in current economic times Technology not sufficiently matched to business needs and exiting manufacturing Previous experiences of IT projects Pace at which technology becomes obsolete No barriers experienced / envisaged
32%
7%
18%
77%
46%
13%
21%
20%
50% 47%
25% 13%
14%
20%
18% 7% 10%
0% 10%
20%
There has been a significant shift in the primary barriers to the implementation of ICT according to this year’s report. Although the cost of the investment remains a significant barrier, the most critical barrier reported this year is management buy-in. Likely the two barriers are intrinsically linked and demonstrates that there is still a certain level of nervousness in the manufacturing market about making investment in ICT. Improving managers understanding of the benefits of individual ICT implementations whilst encouraging more flexible payment options would likely significantly lessen the level to which management is standing in the way of ICT investments. On the latter point, anecdotal evidence from the market place points to more and more vendors introducing just such flexible payment options.
46
What can Government do, or stop doing, to better help UK manufacturing? A selection of responses...
Aid Invest in training, make manufacturing/ engineering a realistic career choice with fee free degrees for engineers/ manufacturers. Incentives to keep manufacturing and suppliers within the EU. Incentives that would allow offshore businesses to return to these shores.
Law H&S is too onerous e.g. risk assessments for basic hand tools and ladders is ridiculous. Stop threatening criminal action if paperwork is not completed on time. Stop interfering with more and more harebrained Euro-driven legislation which our “fair-minded” bureaucrats dream up, implement and police to death so as to justify their existence.
Taxation and grants Stop introducing further taxation via duty and or VAT. Make Tax credits for R&D easier to get. Tax credits for updated new low carbon buildings. Tax breaks for research and development and capital investment 120%.
Politics Ministers need to become much better aware of the global manufacturing situation. Spending cuts are required but trying to do too much too quick. There has been too much scare mongering by politicians resulting in poor consumer confidence.
Competition Finance and Economy Introduce export credit guarantees. Encourage banks to invest and think long term in SMEs and think of community spirit and not short term leverage/profit. We understand that viability is paramount, but the banks take too long to give negative answers. Make the banks lend money at sensible rates without difficult covenants associated.
European board mill prices need to be reduced and controlled rather than the current monopoly. UK supplier’s prices need to come down with the help of the government. We can purchase cartons significantly cheaper from other European countries such as Poland and Turkey and the prices include delivery costs. Recognise that we are losing manufacturing to overseas businesses and that in order for us to compete at times need assistance.
Manufacturers’ Opinions: What can Government do, or stop doing, to better help UK manufacturing?
Manufacturers’ Opinions:
47
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