Why is Manufacturing Flexibility Important?—Part 1
By Alberto Moel, Vice President Strategy and Partnerships, Veo Robotics
Welcome back, dear reader, to one more installment of our regular musings on the future of work and manufacturing. Over the last few weeks, we have concentrated on how manufacturing flexibility delivers value—in terms of microeconomics and in historical context. But we have only made oblique references to the macroeconomic and manufacturing trends that increasingly require this flexibility.
In other words, we have not provided a lot of evidence that shows why manufacturing flexibility is important and, in fact, a necessary requirement for a manufacturer’s continued survival. As we’ve seen over the last few months, the ability to be nimble and flexible can mean the difference between thriving and disappearing.
Over the last couple of decades, as a result of changes in demand, competition, and market pressures, manufacturing has become a more complex and fraught affair requiring increased flexibility with a narrower margin of error. Recently, this narrow margin between thriving, surviving, or disappearing has been tested like never before as manufacturers are forced to rethink everything from their supply chains to their end markets. More broadly, we can sum up this changing environment in three long-term trends affecting how stuff is designed and made:
- Mass customization, where a multiplicity of choices on a common platform (think car options or refrigerator form factors) increases cost and/or reduces the returns to automation.
- Increasing SKU proliferation, where multiple variations on the same product (consider how many types of toothpaste you can buy) result in complex supply chains and frequent manufacturing changeovers.
- Shorter product cycles, which result in less time for line planning and commissioning, limit the amortization of fixed investments (such as automation), and increase fixed costs per unit of production.
Manufacturers have responded to these trends at great expense and cost, which has made manufacturing a higher-stakes activity. In today’s blog post we will present you with some in-depth quantitative evidence of these trends. We’ll focus on the first two and in a subsequent post we’ll tackle the remaining one, before moving on to other topics relating to flexibility and the macroeconomics of automation, including our view on how a lack of flexibility has impacted industry economics.
Customization and proliferation
Say you are in the market for a new fridge—the one you inherited from a much-maligned college roommate is now a goner. You walk into your local home improvement center (virtually, these days) and are confronted with this scene:
Choices, choices, choices! What color? Features? Form factor? Do you want the freezer on top, or on the bottom, or on the side? Would you like a water dispenser and an ice maker, or just the water dispenser? There’s something for everyone, and if you don’t like what you see, you can always pay a little more to custom build your dream fridge.
Surely this deluge of choices is overwhelming. But if you think you’re having problems deciding which one to buy, what must it be like for the manufacturer who has to make so many different versions of the same basic appliance? Even the biggest appliance manufacturers probably only devote a couple of production lines per factory to refrigerators. To make all of the variations demanded (or assumed to be demanded) by the consumer, a single production line must be able to build many different kinds of fridges, each with different part counts, shapes, and even suppliers.
Now, extend this cornucopia to all of the other kinds of appliances in your home. A beer fridge! A wine fridge! A freezer in the garage designed specifically to keep meats in tip top shape for summer barbecues. Speaking of barbecues, how about a grill? Charcoal? Propane? Weber or Foreman? Speaking of burning things, what about a toaster, a bagel toaster, a toaster oven, or a microwave with a toaster built in? We could go on and on—an electric stove, a gas stove, an induction stove—but you get the idea.
Detailed data on the SKU proliferation of household appliances has proven elusive, but we do have other data that makes the point, in a bit of a roundabout way, that mass customization and SKU proliferation in household appliances is real and here to stay.
Figure 1. Indexed housing starts and CPI-deflated household appliances, 1990-2018.
As an example, Figure 1 shows indexed US housing starts against household appliance shipments in the US, where the value of appliance shipments is deflated by the consumer price index (CPI) of durable goods.1 Yes, a mouthful, but stay with me here. We’re deflating the dollar value of household appliance shipments by the durable goods CPI in order to obtain a measure of household appliance shipments against housing starts.
What we can see in this chart is that housing starts have fluctuated around a mean value2 for the last 30 years or so, cycling up and down in response to general economic conditions. And when a unit of housing is built, it needs to be outfitted with all of our modern-day trappings: fridges, stoves, toilets, bathtubs, air conditioners, etc. Hence, one would expect household appliance shipments to more or less track with housing starts. However, the data says that household appliance shipments have risen dramatically, almost doubling since the turn of the century.
One explanation is that we all may have two or even three specialized appliances where before we had just one—perhaps a large fridge-freezer combo for the kitchen, an overflow fridge for the basement, and a meat locker for the garage.3 There has been a material explosion of available household appliances in varied form factors and they all have to be built in the same factories of yore, which were designed to churn out the same product with limited variation in large quantities.
Figure 2. Number of automobile models in production, 2000-2019.
And this Cambrian explosion of models and form factors is not limited to household appliances. Figure 2 shows data from IHS and Bernstein Research plotting the number of distinct car models (churned out by the same 20 or so global manufacturers) over the last couples of decades. Forget Henry “You can have it in any color, as long as it’s black” Ford. As economies grow and more and more people buy cars, it is clear that vehicle customizations that meet specific geographic and market needs are a “thing.” Though automobile manufacturers would much prefer to sell everyone the same car model in the same color, alas, people like to have more than one option. Auto makers must have the flexibility to switch among models and option packages quickly (as in, from one car to the next).
These kinds of mass customizations and proliferations extend backward into the supply chains of durable goods and horizontally into other goods.
For example, Figure 3a shows a different cut from Roland Berger4 on the proliferation of automobile models, with added detail showing the increasing variety of raw materials and components. Manufacturers have made heroic efforts to minimize the diversity of raw materials and components through supply chain rationalizations and common platforms but can only do so much to slow the tide.
And, as one would expect, increased variation in materials and end products necessitates more variation and proliferation in the machinery and tools required for their fabrication. Figure 3b shows how these complications have reverberated backward to affect the array of machine tools required for automobile manufacturing.
Figure 3a. SKU and materials and components proliferation in automotive manufacturing.
Figure 3b. SKU and materials and components proliferation in automotive manufacturing machine tools.
Not coincidentally, the manufacture of automobiles and household appliances rely on many of the same machine tools (for example lathes, presses, welding equipment, robots, or metal forming tools). So if proliferation of SKUs in automotive manufacturing is an issue, it’s a safe bet that it is also an issue for makers of household appliance manufacturing capital equipment.
Figure 4. SKU and materials and components proliferation in FMCG.
Figure 4 shows that the good people at Roland Berger found a similar explosion of product variety in fast-moving consumer goods (FMCG) like toothpaste, toilet paper, paper towels, shampoo—you name it. This variability becomes particularly tricky once the FMCG have been packaged into individual containers (for example, shampoo bottles) and need to be boxed and palletized. Increased variability in product form factors means more complications in palletizing, and as we have seen, flexibility in end-of-line palletizing becomes essential.
To answer our opening question, the data (and extensive anecdotal evidence) show that mass customization and SKU proliferation are issues for manufacturers, making the ability to quickly and economically switch what is being made (in other words, flexibility) a necessary condition for thriving (and maybe just surviving) as a manufacturer. And, as the last few months have shown, this need for flexibility is not a hypothetical exercise, but a pressing and immediate concern for current manufacturers and the state of the industry post-pandemic.
In our next post we tackle the third bugbear of a trend that demands manufacturing flexibility: shorter product cycles.
1 If you really want to know, the housing starts data is “New Privately Owned Housing Units Started, Thousands of Units, Monthly, Seasonally Adjusted Annual Rate” courtesy of FRED, from the St. Louis Fed. The household appliance data is Census Bureau data for Series 35B, “Dollar Value of Household Appliance Manufacturing, Seasonally Adjusted,” deflated by the Durable Goods CPI, “Consumer Price Index for All Urban Consumers: Durables in U.S. City Average, Index 1982-1984=100, Monthly, Seasonally Adjusted” from FRED. Now you probably wish you hadn’t asked, but too late!
2 About 1.5 million housing starts a year, more or less.
3 Another explanation is that these “extra” household appliances are really meant for renovations of existing housing stock, not new housing. In other words, they are replacements, not incremental shipments. We’ll discuss this possibility in our next blog post.
4 Mastering Product Complexity, Roland Berger Consultants, Germany. Their research encompassed surveys of over 100 manufacturers in five industry clusters (automotive, machinery, fast moving consumer goods, chemicals, and pharmaceuticals) about the number of end-product and supply chain SKUs over time and product lifetimes.