Manufacturing industry: what to do when the inflection point comes?

In the past ten years, local manufacturing, especially the small batch industry, has developed rapidly, and many have become global leaders. For example, Huawei surpassed Ericsson for the first time in 2012 and took the lead in the global telecommunications equipment industry; Sany Heavy Industry has risen 37 places in the global ranking of construction machinery in 10 years, jumping to No. 6 in 2012; Zhenhua Heavy Industry Co., Ltd. 80% of the international port machinery market. The multi-variety and small-batch industry has always been the soft underbelly of the local manufacturing industry, and the overall development in the past ten years has been very gratifying. Taking construction machinery as an example, in 2003, Chinese equipment manufacturers accounted for only 1.6% of the global top 50 sales; 10 years later, this proportion increased to 16.9%, which has increased 10 times in 10 years. The number of enterprises has also reached 9.

The double-digit compound growth rate year after year has improved the international status of local companies, but also brought blind optimism and overconfidence, as well as the inevitable inflection point. The rapid development of more than 20 years is very abnormal, and it is even more abnormal to get used to it. As far as Huawei is concerned, if someone asks Ren Zhengfei, "Mr. Ren, how much have you grown this year", everyone will definitely say that this person is crazy; but to "Huawei has no success, only growth", why are so many people applauding? Woolen cloth? "No success" reflects Ren Zhengfei's low-key and cautiousness, which may be the reason for Huawei's success; "only growth" is shocking: when people stop growing, how can a company grow infinitely?

Over the years, local companies have always been troubled by their youth, aiming to catch up with overseas competitors; in fact, how many people realize that while surpassing their competitors, they are also middle-aged, and their scale is getting bigger and bigger. Fast to deal with low growth, no growth or even negative growth and other problems that have plagued competitors for many years. Just like Zhenhua Heavy Industry at the moment: the high-speed growth strategy leads to over-investment, and the over-investment leads to high depreciation of fixed assets. With the decline in revenue since the financial crisis, the cost problem is like a stone out of the water, causing the company's first since its establishment. degree of loss. Now that the business is so big, the company's operations are inefficient, and fixed costs are high, even though revenue has returned to pre-crisis levels, Zhenhua still has a long way to go to return to profitability.

With the rapid development and expansion of manufacturing enterprises, the following three problems will become increasingly acute, and they will intensify when the inflection point occurs. Forward-looking companies will continue to optimize and adjust to respond in advance; companies with rigid organizations and extensive operations are not necessarily, and are destined to suffer when the inflection point comes.

Whether you admit it or not, when you fall into the "growth trap"

When growing rapidly and conquering cities, most local manufacturing companies adopt high-growth, high-cost competitive strategies, such as expanding production facilities, placing more inventory, Hire more employees. Under this strategy, costs often rise faster than revenue, especially when the company has a certain scale and market share. The result is that the profit margin of the enterprise is decreasing, "there is a market, there is no profit", "earning is profit, but all the profit goes into inventory", which vividly describes the embarrassment of the company at this stage. As the market share increases to a critical point, the growth rate slows down, and under the influence of inertia, the cost continues to increase, especially when the fixed facilities invested in the high-growth stage begin to operate, depreciate, and eat up the only profit, the company will Falling into the "growth trap" of high growth and high costs (see Figure 1).

The company's focus had to shift to profit protection. However, the cost rigidity at this time is too high, such as high sluggish inventory, underutilized production facilities, huge organization, and complicated processes. It is impossible to fundamentally reduce the operating cost of the supply chain, so we have to sacrifice revenue, give up high costs, Low-margin projects or products shrink in market development, resulting in stagnant revenue or even negative growth.

There is a large equipment manufacturing company. In the past, as long as international competitors bid, they would do it regardless of whether they win or lose. In this way, they have achieved more than half of the global market share. However, since the financial crisis, the revenue has been greatly reduced, and the company has lost money, out of profit. Considering this, it cannot continue to do so. As a result, revenue has fallen further, highlighting the disadvantage of high costs. In this way, the company falls into the "growth trap" of low growth and high cost, which is also unsustainable.

The "growth trap" is something that every fast-growing company encounters, and it explains why it's impossible for a company to grow indefinitely. On the surface, this is a trade-off between market share and profitability. In essence, we have to find the answer in the company's supply chain, that is, how to meet customer needs with lower cost, better quality, and faster speed. . This requires the optimization of two main processes (see Figure 2):

One is the product development process. The product development process is the main artery of the company and drives almost all other processes. Problems in product development will be magnified tenfold or a hundredfold in subsequent stages.

After the company has developed to a certain scale, if it wants to further increase its revenue, it has to enter more market segments, which leads to a large increase in the number of product types and models, and increases the complexity of products; and complex product lines Requires complex processes and organizations to support. The high complexity of products, organizations and processes determines that product development cycles are longer, more unpredictable, and product costs remain high. Optimizing the product development process is to integrate market, design, production, installation and service, optimize product mix, design and import, and quickly develop good products with low life-cycle costs.

The second is the supply chain support process, that is, starting from demand planning, production, and supply management, balancing demand and supply, controlling costs, reducing waste, and improving the response speed, flexibility and efficiency of the supply chain to better meet client needs. The profits of some companies seem to be good, but apart from the backlog of inventory, rushing overtime, and emergency transportation, in the end, they still make less and lose more. For example, a company successfully completes a large project and makes a good profit on the book, but it has tens of millions of yuan of special materials left, which is difficult to use in other projects. During high-speed development, these problems are often concealed by superficial profits; once the inflection point is reached, it will appear like an iceberg. From the perspective of supply chain management, coordinating product, demand and supply is the only way to avoid these problems.

Before the inflection point is reached, forward-looking companies start to improve both of these processes. For example, in the past decade, Huawei has introduced IBM's Integrated Product Development (IPD) and Integrated Supply Chain (ISC) at a high cost to improve product development and operational efficiency and offset the cost increase that comes with scale. For companies with extensive management, 80% of these problems will accumulate, and finally erupt in a blowout manner with the arrival of the inflection point.

What makes you successful is causing you to fail

"Success is also Xiao He and failure is Xiao He". For local manufacturing companies, the success factors that promote their rapid development are also driving them to fail after the inflection point.

Let's talk about low cost first. For a long time, many local manufacturing companies have taken the low-cost route. Logically, its supply chain should also be low-cost. The basis behind this is a classic article published by Marshall Fisher in Harvard Business Review in 1997, saying that the supply chain of innovative products should be dominated by rapid response, which means high flexibility and high cost; The supply chain for low-cost products should focus on efficiency, which means low costs and less flexibility. But careful analysis shows that in absolute terms, the supply chain costs of local companies are not low: they use similar materials to their competitors, consume more energy, and also consume labor hours. So how did this low cost come about?

One is cheap labor and the other is favorable exchange rates. The problem is that both are moving in the wrong direction, squeezing the profit margins of local companies. Its solution, in addition to transferring factories to areas where labor is cheaper, has to work hard to improve extensive operations and improve efficiency. Enterprises in Shenzhen are the first to be affected by these two points. Many enterprises are closed, relocated, merged, and transferred, and the rest pay more attention to improving their management level. However, nationwide, more companies did not realize, or realized and did not take concrete actions, and continued to rely on "offensive" (increasing revenue) to solve the cost problem, but they forgot that the root cause of the cost problem has always been a "defense" "The problem, in the long run, you can't solve the problem of defense through offense, just like in the NBA, some teams that advocate offensive play, although the offense is as smooth as mercury, and it is very watchable, but in the end it is empty-handed: true The ones who can win the championship are the teams with the best defense.

More flexibility. The company is small, just like a two-person lion dance, the process is simple, the leader gives an order, and the execution is in place. Such rapid response capability is the competitive advantage of local enterprises. For example, when there is a problem with the product, some multinational companies are still reporting to each other, and the technical personnel of the local company have already arrived at the scene to help customers solve the problem.

When the company is big, like the Roman Corps, it loses the advantage of small ships and turns around, and must rely on the optimization of the main process to improve efficiency. Some local manufacturing enterprises, despite the scale of hundreds of billions of dollars, still rely on the rule of man. The management spends too much time issuing orders, but under the constraints of complex and inefficient processes and systems, they often go further. Taking two steps back is inefficient; the more inefficient, the more human intervention, the more human factors are injected into the process and the system, and the lower the efficiency, thus falling into a vicious circle and suffering from the typical "big company disease" .

As the company grows, the "big company disease" is everywhere and complicated. From the boss to the grassroots, they all become victims: If you don't start from improving the main process, but rely on people to manage, no matter who it is, no matter who it is. No matter how high the position is, and the complex process and system that maintains thousands of people, it is inevitable that Don Quixote will rush to the windmill, and in the end it will always be the loser.

It's not over yet. When the scale of local manufacturing companies was small, the market price was set by international competitors, which was much higher than the cost of local companies plus normal profits. Local companies had a lot of room to maneuver and could afford higher supply chain costs; The market share has greatly increased, and it has become the protagonist in many fields. It has also become the representative of the market price, and the price pressure is even greater. Take telecommunications equipment as an example. It turns out that Huawei and ZTE have a very small market share. The market is dominated by Nokia, Motorola, Siemens, etc. For example, a piece of equipment costs 1 million yuan, and Huawei and ZTE sell it to three domestic telecom companies for 900,000 yuan. The giants, the customers are very happy; now Huawei and ZTE are playing the leading role, and they have fiercely lowered their prices, and customers at home and abroad have further increased their expectations for prices. The market price is no longer 1 million, not 900,000, but 700,000. Huawei and ZTE have recognized the dangers of vicious competition, and they have restrained since 2012, but the essence of the problem has not changed: in this case, only an efficient and low-cost supply chain can survive. If you are accustomed to extensive operations and continue high-cost supply chain operations, you will fall into the "growth trap" mentioned above and cannot be maintained.

The above problems are new challenges for many local enterprises, and the key is the change of management methods. Compared with the upgrading of products, the transformation of management methods is more difficult and takes longer, and it is destined that the local manufacturing industry will struggle for a long time.

Old dogs are reluctant to learn new tricks, and be wary of veterans becoming "old"

Growth has slowed down, and an inflection point has appeared. After a company falls into a "growth trap", the most uncomfortable thing is that some of them have developed together with the company. elder. A sluggish market, an unprofitable company, and changes in management style brought on by changes at the top (for example, founders always retire) have left some veterans grumbling. They blame others, blame the market, blame customers, blame suppliers, and are immersed in past glory and cannot extricate themselves; they resist changes in processes and systems, resist new strategies and measures, and resist foreign professional managers, especially the second generation of the company , three generations of leaders. There is a proverb in English that you can't teach an old dog new tricks. In fact, this is not a question of teaching, the key is a question of learning, that is, the attitude of accepting new things. Veterans who are unwilling to keep pace with the times become "old veterans", become the distribution center of negative energy, and become the biggest obstacle to the company's transformation and successfully passing the inflection point.

In the past few years, the author has provided training to local manufacturing companies many times. There is a company that is going through the pain of inflection point. It has developed to an annual sales of about 20 billion in more than ten years. Due to the financial crisis and excessive expansion, it suffered a loss for the first time in history in 2010. Seventy or eighty people participated in the training, including most of the middle and senior level in the design, operation, purchasing and sales departments. Many of these people have been with the company since its inception and are typical veterans.

Some veterans complained constantly during the training, such as market turmoil, inaccurate forecasts, and suppliers not being able to deliver on time. These are the reasons why they couldn't get through the difficult time. When it comes to the lower-level suppliers designated by customers, they are even more complaining: these lower-level suppliers are mostly global companies and industry giants, with high prices, long delivery times, low flexibility and difficult management. The author asks, why do customers specify them? The answer is that sub-suppliers lobby customers. Continue to ask: Since sub-suppliers can lobby customers, you are direct suppliers, you deal directly with customers, and you have more opportunities to influence customers. What about suppliers? The answer is that I lobbied, but it was unsuccessful. So why are lower-tier suppliers able to lobby successfully?

Some people may say that the sales staff of lower-level suppliers are more capable. This is just a small part of the reason. From the author's point of view, I lobbied, but once I failed, I gave up. It seems to be a problem of ability, but it is actually a problem of attitude. There are very few things in this world that can be accomplished overnight. Lions are the king of beasts. They must be killed on the grasslands of Africa. Does anyone know that they can only succeed once in four hunts? The "old people" must also understand this truth. Otherwise, they would not have succeeded in expanding their territories. Now they are willing to be faithful believers of the complaining culture, rather than showing the energy of the past. The problem of mentality is the root cause.

It's hard to turn dead wood into living wood for such an "old man". The great changes in the environment, some veterans can adapt, and some are destined to not, it becomes a resistance to change. In this way, the past holds the future hostage.

The reason why it is difficult to change, the reason why it is difficult to succeed in the second entrepreneurship, and the reason why it is difficult for the company to go from great to great is largely because of the existence of these "old people". Motivating and managing these "old people" consumes too much of the management's precious time, and the returns are often negative. At this point, instead of letting them stay in the car and become a hindrance to the company’s transformation, it’s better to get them out of the car and get the right person in the car.

And this suitable person is not necessarily a foreign "airborne soldier"; among the existing employees of the company, especially among the young and middle-aged cadres, there will be many suitable candidates. Most of these people have been in the company for many years, are familiar with the company's products, markets and operations, and are familiar with the company's problems, and often have relatively mature solutions, but they cannot implement them because they are weak. Promoting such employees and giving them opportunities is often more effective and less risky.

Step back in time to a high-tech manufacturing company in Silicon Valley at the end of the last century. The company has good products, once the market share reached the world's first, with annual sales of 12 billion US dollars, is a global company. However, the management continued the extensive operation at the beginning of the company, the cost could not be achieved, the quality could not be improved, the on-time delivery rate was not good, and the company was eliminated by the largest customer in the industry. The company lost money and was on the verge of bankruptcy. The board of directors decided to change the top management. After the airborne president and chief operating officer were in place, the signal to the senior executives was clear: the company has to change, you either change or you get out. As a result, more than half of the executives were eliminated, and the company was turned around in one fell swoop, becoming the industry's first again, and becoming a model of operational excellence in the industry.

Jim Collins, author of "Building to Last," said that when things are going well, you should look out the window to understand what external opportunities have contributed to today's achievements; when things are not going well, Instead of pointing your finger away, you should look in the mirror and reflect on your own problems (from Bai Lixin's "Above the Clouds, Looking Up at the Starry Sky", Business Review, November 2012). This is not only good advice for the "old people", but also advice to every company at an inflection point. Many problems that appear to be external are actually internal. I sincerely hope that more and more local enterprises can start from internal adjustment, smoothly pass the inflection point, and complete the transition from greatness to excellence.

Liu Baohong, US Certified Purchasing Manager (CPM), founder of "Supply Chain Management Column" (www.scm-blog.com), Executive Director of CSCS International. MBA from Arizona State University, specializing in Supply Chain Management, and a Six Sigma Black Belt qualification. Mr. Liu currently lives in Silicon Valley and often travels between China and the United States, training local procurement, planning and supply chain management talents, and providing consulting services to help local companies improve their procurement and supply chain management levels. His monograph "Procurement and Supply Chain Management: A Practitioner's Perspective" was published in 2012 and topped the bestseller list for seven consecutive months.