1/ Introduction, Management summary:
Unfortunately, as we understand now, COVID-19 will not go away in a matter of weeks or months. Even with a vaccine, scientists have doubts about a prompt turnaround of the situation we are in. It is to be considered as a major disruption on top of others, as the world trade rebalancing with the ongoing trade wars, global warming concerns, and the geopolitical instability that will contribute to profound structural evolutions of our economies for the foreseeable future.
With almost nine months of this Pandemic, we can observe how the events are unfolding. Traveling, entertainment and hospitality were the first ones to be hit. Manufacturing was stopped due to the lookdown of plants and global supply chain issues, . Some experts initially believed that with the right policies, the pandemic could have been manageable with a strong V-shape recovery if the virus had been under control by now!
Looking forward, , we can expect a significant domino effect in all sectors of the economy, including manufacturing. The drop in consumers’ confidence and massive unemployment triggered by COVID-19 will most likely mean a major slowdown in the consumption of equipment and goods as cars. Another industry to be mentioned is the aircraft vertical. Companies like Boeing, Airbus, and their OEM partners will see their order books dry up since we cannot expect the traveling segment to recover for several years.
Other sectors affected are the ones where many people need to be in a commonplace to produce goods or services. In order to produce a plane or a car, you require a team of people in a factory to assemble the components and produce the final object. On the other end, processing insurance claims or financial analyses can be done from home with the existing technology. Productivity might be weakened by the kids, the dog, or other household chores and duties – , but it can be done! In today’s world, producing an HVAC system in a backyard by a single man is something that remains to be seen!
Still, manufacturing is the backbone of the economy, and we have reasons to estimate that; in the long run, it will be more resilient than others, such as hospitality and commercial real estate. At a macroeconomic level, countries with a reduced manufacturing footprint will most likely struggle significantly more to recover.
Therefore, manufacturing industries will have to go through the following steps:
- Ensure Business continuity by curtailing costs.
- Increase flexibility and resilience, reworking, and simplifying critical processes.
- Turnaround, reform and reinvent, in some cases, meaning a fundamental transformation of their business models.
Before embarking on the next section with the step-by-step analysis of the COVID-19 impact on manufacturing processes, Let me start by saying that I strongly believe that the consensus that digitalization is the silver bullet to crack down the issue, is questionable. Besides, some of its promising features digitalization is still in the infancy stage For example, the reasoning capabilities of Artificial Intelligence (AI) applied in industrial operations, are limited to a 4-year-old’s intelligence. Revamping existing processes, to become more agile, and trusting the human imagination capabilities and capacity of resilience is paramount in overcoming the complex situation we are in. Digital tools are enablers, not solutions.
Learnings from the COVID-19 crisis, will lead to a more sustainable and balanced approach to the economy with a larger scope of stakeholders benefiting from their contributions. This, however, remains to be seen!
2/ Manufacturing process analysis:
In this section, I will share our thoughts on some general critical issues to be addressed, that will contribute towards making manufacturing stronger and more resilient.
Business leaders according to their verticals, geography, company culture… and the specific situation of the company will need to prioritize the ones having the highest return on investment.
2.1/ Product development & innovation:
- Removing complexity is a must. Throughout the years, corporations have added layers of bureaucracy in their new product development process (NPD) adding costs and slowing down the product release to the markets. Even if we are strong believers of an orderly NPD process, management should embrace the opportunity coupled with the necessity to curtail costs imposed by COVID-19 to streamline the development processes by adopting a more agile philosophy.
- As the Research and Development (R&D) function is reconsidered, we may consider that often the teams are not always adapted to the evolution required by nascent customers’ demands such as electrification of vehicles or mobility as a service (MAAS) in the automotive segment. The shock wave of COVID-19 and the long-term implication of cultural changes should help companies’ leaderships to alter existing models and adjust staff skills accordingly.
- New digital technologies such as 3D printing, digital communication, rapid virtual prototyping, artificial intelligence can help. In the automotive ecosystem, some manufacturers succeeded in reducing the new product development cycle lead time from 36 months, in the 90s, down to 24 months, and reducing costs drastically by using these tools.
2.2/ Managing vendors:
- Professionally managed suppliers’ relations are a significant aspect of the competitiveness of a company by managing cost, accurate lead times, and quality. Therefore, a constant flow of information and contacts are required. Obviously, with COVID-19, the frequency and the depth of suppliers’ days or suppliers’ audits, just to mention these interactions will be limited. Revision of communication tools such as performance dashboards transmitted electronically will become more common. Scheduled video conferencing on the production floor using mobile devices will have to be done regularly. Thus, revisiting granularly processes and using communication digital tools will contribute to solving this pain.
2.3/ Supply chain:
- Most certainly, supply chain is one of the most discussed topics of this pandemic. The reliance of many manufacturers on Asian production for finished goods or components is pinpointed as a weakness. Even if “China Manufacturing INC” is bouncing back and roaring again. COVID-19 should be an alert and a call for reindustrialization close to home, but without leading to a major increase of the Cost of Goods Sold (COGS).
- The answers to this complex equation might be twofold:
- To strengthen inventory management with robotics and Industrial Internet of Things (IIOT), as a way to improve accuracy and reduce labor costs. Recent studies demonstrate that in best-case scenarios, inventories can be reduced up to 35%. Besides, transport costs will decrease naturally and represent significant savings.
- In the production processes, redesigning workflows integrating technologies like robotics, IIOT, and 3D printing will greatly reduce the labor cost of goods sold (COGS) and eventually productivity of the company.
- Nevertheless, capital expenditures (CAPEX) will be heavily impacted by doing so. Therefore, it is a balancing act issue and investment strategies in this field must be considered cautiously.
2.4/ Production: COVID-19 is a headache for production management, due to maintaining the necessary high level of productivity and quantity without jeopardizing the health of employees. Not to mention the equipment of manufacturing floors with Personal Protective Equipment (PPE) and redesigning the workflow create significant cost. The conundrum can be broken down into:
- Essential workers need to be outfitted with the relevant PPE and the production premises adapted to ensure social distancing. Seen as a cost factor, paradoxically it has been demonstrated that the process of rethinking the production lines has contributed to some manufacturing sites to improve efficiency, safety, and productivity. The operational procedures, including a description of new constraints, need to be issued and staff trained accordingly.
- For “non-essential” workers (staff and management), when on production sites, PPE should be used not only be for protection but also to demonstrate proper leadership, under the principle of leading by example. When in the offices, social distancing will have to be addressed by redesigning the space’s floor plan. Working remotely from home is currently common practice.The issue here is to ensure that employees stay motivated and productive. Frequent contacts through social media, videoconferencing as well as virtual group meetings are advised.
- The most critical key to success is to maintain a high level of motivation, and thus productivity, by ensuring frequent and adequate communication. The leadership’s genuine and transparent engagement is crucial to maintain a positive work environment
- COVID-19 is making the onsite routine maintenance more complex to plan and execute. Maintenance staff might not be available in case of a sudden breakdown. Real-time diagnostic of critical equipment thanks to IIOT sensors will reduce planned maintenance needs and prevent unplanned production breakdown, saving significant monies, and avoiding revenue losses. It has been estimated that robotics, machine learning, sensors, and connected wearables reduce production waste by up to 20%, improve productivity between 20% and 40%, and reduce the cost of maintenance up to 15%.
- COVID 19 could lead to improvements in breaking down silos, enhance transparency, and drive a less hierarchical culture within the manufacturing companies. Empowering the workforce, with less middle management supervision, will reduce headcount costs and potentially lead to a more positive company climate and culture.
- As in the case of the supply chain, the benefits and costs added with a careful financial analysis must be done before relocating production manufacturing activities. Nevertheless, the COVID-19 shock, combined with the technological breakthrough of the last few years, could contribute towards changing the paradigm of the manufacturing goods production locations.
2.5/ Commercial operations:
- Marketing: We can already observe that COVID-19 is already having a significant impact on pricing. While food and beverage prices tend to rise, retail prices of clothing, for instance, are collapsing. It is becoming critical to adjust pricing policies and tactics in almost real-time. Analytical tools enabled by AI are more than ever needed to address this issue.
- Sales: The traditional customers’ intimacy tools as retail shops trade shows, professional conferences have almost disappeared in the last few months to the benefit of online sales.
- Business-to-Consumer (BtoC):
- Considering BtoC retention sales, enhancing customer satisfaction can be addressed by improving support tools online or via telephone help desks. Most customers find online chat-bots inefficient and too robotic, yet, many companies in reducing operating costs have curtailed real human phone assistance leaving customers frustrated.
- Due to the lockdown, many people are now starting to regret the enjoyable experience of “going shopping” which might need to be reinvented rapidly with humans refocusing on human-to-human interaction and not only humans-to machines. We can imagine, the generalization of a hybrid concept of a highly sanitized showroom with limited inventory, where customers would discover the goods to purchase immediately followed by quasi instant delivery at home. This would enable the enhancement of today’s customer experience as well as downsizing the inventory, leading to major cost reductions as well as cash flow improvements for manufacturers.
- Business-to-Business (BtoB):
- The customer retention effort can be assisted with the available communication technologies as a marketplace, blockchain, videoconferencing, and electronic dashboards. An ad-hoc way of interacting should be avoided to the benefit of structured planned “Videovists” to maintain a high quality of relations. It has been estimated that companies efficiently adopting Operational Technology (OT) sales tools generate up to 3.5% more revenue than others, also, the traveling and entertainment costs (SG&A) linked to customers’ physical visits will be slashed down impressively.
- With the lockdown and current travel restrictions imposed in numerous countries, acquisition sales using traditional methods such as visits, attendance to shows and professional conferences are close to impossible. It can be foreseen that even if digital technologies will, to a certain extent reduce the pain, it will be far from being enough to close the gap companies are facing. Refocusing of the sales acquisition teams and usage of tighter management methods to improve the conversion rate will then become critical.
- Sales management technics and customer relationship management (CRM) tools like “Salesforce” for instance, have been existing for many years, but the adoption rate in most cases is still low in manufacturing. In difficult times, sales leaders must use granular data and decision-making methods to boost the effectiveness of the teams, tightening significantly the follow-up process, regularly working on the pipeline opportunities with the sales team to pump up order books focusing on opportunities with the higher “return on investment”. On the positive side, the COVID-19 crisis implied less traveling thus fewer costs.
- Distribution channels development is often neglected by manufacturers. The progressive ramping up of online sales primarily in BtoC and gradually BtoB for final small business customers has been boosted by COVID-19. Some small business owners were forced to change their ordering patterns due to the current circumstances. Yet, many discovered that they had more choice, sometimes lower prices, almost instant delivery, and services. Manufacturing companies, not having an aggressive game-changing strategy in this field will be significantly penalized.
- BtoB corporations supplying components to large customers.For instance, Heating, ventilation, and air conditioning (HVAC) in the building and construction vertical or Original Equipment Manufacturer (OEM) in the automotive industry will not see their distribution model disrupted for now. The main headwind to address for them is the global slowdown of the economies due to the COVID-19 crisis.
2.6/ Support functions:
- Finance: Due to the extensive use of IT technologies already for years, the finance functions are not fundamentally affected, nevertheless, the pressing need to design and implement management tools like dashboards and key performance indicators (KPIs) to manage the business more tightly in real-time are implying a larger workload.
- The HR function is a key element in the design and implementation of renewed processes and procedures. More significant, the critical role of HR staff and leaders is to provide support to employees to overcome physical, psychological difficulties and ultimately ensure that the team morale is still high.
- Legal: Even if most countries’ legislation currently applicable are stating that a company can enforce the obligation to have the employees physically on-site when there are no major risks. The issues are to define the concept of major risk in the case of COVID-19 and if the company is taking all necessary precautions to mitigate them. Legal disputes and cases of laws are predictable. Thus, it could be recommended to issue “contractual documentation”, respecting the country regulations, defining the commitment and responsibilities of both parties the employers, and the employees. Needless to underline that it will not remove all probable litigations but will have the advantage to frame the issue.
- Information technologies. Before the COVID-19, IT and OT were already becoming increasingly important to manage companies. Nowadays it is the backbone to recover profitability. Nevertheless, we cannot emphasize enough that systems can only contribute to delivering results when processes are fully efficient and effectively managed. To put it in other words, a broken organization even with magnificent IT/OT infrastructures will stay a broken organization!
- Many papers on this matter declare that top management needs to conduct and sometimes enforce changes. Let us offer a caveat to this statement by describing the managerial role in creating the conditions to enable teams to drive changes and therefore succeed. The magnitude of the crisis we are in is such that a few, even incredibly talented individuals, will not have the capacity to turnaround the difficult situation encountered alone.
- As per the tools to turnaround, they exist and are powerful, with re-engineering technics to rework distorted processes, Agile, new product development (NPD), product portfolio management (PPM), advanced analytics to tighten monitoring of the operations, and now, efficient communication devices, enabling fast and efficient contacts with a large audience.
- The biggest risk, at this point, for CEOs, CFOs, COOs… is denial, applying recipes of the past with restructuring cutting headcounts, releasing accruals to have the P&L look better, performing stock buybacks, and then hope for the best. On top of an already disrupted ecosystem with global trade disputes, Manufacturing 4.0, evolving consumers requests, regulatory constraints strengthening, just to mention a few examples, the COVID-19 is “the cherry on the cake” that should be driving leaderships to seriously consider evolving towards a longer-term vision of the businesses they are leading. Empowering agile teams, focusing on stakeholders, and embracing innovation should become the new leadership norm.
- Finally, leaders must accelerate the speed of changes and readjust strategies not only in a first step to implement cost-cutting initiatives but to proceed to a deep rethinking of current processes and in some cases Business models. Structured strategic planning tools to design them will be needed, Agile implementation relying on empowered employees a must, and follow-up and reward systems strongly recommended.
3/ Covid-19 & Manufacturing in Europe versus The United States:
3.1/ The focus on manufacturing: On both sides of the Atlantic, differences are noticeable from one region to the other. When in Germany Manufacturing is about 20% of the national GDP, in France it is around 10% and it does appear to be equivalent in the USA. So, these different situations will lead to different measures to protect the overall economy. To put it simply, when it comes to Manufacturing there is not One Europe or One USA.
3.2/ Laws & regulations: As in other sectors of the economy in the EU and the United States, the legal framework concerning manufacturing is impacted by European directives, as well as national laws and in the USA, States, and federal regulations. This complexity is leading, in case of emergencies, to slowing down the process of recovery. This said, in the case of COVID-19, governmental agencies, including the EU council, have rapidly taken significant and powerful initiatives. The conundrum to foresee will most likely be in the interpretation and implementation of the rescue packages allocated.
3.3: The magnitude of the recovery packages: is enormous on both sides of the Atlantic, and manufacturing industries will benefit from them. However, understanding that COVID-19 is a long-term battle, will it be sufficient to turnaround today’s situation, without a major overhaul of our existing manufacturing footprint? Also, we believe it is possible to make the best out of a bad situation, by benefiting from advanced manufacturing concepts and technologies to make our manufacturing ecosystem more resilient, more productive, and fairer.
3.4: Green versus “traditional”: The EU infrastructures and manufacturing sectors are engaged in a significant “Greenification”, when, in the United States, with the current administration, the consensus is to reinforce the existing paradigm. We can already see trends enforcing the divergence between Green and “traditional, especially due to COVID-19 and the United States’ push to recover their economy.
3.5: Global versus Local/ Regional: The refocus on repatriating manufacturing at home had already come into focus in the United States. Meanwhile, COVID-19 forced multiple European country governments, maybe except for Germany where the manufacturing footprint has always been strong (20%+ of GDP), to reconsider a change in policies. As an example, a few years back, under François Holland, in France, the “Ministère de l’industrie” (Ministry of Industrial affairs) was transformed into the “Ministère de la Transition écologique et solidaire” (Ministry of the Ecological transition and solidarity), showing a low level of concerns towards manufacturing activities. Those deindustrialization trends, with COVID-19 and the fantastic advance of technologies (Robotics, OT) can be decisively addressed by most European countries under the leadership of the EU organization. This said, some decisions, such as not allowing the merger between Alstom and Siemens in the railway sector before COVID-19, are questionable and should be revisited.
A revamped EU strategy was launched in March 2020, emphasizing the urgency and complexity of the issue. Ursula von der Leyen, President of the European Commission, said: “Europe’s industry is the motor of growth and prosperity in Europe. And it is at its best when it draws on what makes it strong: its people and their ideas, talents, diversity, and entrepreneurial spirit. This is more important than ever as Europe embarks on its ambitious green and digital transitions in a more unsettled and unpredictable world. Europe’s industry has everything it takes to lead the way and we will do everything we can to support it.” And Thierry Breton, Commissioner for Internal Market, said: “Europe has the strongest industry in the world. Our companies – big and small – provide us with jobs, prosperity, and strategic autonomy. Managing the green and digital transitions and avoiding external dependencies in a new geopolitical context requires radical change – and it needs to start now.” In a few words, the new Industrial Strategy will help deliver on three key priorities:
- Maintaining the European industry’s global competitiveness and a level playing field, at home and globally,
- Making Europe climate-neutral by 2050,
- And shaping Europe’s digital future.
In light of the unfolding events due to COVID-19, this major undertaking should be accelerated.
In this section we tried to open the conversation to the diversity of views and approaches, describing some headwinds and backwinds, without being conclusive on which alternatives will yield the best outcomes. The future will tell us which area of the world will get out of this crisis stronger and more resilient.
This article aims at giving a quick, and certainly incomplete, analysis of the impact of COVID-19 on the manufacturing ecosystem and some hints on ways to sort out the major ordeal we are facing.
Hopefully, the step by step approach described contributes towards demonstrating that managerial technics, processes, and digital solutions are available to, as already pinpointed:
- Ensure business continuity.
- Increase flexibility.
- Turnaround, reform and reinvent.
The concept is rather straightforward to understand, but represents a significant level of complexity to implement in an environment where critical team members will be working remotely and mobility restricted.
Pushing back and closing our eyes is a recipe for disaster; on the contrary, the COVID-19 crisis in our fast-evolving world is an opportunity to drive a great evolution in our manufacturing system.
The diverse cultural and political environment in each region of the world will in some cases lead to enable recovery and some other become roadblocks slowing it down, we will see various understanding, interpretations of what to do, and different implementation speeds.
BUT let us remember that, for example, the bubonic plague accelerated the diffusion of knowledge and technologies. This made it possible to go from the Middle Age to the Renaissance!
- Eric Thormann, eric.thormann[at]ethormann.com
Compliments of Eric Thormann Consulting – a member of the EACCNY.