Five ways to compete globally without focusing on price
The one constant for materials manufacturers since the formalization of the industry has been a constant downward pressure on prices. Every year, in every material, manufacturers and plant operators are expected to produce a product that’s as good or better than the year before, while reducing end-user prices. Some years, this is obviously impossible; we are, after all, subject to the whims of the broader commodities market.
For the last several decades, the industry has responded with a fairly predictable mix of value-added material complexity and reduced internal costs through increased efficiency and optimization. For the former, manufacturers have taken on R&D costs to create patented and unique formulations, and buzzword-laden sales brochures to try to find product differentiation in a crowded marketplace. While this has resulted in some great new materials, it also presents a large upfront investment with little guarantee that the final product will boost cost significantly. The latter approach, efficiency and optimization, has largely been driven by a combination of plant equipment maintenance and innovation and a reliance on management to consistently improve systems and processes. Whether through optimization philosophies or more basic cost-cutting measures, plants have seen fat trimmed and performance streamlined over the last few decades.
Ultimately, both of these approaches have had mixed results. Optimization has increased, and value-adds have pushed revenues up, but not consistently and not without sacrifices. More importantly, both approaches are tied inexorably to an old way of thinking: competition is about price and nothing else. In an age of globalism where emerging markets can do the same things as your stateside plants for a fraction of the cost, it’s an outdated philosophy that is simply not sustainable.
The solution, then, is to move away from final price as the source of differentiation. As radical as it might sound, manufacturers need to stop treating materials like commodities, and to start treating products like solutions. The difference? By focusing your supply chain into a solution provider, you differentiate your company from the competition. You begin to understand where your customers’ pain points are, and addressing them. You stop competing on price, and begin competing on all of the ways that you can make life easier for the people and companies buying your products. That kind of value-add is invaluable to moving the top and bottom lines, and builds a true competitive edge.
In sitting down and talking with supply chain and plant managers, it became obvious that addressing a small handful of long-standing problems in the manufacturing supply chain holds the key to maintaining competitiveness in a global materials manufacturing sector. The five major problems identified in this research should be familiar to anyone who has to manage, or work with, a large manufacturing supply chain:
- Lead times
- Customer Intimacy
- Communication and response times
- Competing software standards
It’s only in recent years that companies in intermediate steps in the supply chain—the manufacturers and processors—have embraced the idea that there’s more to selling materials than low pricing. When asked what the last major innovation in materials sales and production was, many of the company executives we spoke to couldn’t remember anything more recent than the advent of digital spreadsheets or online catalogs. The idea of commoditization has largely frozen progress in the industry, leaving it far behind direct to consumer products.
Take forecasting, for example. In retail, forecasting has been shifted from primarily managing supply chains to generating top line growth by identifying new products and services that will produce new revenue. Instead of focusing purely on optimizing existing revenue streams, top retailers are digging deeper into the data to find money in places it hasn’t been found before. Unlike retail, the manufacturing sector has been reticent to fully embrace the technologies that have catapulted agile retailers to the top. We’ve found ourselves trapped in a price war that no one can win. Looking back to retail, we can see models of where we are and where we need to go. Consider two department stores that sell identical or nearly identical products. These days, it’s pretty rare to see an all out price war break out.
Instead, those department stores offer additional services to entice loyal customers. Sometimes it’s as simple as a favorable return policy, other times it’s comprehensive customer loyalty and reward programs. Either way, the retailers win when they can downplay price and still lure customers in. Across price categories, the winning players are the ones that can transform the shopping experience into a solution to problems their customers may not have even realized they had.
Technology, and the on-demand mindset it produces, has already shown itself capable of disrupting seemingly safe industries. It will do the same to materials manufacturing companies that don’t fully embrace the future. While it’s a safe bet that demand for lower prices will never stop being a factor, it’s just as safe a bet that the leading materials manufacturers of the future will get to be leaders by embracing a solutions-oriented business model.
Companies that can’t shake off the traditional commodities mindset and embrace the extra value they can offer to customers, will increasingly be marginalized and see shrinking demand and shrinking profits. Now, more than ever, the old maxim holds true: if you’re not evolving, you’re falling behind.
Nicole Snyder is the brand and marketing manager for JW Aluminum, a U.S.-based supplier of rolled aluminum products.