[Last] Episode: What is changing in manufacturing

Usually when we refer to production, factories and industries, we all think about the production function. As we now an output is mainly made by Labor, Capital and Land. The way they combine together is called technology. As I reported in my previous posts technology is deeply changing. During the 20^th century technology had a lot of innovations. By thinking on processes we shifted from the mass production of the beginning of the century to lean production in the 1990s. Yet we needed a huge amount of capital, land and labor. Thus, companies moved from richer countries to poorer as the process of globalization gathered pace. Poorer countries allowed the same production level for less capital, land and labor costs. Costs not technology. Yes, the famous abroad outsourcing process wasn't a technological breakthrough. It was simply a movement, allowed by transport cost reduction and internet communication, from a high-cost place to a low-cost place. The technology of production didn’t change at all or so. But now something is changing. New production machines as 3D printing allows people to produce some products (even iPhone or car parts) directly at home (at $ 1,299 you can buy a 3D printer). Furthermore, people having ideas and no money now can go online and see their ideas produced and sold, and they gain 30% of the profit. I don’t know if this is a revolution but it seems to me. For sure is big change. Let’s see what and how is changing in production.

The figure of the entrepreneur and the role of capital in production could change. Henry Ford needed heaps of capital to build his colossal River Rouge factory; his modern equivalent can start with little besides a laptop and a hunger to invent.

The factory will change. The factory of the past was based on cranking out zillions of identical products: Ford famously said that car-buyers could have any colour they liked, as long as it was black. But the cost of producing much smaller batches of a wider variety, with each product tailored precisely to each customer's whims, is falling. The factory of the future will focus on mass customisation—and may look more like the 18th century weavers' cottages than Ford's assembly line.

The geography of supply chains will change. An engineer working in the middle of a desert who finds he lacks a certain tool no longer has to have it delivered from the nearest city. He can simply download the design and print it. The days when projects ground to a halt for want of a piece of kit, or when customers complained that they could no longer find spare parts for things they had bought, will one day seem quaint.

The role of labor in production will change. Labour costs are growing less and less important: a $499 first-generation iPad included only about $33 of manufacturing labour, of which the final assembly in China accounted for just $8. Offshore production is increasingly moving back to rich countries not because Chinese wages are rising, but because companies now want to be closer to their customers so that they can respond more quickly to changes in demand. And some products are so sophisticated that it helps to have the people who design them and the people who make them in the same place. The Boston Consulting Group reckons that in areas such as transport, computers, fabricated metals and machinery, 10-30% of the goods that America now imports from China could be made at home by 2020, boosting American output by $20 billion-55 billion a year.

Source: The Economist, Special Report on Manufacturing and Innovation, A third industrial revolution, April 21^st 2012.

Third Episode: Collaborative production, from outsourcing to crowdsourcing

In 1950, in the era of mass production, New York City was the capital of manufacturing in America, with 1 million of people working in the sector. Today only 80,000 people are employed in the sector, largely by specialist producers. Yet nourished by the city’s entrepreneurial spirit, a new industry is emerging. It might be called social manufacturing.

Quirky, for example, is a design studio with a small factory complete with a couple of 3D printers, a laser cutter, milling machines, a spray-painting booth and other bits of equipment. This prototyping shop is central to their business of turning other people’s ideas into products.

Yes, have you ever had an idea about a product with no knowledge on how to build it? Now you know Quirky exists. The process works like this: a user submits an idea and if enough people like it, Quirky0s product-development team makes a prototype. Users review this online and can contribute towards its final design, packaging and marketing, and help set a price for it. Quirky then looks for suitable manufacturers. The product is sold on the Quirky website and, if demand grows, by retail chains. Quirky also handles patents and standards approvals and gives a 30% share of the revenue from direct sales to the inventors and others who have helped. In this way, Quirky can quickly establish if there is a market for a product and set the right price before committing itself to making it.

Shapeways is an another online manufacturing community, it specializes in 3D printing services. It shipped 750,000 products last year. Users upload their designs to get instant automated quotes for printing with industrial 3D printing machines in a variety of different materials. Users can also sell their goods online, setting their own prices. Some designs can be also customized by buyers.

Easy online access to 3D printing has three big implications for manufacturing:

1.    Speed to market is increased

2.    Market risk almost inexistent: entrepreneurs can test ideas before scaling up and tweak the designers in response to feedback from buyers

3.    It becomes possible to produce things that cannot be made in other ways, usually because they are too intricate to be machined.

Once in digital form, things become easy to copy. This means protecting intellectual property will be just as hard as it is in other industries that have gone digital.

MFG.com, another online production service, provides a lot of services with more than 200,000 members in 50 countries. Firms use it ot connect and collaborate, uploading digital designs, getting quotes and rating the services provided. This could tunr into the virtual equivalent of an industrial cluster.

Dassault Systemes, a French software firm, has created an online virtual environment in which employees, suppliers, and consumers can work together to turn nee ideas into reality. It provides lifelike manikins on which to try out new products. They call such services “product life-cycle management” because they extend computer modeling from the conception of a product to its demise, which nowadays means recycling.

As digitization has freed some people from working in an office, the same could happen in manufacturing. Product design and simulation can now be done on a personal computer and accessed on the cloud. It means people involved in can work from anywhere and share ideas. This could means the factory of the future could be anyone sitting in his own office.

Source: The Economist, Special Report on Manufacturing and Innovation, A third industrial revolution, April 21^st 2012.

Second Episode: From mass production to smart production.

Additive manufacturing is not yet good enough to make a car or an iPhone, but it is already being used to make specialist parts for cars and customized covers for iPhones. Additive manufacturing is only one of a number of innovative production equipment leading to the factory of the future. Conventional production equipment is becoming smarter and more flexible too.

For example, Volkswagen is implementing a new production strategy called MBQ. By standardizing the parameters of certain components they hope to be able to produce all its models on the same production line (Again economies of scale).

Factories are becoming vastly more efficient. Nissan’s British factory in Sunderland, opened in 1986 is now one of the most productive in Europe. In 1999 it built 271,157 cars with 4,594 people (59 cars per capita). Last year it made 480,485 cars with just 5,462 people (88 cars per capita).

As the number of people directly employed in making things declines, the cost of labor as a proportion of the total cost of production will diminish too. This will encourage makers to move some of the work back to rich countries, not least because new manufacturing techniques make it cheaper and faster to respond to changing local tastes.

The materials are changing as well. Carbon-fibre composites, for instance, are replacing steel and aluminum. Sometimes it will not be machines doing the making, but micro-organisms that have been genetically engineered for the task. Software are going smarter. And the effects will not be confined to large manufacturers, much of what is coming will empower small and medium-sized firms and individual entrepreneurs. Launching novel products will become easier and cheaper. Communities offering 3D printing and other shared production services are already forming online.

The consequences of all these changes amount to a third industrial revolution, as The Economist wrote in April 2012. The first began in Britain in the late 18^th century with mechanization of textile productions. The second  began in America in the early 20^th century with the assembly line and the era of mass production.

As manufacturing goes digital, a third great change is now gathering pace. It will allow things to be made economically in much smaller numbers, more flexibly and with a much lower input of labor. The first two industrial revolutions made people richer and more urban. The third?

Source: The Economist, Special Report on Manufacturing and Innovation, A third industrial revolution, April 21^st 2012.

Why Italy was / is (and will be) suffering the crisis more than the rest of Europe

In last period, the attention of italian politicians and journalists/experts have been focusing on the concept of "growth" as a fundamental response to this crisis.


After Berlusconi's and Monti's financial laws to put in safe the Italian debt and accounting, taxes have been raising to the highest level in Europe. VAT increased from 20% to 21%, and will increase to 23% in 2012-2013, taxes on home property have been replaced, and so on... 


Some institutions have calculated that an average family will have an increase of tax expenditures of more than a thousand of Euros for 2012. 


Now, politicians and journalists said that we need to focus on "growth", the phase 2 of the Italian (and European) Economy's revitalization. A new law is trying to liberalize some markets as: pharmacies, taxis, lawyers, notaries and so on. 


All the measures that will be applied with the new law for sure will have a positive impact on the internal economy and on the profit/surplus redistribution. 
Basically, to use the street man words, companies and some categories will have less and consumers (hopefully) will have more in their pocket.


But, if we think back about our lessons on macroeconomy we should remember that a profit/surplus redistribution does not affect the "growth" of a nation's economy. 
In fact, if we clean out from the dust the GDP equation we will find that:

Y = C + I + G + X

where

Y = GDP

C = consumers spending

I = capital expenditures / investiments

G = public/government spending

X = net exports given by = E - Z

where

E = exports

Z = imports

Now, during an economic crisis, where individuals and organizations are more wise on expenditures and where the growth is quite close to the ZERO, it is obvious even to a freshman that Y cannot grow if you only move profit/surplus from a category to another, the sum (of the change) still will be ZERO.

But, in that equation there is an X, a letter that in Italy is always forgotten by politicians and journalists. The easiest way to grow is to increment the exports.

But even if this seems obvious to everyone, we still don't know why every Italian government (even the last one who is formed by outstanding economists) have not taken any measure to favor the exports.

In fact, Italian multinationals confirmed their position as the companies with the lowest share of non-domestic sales, stated a research of R&S on world's multinational companies financial statements that took into account the last 10 years. 

Even if Italy is part of the Europe, which is the most globalized continent for non-domestic sales. 

During the last 10 years Italian multinationals grew their non-domestic sales of 9%, but they are still at the lowest level in Europe.

This situation seems to be a weakness of the Italian economy, but, as a management scholar, I would say that this is a great opportunity too!

So, dear Professor Monti, dear Italian politicians, pleas take into consideration the idea to favor those businesses that export! 

Let take measure to push Italian exports and we will grow!