Manufacturers Invest in Innovation

July 16, 2012
U.S. is expected to lead the growth

Though still focused on cost management and operational efficiencies, cautiously optimistic global manufacturing executives are beginning to invest in innovation and value-added services to drive growth, according to a report from KPMG International.

KPMG polled 241 senior manufacturing executives, 50 from the U.S., in the aerospace and defense, metals, engineering and industrial product sectors. The survey found that 75% of respondents are optimistic about their business outlook over the next 12-24 months. The U.S. is expected to lead the growth, according to 40% of the respondents, followed by China, India, Brazil and Germany.

Despite optimism, executives still focus on top- and bottom-line growth, especially in the U.S. — 58% U.S./41% global identified top-line growth and 62% U.S./43% global identified bottom-line growth as main priorities for their organizations. They will also focus on improved productivity/efficiency and increased competitiveness.

"Manufacturers may be optimistic about the business environment over the next few years, but they are challenged with continued price volatility on cost inputs, risk in the supply chain, and uncertain demand," said Jeff Dobbs, KPMG's global head of diversified industrials and a partner in the U.S. firm. "As such, companies must continue to seek opportunities to optimize business operations and squeeze costs out of the process to maximize revenue and profits."

More than half of the respondents said their companies are eliminating unprofitable product lines and markets, but Dobbs points out that manufacturers are also developing new products and value-added services to help spur growth. More than a third of global executives (44% U.S.) indicate that their companies will increase investment in innovation and R&D. A large majority of global respondents (72%) say that "transformational innovation" is either in full swing or will be so in 12-24 months.

"After several years spent cutting costs, many manufacturers realize that they can't afford to sit back and wait," Dobbs said. "They must deploy capital to develop the products that could give them a competitive advantage."

Innovation will happen increasingly in collaborative arrangements with suppliers, customers and partner companies, according to survey results. Just over 60% of respondents said they will work with customers and suppliers for product development and design.

"Customer and supplier collaboration in the earliest stages of product development allows for cost and risk sharing, and lets manufacturers focus on what they do best by leveraging the expertise of external partners, accelerating speed to market," Dobbs said.

The stronger focus on innovation is having a significant impact on manufacturing business models, which are becoming more service-oriented.

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