VENDAVO ININDUSTRIALMANUFACTURING

WINNING THE RACE TO VALUE

VENDAVO INDUSTRY COMMENT#3: Industrial ManufacturingFEBRUARY 2017

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The industrial manufacturing sector is on the brink of something big, which will change it beyond all recognition.With Industry 4.0, industrial manufacturing embraces the technological revolution of the 21st century, where the physical world meets the virtual one. And the result is a shake-up the likes of which we haven’t seen in a very long time.

The term ‘Industry 4.0’ originally comes from a high-tech initiative of the German government, and builds on to the three previous upheavals we’ve seen over the last two centuries.

Industry 1.0 was heralded by the Industrial Revolution of the 19th century, when mechanical production driven by water and steam moved beyond manual labour and delivered exponential gains. Industry 2.0 in the early 20th century took that one step further, with mass production, the intelligent division of labour and the use of electrical energy. Industry 3.0 came towards the end of the last century, with the introduction of electronics and IT to automate production.

INDUSTRY 4.0: A GAME CHANGERWe’re now at the dawn of a new industrial age. With the advent of Industry 4.0, we’ll see a major shift in how the industrial manufacturing sector operates:

• Human-machine interaction will be the norm, with touch interfaces, augmented reality, connected devices, the Industrial Internet of Things (IIoT), and even the ‘Internet of People’.

• Integration of the virtual and physical will become a reality through advanced robotics and 3D printing. Decision making will be supported with real-time sensors and aggregated data, and manual effort will be supplemented by cyber-physical systems.

• Advanced analytics will radically improve the entire production process, delivering unprecedented insight and business intelligence.

Industry 4.0 isn’t just a theoretical vision or the ‘next big thing’. The revolution is already underway, and is delivering significant gains for industrial manufacturing players.

INDUSTRY 4.0 IN ACTIONAn African mine improved yield by 3% or $20m1 by using sensor data to address a problem with oxygen levels in its manufacturing process. And a German logistics company used augmented reality headsets to improve pallet loading and security, reducing error rates by 40%.1

Harnessing the power of big data and analytics, a carmaker used its online configurator to identify and focus on options that customers would pay a premium for. They cut time and production costs dramatically, reducing possible combinations to 13,000 – a fraction of the millions of permutations unnecessarily offered by some competitors. These process modifications can typically improve gross margin by 30% in 24 months.1 Industry 4.0 is a game changer, taking the sort of cutting-edge technology that’s traditionally associated with knowledge workers and service industries and applying it to the physical world.

It’s on everybody’s radar, as people move towards ‘digital transformation’. One study found that 33% of respondents are already ‘advanced’ in the process, with that figure set to rise to 70% by 2020. These organisations are very much focused on concrete results, expecting a digital revenue increases of 2.9% and cost reductions of 3.6%.2

So there are big gains to be made to the top and bottom line with Industry 4.0. But what else is on the industrial manufacturing radar?

THE DAWN OF A NEW ERA

1. Source: Manufacturing’s next act, McKinsey.

2. Source: PWC Global Industry 4.0 survey.

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CHALLENGES AND OPPORTUNITIESGrowth is on everybody’s agenda. 74% of companies are making it a high priority for the next two years, according to a recent survey.3 They’re looking at entering new geographic markets (56%) expanding the range of products (49%) or services (39%).

The move towards new markets is fuelled by slower growth in traditional markets and increased price pressure.

But this isn’t just about cost reduction - it’s also about improving the top line. Many organisations are investing in China not just to lower production costs and export back to home markets, but to sell internally to China. But with the slowdown in Chinese demand, that could prove a risky strategy.

Research & development is a big focus for industrial manufacturing players. 49% are investing 6% of revenues in R&D in the next two years, with 34% already doing so.3

Raw material costs are an ever-present concern for industrial manufacturing companies. The Chinese are ramping up steel production in 2017 (+0.5%, to 825m metric tonnes) though mostly for domestic consumption. But it’s based on demand from construction and real estate, and if that falters, they may well start dumping again on the global markets and depressing prices.

Manufacturing costs continue to be a major issue. ‘Low cost’ is a moving target, a result of the interplay between raw materials, energy, transport and labour costs. Chinese wages quintupled between 2004 and 2014, and though productivity also increased, it was offset by a stronger renminbi. Brazil, Russia, Poland and the Czech Republic are also looking less attractive to manufacturers, so the search is on for the next low-cost geography.

Other factors include a new US administration with increasing pressure to repatriate production (Ford and GM), the continuing uncertainty over Brexit (single-market access, bilateral trade deals, tariffs) and geopolitical tensions (e.g. the Middle East and Russia).

THE KEY TO SUCCESSOne thing is crystal clear: standing still is not an option. Competitive pressure, price pressure and the unstoppable move towards digitization mean that smart organisations need to get ahead of the curve and take action now.

• Agility is key, letting industrial manufacturers make fast, accurate, informed decisions to react to market changes, new competitors or global events. But agility comes at a price, and having sufficient working capital is crucial to the process.

• Transparency and visibility are vital across the entire production process, based on real-time data and business insight gained from analytics. And it’s not just production – it’s the entire value chain that organisations need to gain sight of, to see where revenue can be generated or recovered.

• Innovation is non-negotiable, as it creates significant competitive advantage. But it requires a consistent investment in R&D. The most successful companies are the ones who invest most in R&D, with the most innovative 20% of companies seeing 38% growth over three years, compared with just 10% for the least innovative 20%.

THE PRICING REVOLUTION AND INDUSTRY 4.0Success or failure in the world of Industry 4.0, with competitive pressure, price pressure and global unpredictability depends on having financial manoeuvring room.

Which in turns means not being permanently under financial pressure and resorting to the usual strategies with damaging long-term consequences: reducing R&D (and innovation) cutting costs (and prospects for growth) and divesting (when you don’t need to).

Pricing strategy is a powerful weapon in your sales arsenal. But all too often, it’s an inexact science, with opaque and highly complex pricing models. Legacy deals are in place that don’t maximize profit, and margin leakage happens at all stages of the value chain.

3. Source: KPMG Global Manufacturing Outlook Survey 2016.

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Segmentation may be rudimentary, relying on gut feel and impressions rather than hard facts or verified data. Most pricing strategies aren’t dynamic or flexible, and are not optimised for sector or geographical variation.

But that’s all changing. Because in parallel to Industry 4.0, there’s another revolution that’s changing how companies are doing business. It’s a pricing revolution that’s harnessing the power of big data, analytics and deep insights to maximize profit on every deal.

VENDAVO AND INDUSTRIAL MANUFACTURINGVendavo works with some of the world’s leading industrial manufacturing companies – such as Honeywell, Emerson and Philips – to recover margin and maximize profits in a highly competitive market with relentless price pressure.

We apply cutting-edge technology to pricing, giving organisations unprecedented visibility and control. Our end-to-end pricing strategy includes:

• Identifying and eliminating margin leakages, from product development right through to customer fulfilment.

• Optimising segmentation across products, segments and geographies, to ensure best price and best margin opportunity.

• Creating dynamic pricing models with sophisticated waterfalls that are automatically updated to reflect changing market dynamics, win/loss metrics and cost drivers.

• Reducing the risk of margin being left on the table, by ensuring that deals are closed at the right price and monitoring compliance of customer volume commitments.

TAILORED PRICING FOR PROVEN SUCCESSWith Vendavo, one size doesn’t fit all. Our pricing strategies are completely tailored to, and aligned with, organisations’ needs and business objectives. We also ensure buy-in across all internal teams (product, sales, marketing, pricing and finance) to ensure everybody’s on board and fully understands the crucial importance of pricing right on every deal.

With Industry 4.0 transforming industrial manufacturing landscape forever, Vendavo is at the forefront of another revolution.

We help industrial manufacturing companies eliminate margin leakage and maximise profit, helping them stay agile, invest in R&D, and react to competitive threats and price pressure. Which makes sure they’ll prosper in a globalised world, meeting the challenges and harnessing the opportunities of tomorrow.

We’re Vendavo, and we could do the same for you. Talk to us today.

www.vendavo.com

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Our sales team want simplicity and the ability to execute quickly. Some simple questions used to take us weeks to figure out, but now with Vendavo within a matter of minutes we can get a result.”

Alicia Vitalis, Entity Controller, Honeywell