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Manufacturers Must Manage for the Downturn, But Position for the Upturn

by Peter Maier | SAPinsider

April 1, 2009

How do manufacturers manage the short-term pain effectively, but also position the business for long-term gain? This is the essential challenge that companies need to address — and in this executive Q&A, Peter Maier advises SAP customers on how to tackle it.
 

Peter Maier
Senior Vice President
Industry and Suite Solution Marketing
SAP AG

SAP Insider asked manufacturers to name their current causes for concern. Among the most cited were:

  • Managing cash and credit effectively

  • Finding additional revenue sources

  • Ensuring supplier viability

  • Fielding unprecedented shifts in customer demand

  • Handling volatility and fluctuation in
    energy costs

  • Managing production overcapacity and
    plant closures
  • Lowering production costs

  • Ensuring quality and regulatory compliance

  • Quickly adjusting IT to support business tactics

  • Having visibility and integration across manufacturing, procurement, supply chain, and customer-facing processes

  • Not knowing how long the recession
    will last

In this Q&A, Peter Maier, Senior Vice President of Industry and Suite Solution Marketing at SAP AG, advises SAP customers on how best to prioritize and tackle these challenges, and how to align their IT investments — limited though they may be — with both short-term and long-term business objectives.

Q: Manufacturers are now contending with a long list of serious challenges. Which should they address first?

A: Every manufacturer I speak with has its own distinct set of business priorities. But common topics clearly include ensuring cash and liquidity and understanding and minimizing risk — both on the supplier side and the customer side. From an operational perspective, companies are focused on adjusting production capacities to demand fluctuations as a way to free up capital that’s tied up in inventory, production, and receivables.

However, this is only a short-term agenda. Many manufacturers are already leveraging the current changes in the market to get the fundamentals of their business in order. They’re weeding out unprofitable products, strengthening relationships with their most valuable suppliers and partners, retaining their most profitable customers, safeguarding key players in the workforce — and streamlining their IT systems for efficiency so that they can flexibly embrace unexpected business opportunities.

So the key question I hear from our customers is: How do I manage my business effectively for the downturn, but also position it for success in the upturn? In other words, how do manufacturers manage the short-term pain effectively, but also position the business for long-term gain? This is the essential challenge that companies need to address.

How do manufacturers manage the short-term pain effectively, but also position the business for long-term gain? This is the essential challenge that companies need to address.

Q: So how does a manufacturer “manage for the downturn, but position for the upturn?”

A: It’s a three-part prescription that focuses on maximizing operating margins, which is what most companies are being measured by right now. Manufacturers need to:

  1. Conserve cash and cut costs by running lean operations without compromising service-level objectives. While overall assets need to be reduced, companies also must get the most out of their existing operating assets.

  2. Minimize the possibilities of revenue leakage by maintaining their focus on quality and compliance. Especially for products that are still in demand, companies must ensure that they can meet mandated regulatory standards and customer expectations.

  3. Identify and capture new revenue opportunities that result from shifting customer preferences or demand. The thought leaders among our manufacturing customers are looking for opportunities several steps further up and down their value chains. They look at what drives the short-term and long-term agendas of their customers’ customers and their suppliers’ suppliers.

Devising strategies for each of these measures requires deep insight into customer preferences, external supply and demand dynamics, and internal operations like design, production, and service. Companies need visibility and actionable intelligence across demand, production, inventory, sales, and supplier activities throughout their extended business network.

Once they gain that insight, they must also be able to make swift decisions and take precise actions that will positively impact both strategy and execution. What makes it difficult is that each measure outlined above requires insight and action that both cross the traditional, functional domains of internal lines of business and stretch across the business network.

This is where IT can play a significant role. The right IT infrastructure should aggregate across traditionally siloed applications and add context across multiple departments, functions, and business partners to provide actionable intelligence to line-of-business owners. This infrastructure should also help the organization design and deploy flexible and efficient business processes that span departmental boundaries and ensure coordinated action across the value chain.

The importance of IT in all this cannot be overstated. In this volatile economy, IT organizations have to enable real-time insights, deploy cost-saving processes, improve interdepartmental and cross-company coordination, ensure the sustained integrity of mission-critical core processes, and promote rapid process innovation and propagation.

Manufacturers should employ cost-cutting measures and make targeted investments to provide fast returns and focus on their mission-critical, highest-value, or differentiating business processes.

Q: Given this challenging set of priorities and constrained IT resources, what strategies and guidelines does SAP recommend for customers?

A: We’re recommending a number of practices, many of which are already yielding demonstrable cost savings and process efficiencies for manufacturers in the SAP customer base. The key is both employing cost-cutting measures and making targeted investments to provide fast returns and focus on your mission-critical, highest-value, or differentiating business processes.

To conserve cash and reduce IT costs, we recommend that SAP customers:

  • Prioritize your key business processes. It’s typical for line-of-business owners to want to optimize their specific areas, but this is a costly endeavor. To effect meaningful cost savings, optimize margins, and act on new opportunities or changes in the marketplace, organizations need cross-application continuity.

    Moreover, right now there aren’t sufficient funds to support competing IT requirements. To overcome this problem, we recommend that lines of business work together to collectively prioritize key projects and engage IT to deliver the best business processes possible, rather than having each line of business focus exclusively on application-specific IT support for their individual functional areas.

  • Standardize your portfolio. If your IT organization works with different applications, and integration doesn’t come naturally but rather has to be force fit, it becomes very difficult and very costly to execute on corporate strategies. You will achieve better short-term and long-term gains by consolidating your application platform. This consolidation can be readily achieved with SAP Business Suite 7 (see Figure 1). A large number of manufacturers standardize on SAP solutions for this reason — our platform makes it easier and far less costly to glean insights and formulate and execute strategies. By contrast, manufacturers that maintain applications that are built on multiple underlying architectures find integration, testing, multiple user interfaces, maintenance and support, and data lifecycle management to be exponentially more expensive.

    What’s more, this fragmented approach lengthens the time it takes to extract insights because your data environment is disjointed. In turn, this elongates your time-to-action because process design and execution hit so many roadblocks.

  • Selectively upgrade only what you need. Instead of working on big-bang, large-scale upgrades, upgrade only the parts of your portfolio that yield the best ROI and that support the most valuable business processes. SAP Business Suite offers enhancement packages, which support our customers’ need to innovate at their own pace in a non-disruptive environment. This greatly reduces the cycle time required to support new business processes and make process improvements.

And to make IT investments that provide immediate and compelling value for the business, we recommend that companies:

  • Focus on mission-critical and differentiating business processes. Make targeted IT investments that help you maintain or extend competitive advantage through your mission-critical and differentiating business processes. For example, if you’re a company that maintains a competitive advantage based on the performance of its supply network, or its use of existing assets, or its product and service innovation, you’ll want to target IT investments on business processes that support this advantage.

    With SAP Business Suite 7, SAP delivers preintegrated business processes that are designed to directly match your organization’s differentiating feature, be it in driving operational excellence, delivering superior customer value, demonstrating product and service leadership, or ensuring responsive execution across the network. This approach promotes a faster deployment cycle and rapid value extraction.

  • Solve your most immediate pain first. You can make investments in the business processes discussed above one step at a time. For example, if you are interested in driving lean operations across your network, you will first need visibility into production. By prioritizing this manufacturing visibility as the first pain point you want to address, you can make an incremental investment into the larger end-to-end process around lean operations. Facilitating that incremental process step to ensure plant-to-enterprise visibility also delivers significant cost savings, plugs revenue leaks, and provides a better platform for innovating future activities. SAP has designed several Best-Run Now packages to help customers tackle their current pain points immediately and achieve a quick ROI now, but still preserve the value of their investment such that subsequent investments deliver cumulative value (refer again to Figure 1).

Remember that times of crisis can also be times of opportunity. This is an ideal time for manufacturers to pause, retrench, and refocus.

Remember that times of crisis can also be times of opportunity. This is an ideal time for manufacturers to pause, retrench, and refocus.

What’s New with SAP Business Suite 7?

Process excellence: Value scenarios and industry solutions

Value scenarios are preintegrated, end-to-end processes that support lines of business in optimizing key performance indicators (KPIs) that contribute to enterprise business strategies. Value scenarios span application and departmental boundaries and contribute to business insight, efficiency, and flexibility to help business leaders make the best possible decisions in a constrained environment.

Value scenarios support industry best practices for many lines of business:

  • For consumer products companies: Collaborative demand and supply planning and manufacturing network planning and execution

  • For chemical companies: Asset safety and compliance and developing high-performing organizations

  • For high-tech companies: Integrated product development and accelerating lead-to-cash

  • For the CFO: Gaining efficiency in finance and optimizing working capital

  • For the head of procurement: Integrating sourcing and procurement

With SAP Business Suite 7, SAP has defined additional scenarios supporting mission-critical and business-support processes for the lines of business in many industries. For a comprehensive list of value scenarios for lines of business, visit www.sap.com/usa/solutions/executiveview/index.epx. And for industry-specific processes, visit www.sap.com/usa/industries/index.epx.

Cost containment: Enhancement and Best-Run Now packages

Enhancement packages help you make selective, modular system improvements that fit into your budget and project scope. You can upgrade key functionality to improve or design new process steps, or you can implement individual applications that are specific to a particular problem. These packages include functionality in:

  • Outsourced manufacturing: Support for PO management (price confirmation/reconfirmation), batch traceability, file upload/download centers, supplier self-service, product configuration, and batch classification

  • Component and task sourcing: Ability to design collaboration networks with sophisticated authorization concepts using new access control list (ACL) functionality to manage role-specific data access

  • Audit management, quality management, and quality notifications: Integration of quality inspection processes into the work in process (WIP) batch process, digital signatures, extended search via objects in the notification list, printouts via SAP Interactive Forms software by Adobe, mailing quality notifications via attachments, and archiving of assigned objects with notification archiving

Best-Run Now packages are designed to help customers solve immediate pain points by implementing selective process steps quickly and in a modular, easy-to-consume fashion. This ensures that customers get a jump-start on their path toward a long-term value scenario deployment. The Best-Run Now initiative combines software, financing, and services to bring customers a complete, cost-effective solution that delivers rapid ROI for today’s economic climate, while simultaneously providing leverage for the long term. Examples of Best-Run Now packages include:

  • Project and Portfolio Management in R&D and IT: Manage high-volume resource usage to increase responsiveness by aligning activities, resources, and budgets with business priorities

  • Manufacturing Visibility, Integration, and Intelligence: Enable shop-floor to top-floor visibility to ensure closed-loop production planning and execution

  • Inventory Optimization: Increase inventory turns and improve asset utilization by ensuring that the right parts, raw materials, intermediates, and finished goods are in the right place at the right quantity at the right time

  • Accelerated Savings in Procurement: Reduce costs and increase efficiency in the procurement process and quickly identify sustainable savings opportunities, optimize contract value, and drive informed supply decisions
Growth opportunities: Insight and flexibility

SAP Business Suite 7 helps you gain insight into your business and drive precise actions through flexible, efficient business processes. The applications are service-enabled — over 80 bundles with more than 2,000 enterprise services are already available — which gives you the flexibility to innovate and add functionality to the software as needed.

Examples of enterprise services include:

  • Supply chain management
    • Service Parts Management Demand Planning

    • Customer Collaboration for the Supply Chain

    • Global Ability to Promise (ATP) Check

    • Supply Network and Product Planning Processes

    • Supplier Collaboration for the Supply Chain

  • Transportation and warehousing
    • Inventory Lookup

    • Yard and Storage Management Process

  • Order to cash
    • Customer Fact Sheet

    • Electronic Bill Presentment and Payment

    • Credit Management

    • Order to Cash Bank Relationship Management

    • External Cash Desk
Figure 1
SAP Business Suite 7 provides business and IT organizations with tools to manage for the downturn, yet position for the upturn

Additional Resources

  • The Procurement, Production, and Inventory Optimization in a Downturn Economy seminar (see www.optimizationseminar.com for event dates and locations)

  • “Warehouse and Inventory Management,” an SAP Insider Multimedia Training CD (www.SAPinsidermultimedia.com)

  • “Innovation Without Disruption: A Deep Dive into SAP’s Enhancement Package Strategy for SAP ERP,” an Under Development column by Thomas Weiss and Christian Oehler (SAP Insider, January-March 2009, www.SAPinsideronline.com)


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