Disruptor 1: Falling Manufacturing Costs
If you are trying to pay attention to what the new economic order has brought us so far, chances are your are feeling uneasy-a term Alvin Toffler calls Future Shock. Technology and the changes it brings, a faster, more transitory existence, has been affecting us since the day the abacus was invented. What is changing these days is nothing more than every single industry in the world…especially getting things repaired.
Have you noticed that nothing gets fixed nowadays? I remember when you could get your TV repaired at home. Or how about watching your local mechanic work on your car? Or the air conditioner repair man? I could be wrong, but I don’t think Maytag actually has a repairman anymore. You know those “extended warranty” and repair contracts? Let Sears handle it.
Well here’s a wakeup call: the repair industry is dead. Almost two centuries of technology has been applied to the factory assembly line-making manufacturing more efficient, lowering the barrier of entry while lowering early adopter costs, significantly! Robot welders have brought down costs as well and moving the physical factory to a country where an entire staff of 35 employees can be had for $80,000 and you get the picture: It is now cheaper to just throw something away and buy new rather than have it repaired.
We Have Become a Society of Planned Obsolescence
Americans have been encouraged to just throw stuff out and buy brand new…after all, it makes no sense to pay $800 to get a TV repaired when you can buy a new 32″ Plasma flat screen for $1200. Everything has been affected by this: toys, food, plastics, computers and clothing. Hard to find a decent tailor isn’t it? How many computers have you purchased over the past 10 years? Or cell phones? My father had the same Studebaker for 30 years. Today he would be considered eccentric. Planned obsolescence has become normal to us.
Case in point: last year, while sitting at a red light, some-one tapped my bumper, which in turn displaced the muffler. It was a quick fix to just pull the muffler back two inches and re-hang it. At least that’s what my Baby Boomer mindset figured. It turns out the entire seven foot-long pipe and muffler unit had to be replaced because installing the new modular unit was cheaper and less time consuming than just pulling the original unit back in place!
This makes no sense if you aren’t aware that modular parts are more efficient, cheaper and easier to install in less than 20 minutes than taking a full hour to pull, push and weld the part back into place.
Modular units have also aided in manufacturing and assembly in other industries as well. Each component is manufactured in another country to exacting specifications, shipped to the US and assembled here.
By using modular parts, companies can bypass inefficient assembly lines and quickly deliver complex customized products. The simple solution is one developed by W. Edwards Deming 60 years ago after WWII. Deming helped re-structure Japanese factories after the war by introducing a productivity model that assured profitability – a simple method of ordering inventory only when needed. No longer will companies be able to afford warehouse after warehouse of inventory. It is simply no longer profitable to rent, heat and pay for electricity or shipping costs while hoping that prices stay the same until inventory is gone. By ordering parts and manufacturing just in time, a factory can get control of their profit margins.
Instead of showrooms filled with stock just waiting for salespeople to move it all, now the manufacturing world must flip that paradigm to an order on demand model. Even more customized solutions can be offered in this scenario because once a company starts running the assembly-line, it becomes easier to add it on at the source – the customized piece is actually an option on today’s modular assembly-line.
Instead of selling merchandise that’s been sitting around for the 2010 season, companies can now turn on the factory lights when enough orders come in. BMW is doing this with the Mini Cooper. You custom order your car from the showroom before they build it…saving manufacturing, parts, storage and shipping costs. It also makes a company more efficient-only spending when necessary.
Order on Demand methodologies are the answer in a volatile world. If You Build It, They Will Come is evolving into, We Will Build It When You Order One…Exactly The Way You Want It. Okay that wasn’t a great marketing slogan, but you get my drift.
And that’s my point. For America to survive they need to adapt and change to what technology has given us instead of clinging to old outdated methodologies. Building thousands and thousands of cars, shipping them to dealerships and waiting for your top sales people to move inventory is highly inefficient. Offering people choices online and in physical showrooms changes possibilities. Customization along the assembly-line?! Henry Ford would be drooling over this innovation.
Car manufacturers now have the capability to simply add or not add certain parts, according to a specific customer request.
In a similar way, if a new part becomes a customized install, then the factory floor itself becomes modular. Simply add a station here or remove one over there. This has revolutionized online computer ordering for companies like Dell a pioneer in the customizable computer market.
And because technology has been applied to the factory floor – with robots doing most of the welding, riveting and installations – it costs the same to build a Jeep Grand Cherokee as it does to build a Range Rover. Imagine that, big-ticket items cost the same to make as lower echelon brands.
It also means that, with a purchase of a lower-end brand, customers are getting similar quality as the high-end brand. Just look at Porsche and Volkswagen. Of course one is a Porsche and can’t be touched by the average consumer, but the engineering and design innovations from a high-end brand like Porsche trickle down to the Volkswagen. Incidentally Porsche and Volkswagen are the same company, sharing similar quality and identical design innovations.
Our World Has Changed Because Our Demands Have Changed
Today we are shocked if we can’t get something delivered overnight from another country. McDonald’s numbering system has gotten ordering times down to 30 seconds. Emails can be downloaded to your cell phone and with Kindle, the iPad and Nook we can download an entire library of book in minutes, (just in time for you Twilight fans out there). We simply want what we want when we want it. And that means NOW!
With our current technology it also means we can demand customization without adding on too much cost.
Once an idea matriculates into the minds of the consumer, it is an easy fix for every other company to adopt the idea into their designs. The 2010 Ford Taurus SHO has been radically redesigned, yet seems to look very similar to the Audi A4. Or look at how similar the Honda Crosstour is to the Porsche Panamera? The similarity can’t possibly be a coincidence.
Because of lower costs to reengineer the assembly line to accommodate new industrial designs and faster methods to getting a product to market, car manufacturers can follow a trend in design when they see a competitor’s model is selling well – and duplicate another car companies design. The “we have that too” is easy to integrate into next years model. It’s as if affordable brands are in the knock-off business. “Hey if you can’t afford a Jaguar get a Hyundai. We’re the workingman’s luxury car. See how we designed our grill to look similar to a Jag?” Why this isn’t considered stealing I don’t know, but this explains why so many cars look alike on the road.
The lower cost from design to manufacturing has given companies the ability to launch new products or follow a trend very quickly. Part of the reason for this agility is it doesn’t take very long to retool a factory for the task.
But more importantly is this: When American manufacturers cling to old methodologies and rely on bailouts, they make themselves vulnerable to better built brands encroaching into their physical territory. Just look at KIA and Hyundai-their new brands have been redesigned to entice a consumer frustrated with American automobiles.
In the automobile industry it used to take ten years from concept drawing to manufacturing. I used to do the annual sales meetings for Ford Motor Company and Lincoln Mercury every year for 7 years and marveled at the concept drawings, wondering when they would be available and in the showroom. Today, from concept to showroom is around two years. We simply are speeding up because we can.
We Become Vulnerable to Faster Price Fluctuations
You would think this would be a good thing but it causes faster price fluctuations as well. No longer is it profitable for a company like IBM to build a huge inventory of servers and sit them in a warehouse waiting to be sold and shipped.
If the original price of computer chips, silver, oil, copper or any one of a milieu of raw materials needed to build those servers comes down in price, IBM could be selling each server still sitting in the warehouse at a loss. Or worse still, what if each server used one older version of a computer chip, or pricier materials.
Imagine selling 1 million servers and as each one sells, you lose $50 on each one…sending you $50 million into the red. The more you sell, the more you lose. Despite a one-penny difference and inventory flying off the shelves, the more units they sell, the deeper the loss.
This means that instead of a company planning five years out they can only think in terms of 5 months. This is scary to seasoned CEOs who are used to a more linear workflow.
And with the recession in full swing consumers are about to get more and more demanding. Why can’t a Hummer be built as a hybrid? Tesla has better solutions let’s buy from them, or when can we get engines that meet the needs of a Green consumer? Why are we still dependent on petroleum products? Buyers are waking up to the fact that any car, truck or motorcycle can be turned into a hybrid. So why haven’t car companies done so?
For those that can afford the big ticket items, the market will be giving them unique choices, all because it is becoming easier to buy brand new than have it repaired. Buying a new computer every three years will soon become a thing of the past as modular CPUs can be instantly installed to replace old CPUs – just unplug the old version and plug in the new. Transfer the data back onto your new drive from a remote storage server. Easy. Or better still just buy an Internet only PC and keep your data on that remote server. It’s just a monthly fee away.
With technology being applied to the factory floor, customization will become the norm and profit margins will increase. We just need to wait it out. Promises usually take 10 years to manifest.
If electric engines become the norm, their job becomes even easier as electric motors have fewer moving parts and fewer support systems. This also means, somewhere in the not too distant future, people will become less and less important in the business of making things.
Are you ready for more Future Shock?
Thank you for your interest in my work