Academic journal article The McKinsey Quarterly

Manufacturing's Use and Abuse of It

Academic journal article The McKinsey Quarterly

Manufacturing's Use and Abuse of It

Article excerpt

Research indicates the greatest potential for IT lies in product development and sales

Moving from laggard to star will take two to three years

Seven highly effective habits

In service industries such as banking and airlines, information technology has established itself as a vital strategic tool. Yet in manufacturing, it has largely failed to live up to its promise. Widespread early euphoria - visions of productivity gains from reengineering and the integration of IT into every facet of manufacturing operations - had evaporated by the beginning of the decade. The introduction of so-called integrated standard software had proven time-consuming and risky. Not only did implementation costs quickly outstrip initial estimates, but anticipated benefits failed to materialize in all but a few cases.

Plant managers complained that production planning systems were not up to the job. Sales managers unable to reorganize order processing condemned their sales information systems as inflexible. Only in handling basic administrative tasks concerned with accounting and personnel, it seemed, could IT demonstrate clear efficiency gains.

Companies now recognize that the use of a particular software application cannot guarantee business success; strategic benefits, they have learned, rarely emerge from a simple increase in IT resources. In response, some manufacturing companies are managing IT purely on the basis of cost, eschewing strategic considerations. In Germany, auto maker Porsche and wire manufacturer Continental have gone so far as to outsource their entire data processing function. Fueled by such developments, the IT outsourcing business is now valued at more than $32 billion worldwide.

None the less, IT can still serve as a powerful driver of process innovation. Technologies such as the Internet and multimedia-supported simulations hold enormous commercial potential.

How, then, can a manufacturing company harness superior IT to gain competitive advantage in strategic business processes? What can IT contribute to corporate success? To answer these questions, McKinsey and the University of Darmstadt conducted a survey of some 70 companies in Europe, the United States, and Asia.

We found that strong performance in IT does make a real difference: better information managers are also better at core processes such as R&D, order processing, sales, and service. In turn, excellence in core processes produces tangible payoffs: solid competencies in core operational processes improve profitability, and superior product development promotes growth.

But there were also some surprises. Sales, where IT penetration has historically been weak, presented a major opportunity. On the other hand, production control at shop-floor level is often best managed with traditional methods.

Few companies, it emerged, are good at IT. Exhibit 1 illustrates the distribution of four IT cultures - stars, big spenders, cautious spenders, and laggards - among the companies surveyed. Exhibit 2 correlates these cultures with the four business measures used in the survey. It suggests that, while efficiency is important, effectiveness makes a particularly powerful contribution to business success: big spenders are about as successful as stars, while cautious spenders fare little better than laggards.

Analysis of the survey results reveals that highly effective IT organizations share seven habits. While no manufacturing operation can guarantee to transform itself simply by following a set of guidelines, there is ample evidence to suggest that the journey from IT laggard to IT star will make a striking difference to a company's bottom line.

Rule 1: IT is a top management affair

Information management must receive the attention of top management. On average, the top managers at IT stars together spend about 45 hours per month on IT, compared with 20 hours for laggards. The stars also charge on average three senior executives with IT management tasks, who each devote about 15 hours a month to them, about three times as much as their peers at laggard companies, where four or five top managers typically share this responsibility. …

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