Peloton announced recently that they were getting out of actually making things. Why? They hope to get rid of all the lowest value activities and manufacturing is low value.
Chief Supply Chain Officer Andrew Rendich calls it “Partnered Manufacturing”. Many industries use this model, especially the aerospace, defense, electronics (called Contract manufacturing), energy, medical, food manufacturing, personal care, and automotive fields. The pharmaceutical industry uses this method, and it is a $14 billion industry. For semiconductors, it’s called the foundry model.
What does that say to manufacturers? It’s says, “you’re not worth much”! It says, “you do the easy, not-very-valuable stuff and we’ll get all the money because what we do is more valuable”. If you are in Partner Manufacturing, what can you do to keep your value? What can you do to stay out of the trough of the Stan Shih smiling curve?
Stan Shih, the founder of Acer, first proposed around 1992 that the two ends of the manufacturing value chain – product conception and marketing/sales – are more valuable than the middle part – manufacturing! Using this model, he heavily invested in R&D to improve the front end of this curve and successful created one of the biggest, most influential companies in electronics. The curve is referred to to justify business strategies aimed at higher value-adding activities.
However, this “smile” graph is not good news for manufacturers.
What can you do? If you are in manufacturing, understand that your value as well as your burden are based on physical processes. The highest value-added manufacturers continually work on making all their physical processes more efficient by going digital.
The most successful manufacturers go digital. They publish digital product catalogs, run digital marketing campaigns, employ robotics to automate what they can, use IIOT to efficiently manage their machines, offer digital payments to smooth customer interactions, use multiple online (digital) sales channels, offer digital subscriptions, etc.
As a manufacturer, you can create value by adding digital elements to every aspect of the manufacturing value chain. ERP, IIOT, digital design, PDM, CAD, 3D printing, robotics, and logistics tracking have all flourished and thriving industries have grown up around these technologies and systems. As a result, they have squeezed manufacturing into an ever smaller, ever meaner part of the entire process.
So, instead of sitting at the bottom, manufacturers should embrace the higher value activities in your own value chain. Are you, as a manufacturer, interested in this race to the bottom?
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