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Executive Summary
The Department of Communications, Information Technology and the Arts commissioned Howard Partners to undertake a study of the development, application and use of information and communication technologies (ICT) in non-ICT manufacturing industries.
The purpose of the study was to provide an analysis of how ICT is being developed and used within the non-ICT manufacturing sector. The study also examined the impact this ICT is having on companies’ operations, productivity, business models and competitive positions.
The key messages from the study are:
- ICT is pervasive throughout the manufacturing sector and in manufacturing businesses. It is evident in all aspects of the value chain – research, product development, production, supply and distribution, customer relationships and post sales service. ICT is also used extensively in corporate management and in administrative support functions. However, different ICT systems are not always well integrated – particularly between manufacturing and corporate systems.
- Industry sectors that in the past may have been described as ‘low tech’, or ‘old’ economy, are in fact very clearly ‘high tech’ in the way they develop and use ICT. Modern manufacturing and business processes now use ICT to support research, product development, production, supply and distribution, and in service support.
- There are substantially different outcomes among companies that spend similar amounts on ICT. The differences in productivity and profitability are due to the way ICT is developed, applied and used in a business context. ICT development, application and use in manufacturing is very much a management, issue. In the companies covered in the study, board level and senior management support for ICT investment is on the basis of validated business opportunities and demonstrated return on investment.
- Companies in highly technical areas of manufacturing, and where ICT generated knowledge is a core capability, have largely built that capability in-house. However, other companies develop their ICT capability through contract and partnership arrangements with providers of proprietary software and their service providers. They also work with a range of smaller specialised software developers working in niche areas and in research organisations.
- The study demonstrates that ICT is a significant enabler of product, process and business model innovation within the manufacturing sector. ICT also enables innovation in contractual relationships, alliances and partnerships between manufacturing companies and specialist ICT providers, and with customers and suppliers.
- The study indicates that the competitive advantage provided by ICT intensive products is not the ICT per se, but the attributes, properties and customised service offerings that the ICT enables and which are embedded in the product. In other words, clever use and incorporation of ICT becomes a differentiator. This re-affirms the contemporary view in business strategy and marketing that customers do not purchase products: they purchase the stream of valued added services that products provide.
- Effective executive managers in manufacturing businesses require an appreciation of the process improvement, product enhancement and market development possibilities enabled by ICT. Conversely, ICT managers need to possess knowledge and expertise in the way in which ICT can be adopted, applied, and used in a business and commercial context.
- Australian manufacturing industry requires a robust and capable ICT sector with the capacity to handle the ongoing development, maintenance and support functions that enable both breakthrough and continuous innovation in manufacturing businesses.
The interviews and supporting research demonstrate that:
- Digital networks and more powerful computing allow companies to collect, communicate, exchange and analyse data more quickly and cheaply than ever before – enabling manufacturing businesses to adopt a broader range of strategies for the management of their core functions and processes.
- Increasingly, ICT is regarded as an important element of corporate infrastructure. However, ICT differs from other infrastructure assets in that it supports the generation of knowledge that can be adopted, applied and used for innovation in business and manufacturing processes and in enhancing the functionality of products and services.
- There are major issues concerning functional integration in the management of information between the corporate and production areas of a manufacturing business. Additional productivity and performance enhancements may accrue to those companies that successfully integrate process control systems with corporate systems, for example through software solutions.
- A major challenge in this area is encouraging managers to trust software and machine generated data, monitoring and analysis to validate processes – without the need for additional physical inspection and intervention.
- ICT allows companies to develop close relationships with customers through on-line and Web-based ordering and secure, advanced communications systems. Success in this area often depends to a large extent on the level and sophistication of ICT use on the part of customers.
- The study examined specifically the extent to which non-ICT manufacturing firms can gain competitive advantage from ICT. It found that the key factors relate to the way ICT is used in combination with other technologies and in the way in which it is applied and managed. In particular:
- ICT enables disparate scientific and technical information to be tracked and integrated, thus reducing uncertainty and risk in product integrity and quality. These reductions in risk can be critical in industries such as food processing – where there are strong public health standards to meet.
- Considerable ICT is ‘hidden’ in manufacturing in the sense that companies are designing, developing and enhancing ICT applications that are incorporated into non-ICT products or services and internal business processes.
- Business process information is used to improve the efficiency (managing inputs, increased coordination both internally and externally), effectiveness (product quality) and flexibility (mass customisation, new products and services) of various business processes including procurement planning, production, marketing and distribution.
- The availability of digital information is driving new management possibilities and the development of new business models. For example, geographically dispersed supply chains can be monitored and controlled through ICT. Companies are also using the information capabilities of ICT to support outsourcing of all activities they perceive as non-core.
- The sale of a single product may now mean that a commercial relationship with a customer continues into the future through an ongoing information link. This link can enable product and process improvements by capturing information about product performance.
- Information links also allow firms to bundle products with services and lock customers into product enhancements and purchase of value added services – including project management and consultancy. These services may be more profitable than original product offerings.
- Developments in ICT have provided small companies with an opportunity to take a major role in industrial and technological innovation. For example, as end manufacturers they are able to make use of the computing power previously only available to large corporations. Similarly, small companies can become niche market suppliers with the aid of specialised software in a range of smart or intelligent manufacturing applications.
- Overseas supplied enterprise software often requires further investments in, and developments of, specialised plant based intelligence systems and process execution systems in order for it to achieve its full potential in industry and business specific operating environments.
- Industry–university cooperative and collaborative research centres and institutes in the manufacturing arena play a significant role in supporting this hidden ICT use. The research outputs of many centres are ICT software, hardware, tools and products designed for adoption in manufacturing processes.
This study indicates that it is becoming increasingly difficult to distinguish between the productivity and performance impact of ICT per se and the wider set of drivers of manufacturing productivity and improved business performance. The main lesson from these interviews is that when ICT is tightly integrated with other business functions, productivity and performance improvement will follow.
As the pervasive impact of ICT grows, ICT is likely to become a less easily distinguishable cause of improved productivity and performance. This generates the paradox that the stronger the productivity impact of ICT – the harder it is to measure that impact. It also implies that existing studies under-estimate ICT’s role in transforming manufacturing.
To adopt a metaphor used by the US economist Dick Nelson – attempting to isolate the productivity and performance impact of ICT in manufacturing may be becoming rather like trying to allocate credit for a good cake to the quality of a particular ingredient rather than to the complex interaction of all the ingredients. Without a particular ingredient, and of sufficient quality, the desired outcome may not be possible. However, at the end of the day, it is the experience, talent and creativity of management that determines which ingredients to add and the way in which these complex interactions are shaped.
The challenges for industry and policy makers include:
- Approaching and managing ICT investment from a business rather than a technology perspective and building effective linkages between general management, business unit management and ICT management teams;
- Recognising the criticality of software development, application and use as an enabler of innovation in just about all aspects of manufacturing activity;
- Effectively integrating production and corporate ICT systems to allow seamless real time information flow and the generation of new management information as a basis for improved decision making and management of risk;
- Promoting a culture of cooperation and collaboration in relation to research, training, and skills development among businesses, universities, publicly funded research organisations, and the vocational education and training sector;
- Building the skills needed to support the critical flows of information between the various functional areas of an enterprise, the ability to turn data into information and knowledge, and to ensure that this is applied and used for the benefit of the company;
- Using the information and knowledge to create and market improved products with enhanced service offerings; and
- Ensuring that ICT education and training systems address the ICT management and application skills requirements for both corporate and production systems.
SMEs, which constitute a significant proportion of Australian manufacturing, face additional challenges in sourcing specialised ICT capability. These include framing appropriate ICT project specifications and finding trusted suppliers and service providers in a highly competitive market that has few barriers to entry. Industry based accreditation and certification would go some way to addressing this form of market failure.
With the continuing globalisation and concentration of the ICT sector it is important that the ICT industry in Australia maintain a capacity to provide for and service the unique requirements of Australia’s manufacturing sector. Both corporate and production systems must be sufficiently adaptable to suit both the larger and the smaller users of ICT in ways that contribute to both industry productivity and business profitability.