Service and Resilience

Stephen DeAngelis

June 30, 2006

The winners of a British “manufacturing excellence” competition were recently announced. An article in yesterday’s Financial Times examines the characteristics that make the winners excellent. The headline for the article is telling — “The masters of good service,” By Peter Marsh. Remember, the award was for manufacturing, not service. Economists have argued for decades that most developed states are moving from manufacturing to service economies. It should come as no surprise, therefore, that successful manufacturers have learned to be good service providers. Marsh’s opening line is also telling: “How does a business make itself “China-proof”?

China is perceived as the next manufacturing powerhouse, primarily because it appears to have an inexhaustible supply of cheap labor. An article in today’s New York Times, however, is intended to put that myth to rest [“As China Ages, a Shortage of Cheap Labor Looms,” by Howard W. French].

The world’s most populous nation, which has built its economic strength on seemingly endless supplies of cheap labor, China may soon face manpower shortages. An aging population also poses difficult political issues for the Communist government, which first encouraged a population explosion in the 1950’s and then reversed course and introduced the so-called one-child policy a few years after the death of Mao in 1976. That measure has spared the country an estimated 390 million births but may ultimately prove to be another monumental demographic mistake. With China’s breathtaking rise toward affluence, most people live longer and have fewer children, mirroring trends seen around the world. Those trends and the extraordinarily low birth rate have combined to create a stark imbalance between young and old. That threatens the nation’s rickety pension system, which already runs large deficits even with the 4-to-1 ratio of workers to retirees that it was designed for. Demographers also expect strains on the household registration system, which restricts internal migration. The system prevents young workers from migrating to urban areas to relieve labor shortages, but officials fear that abolishing it could release a flood of humanity that would swamp the cities. As workers become scarcer and more expensive in the increasingly affluent cities along China’s eastern seaboard, the country will face growing economic pressures to move out of assembly work and other labor-intensive manufacturing, which will be taken up by poorer economies in Asia and beyond, and into service and information-based industries.

China will move into and out of the industrial age faster than any other great power has ever done. Of course, becoming a service economy state doesn’t mean that manufacturing doesn’t exist. The point of the British competition was to find out what makes a successful manufacturer in a service economy. The answer, apparently, is service!

In this competitive battle, companies have adopted a number of strategies. Some have concentrated on narrow product niches that few others can match, or have invested in highly productive automated machinery that reduces the disadvantages of high labour costs. Others have added a “service” component to their product, tethering supplier to customer through an intangible benefit – the nature of which is often defined only after intensive discussion between customer and supplier – that a rival in China would find difficult to reproduce. A manufacturer becomes, in effect, a chameleon. It is likely to take on at least one of these roles: consultant, requiring it to play a part in specifying the product that the customer needs, and maintaining the product once in service; distributor, giving it responsibility for “just-in-time” delivery; accountant, since the manufacturer has a key role on pricing; and designer, taking on the development of new products.

As an entrepreneur starting a new company, one of my greatest challenges has been trying to explain what Enterra Solutions does. While that seems like an easy task, when you are marking a new trail in territory where no map exists, there is nothing you can point to that makes people easily understand what you are describing. Enterra, like many of the winners of the British competition, is a hybrid company. Trying to describe such a company is like trying to describe cleverly manipulated pictures of mixed birds & animals from Worth1000.com that someone recently forwarded to me (click to enlarge).

The Financial Times article ends by providing a few characteristics of “service-based manufacturing.”

Several popular approaches to service-based manufacturing are exemplified by the winners of a competition organised by the UK’s Institution of Mechanical Engineers:

Consultancy. Manufacturers can benefit from helping customers specify the products they need and providing after-care and technical updates. AES Engineering helps its customers specify seals from up to 20m variants.

Alliances. Producers of standardised goods can steal a march over far-flung rivals by providing carefully chosen customers with higher levels of service. Power Panels, a distributor of cabling systems, offers a just-in-time service for companies with variable production schedules.

Technology. Companies can use internet-based systems and design technology to reduce turnround time for new products. Protomold, a plastic products maker, uses its software expertise to offer costing and delivery schedules for complex orders within hours of receiving them.

Design. Higher investment in design and development can help manufacturers dominate less inventive rivals. Wrightbus, maker of bus bodies, has exploited its design nous to sell buses around the world, including in Hong Kong.

Flexibile and adaptable companies will continue to thrive in the future, while less resilient companies will fail. I believe that Resilient Enterprises will successfully manage the balance between people, processes, and resources. Processes will be automated, whenever possible; decision makers will be provided real-time updates of important information so they can intervene when necessary; employees will be empowered by the tools they command; and resources will be more efficiently used because they will be committed based on better information than historical demand. Service is an integral part of the globally integrated enterprise about which IBM’s chairman and CEO, Samuel Palmisano, often speaks. One need only look at recent changes in IBM’s business plan to see how it has changed from a manufacturing to a more service-based enterprise. Hybrid companies are more resilient and will more and more come to define the future of business.