INFORMATION TECHNOLOGY/SYSTEMS

MANUFACTURING’S
Rolf-Dieter Kempis and Jürgen Ringbeck

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 eƒfective habits

Rolf-Dieter Kempis is a director and Jürgen Ringbeck is a principal in McKinsey’s

Dusseldorf oƒfice. Copyright © 1998 McKinsey & Company. All rights reserved.

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USE AND ABUSE OF IT
N SERVICE INDUSTRIES such as banking and airlines, information

I technology has established itself as a vital strategic tool. Yet in manu-

facturing, 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 soƒtware 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 admin-
istrative tasks concerned with accounting and personnel, it seemed, could IT
demonstrate clear eƒficiency gains.

Bio

MICHAEL ROSENFELDER/TONY STONE IMAGES

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MANUFACTURING’S USE AND ABUSE OF IT

ABOUT THE RESEARCH

A s part of the survey, interviews were

conducted with top managers from
many relevant manufacturing sectors, from
machine manufacturers, automobile suppliers,
component producers, and electronics firms
to companies in the process industry. The
sample included companies from Europe, the
United States, and Asia. Operating units with
revenues of $0.2 to $1 billion were the focus
of the research. More than 3,000 items of
data were gathered on each organization.
On average, the companies that took part
spent about 2.2 percent of their revenues
on IT. Most employed standard software,
especially in administration. Over 60 percent
used functionally integrated standard
software, and more than 40 percent used
SAP software in at least some areas. More
than 40 percent still used a mainframe
as a system platform.
Information management performance was
measured in terms of both efficiency (IT cost
as a percentage of revenues, plus project
management performance against schedule
and budget) and effectiveness (the availability,
functionality, and utilization rates of IT
applications for each core business process).
Management performance was judged by a
company’s return on sales, revenue growth
rate, profitability, and market share. We also
developed indicators to assess performance
in specific core processes such as product
development, sales, order processing,
and service.

Companies now recognize that the use of a particular soƒtware 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 contri-
bute 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 diƒference: 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 payoƒfs: solid competencies in core operational processes improve
profitability, and superior product development promotes growth.

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 MANUFACTURING’S USE AND ABUSE OF IT

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 oƒten best managed with traditional
methods.

Few companies, it emerged, are good at IT. Exhibit 1 illustrates the distri-
bution 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
eƒficiency is important, eƒfectiveness makes a particularly powerful contri-
bution to business success: big spenders are about as successful as stars, while
cautious spenders fare little better than laggards.
Exhibit 1 Exhibit 2

Four IT cultures How the four cultures perform

% of companies surveyed 1993–96
Average annual return on sales
Big spenders Stars Rate of change in return on sales
(percentage points per annum)
Rate of change in sales (% per annum)
Rate of change in market share (% per annum)
27

13 Big spenders Stars

7.8 7.3 7.4

Laggards Cautious 4.7 4.8
49 spenders 2.9
Effectiveness of IT*

1.8
0.1

Laggards Cautious spenders

11 4.9 4.6
Effectiveness of IT

3.8
1.8
0.5
Efficiency of IT†
–0.9 –1.1
* Defined as IT support of core business processes
(availability, functionality, utilization rate) –4.0
† Defined as IT costs as a share of sales (adjusted by
industry segment) and IT project processing (meeting
deadlines and budgets) Efficiency of IT

Analysis of the survey results reveals that highly eƒfective 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
diƒference to a company’s bottom line.

Rule 1: IT is a top management aƒfair

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

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MANUFACTURING’S USE AND ABUSE OF IT

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.

Not surprisingly, top managers at low-performing companies, who spend an

average of just 4.5 hours on IT per month, tend to have vague and unrealistic
expectations. These range from the over-ambitious (“halving IT costs through
outsourcing,” wrote one) to the gloomy (“new media and IT tools are unsuit-
able in heavy engineering,” said another). At such companies, business
processes are seldom linked with IT goals, and even major IT projects receive
scant top management participation.

At IT stars, by contrast, top managers devote time and energy to developing

an IT strategy, and get actively involved in the introduction of new systems.
In particular, they play a critical role in defining projects and agreeing
measurable goals in specific business processes and technologies (for example,
reducing the time spent preparing products for specific customers by
expanding intranet connections between sales centers and plants). In major
reengineering projects, each sub-project has a set of concrete goals and is
broken down into work packages for individual employees. Executive
management and users keep in touch with the progress of new projects via IT
Exhibit 3 training sessions. Indeed, managers
Product development performance at star companies spend more than
% of companies surveyed twice as much time on IT training
Companies with good development performance (for example, courses introducing
Companies with poor development performance
new technologies such as digital chan-
Big spenders IT stars nel products) as those at laggards.
100

60
Without the intimate involvement of
40 top management in critical IT issues,
0
information management rarely
performs well.
IT laggards Cautious spenders
Effectiveness of IT

71
Rule 2: Make IT a priority in
60 product development
40
29
Companies with superior IT manage-
ment tend to be better at developing
Efficiency of IT products (Exhibit 3); they achieve
better results with smaller budgets.
As best practice moves beyond heavy investment in CAD soƒtware and
engineering databases, two areas are emerging as the future focus of first-
class product development.

Simulation and calculation soƒtware. The use of soƒtware to perform

simulations and calculations in product development is nothing new. But

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 MANUFACTURING’S USE AND ABUSE OF IT

successful developers boost development output by using them earlier and

more intensively. In our survey, approximately 50 percent of stars claimed to
be able to identify development errors such as design misspecifications
quickly and reliably, compared to only 25 percent of laggards.

The application of simulation soƒtware to modeling is already cutting develop-

ment time and cost, but its future holds even greater promise. Through rapid
“virtual” prototyping rather than conventional tooling up, one auto parts
manufacturer managed to reduce manufacturing costs on rear lights by 60
percent, and shorten its delivery time by 12 weeks.

The use of simulation in assembly and production enables the production

process to be adapted to the product much earlier in development, thus
reducing manufacturing costs.
The application of simulation
Electronic integration of engineering data
soƒtware to modeling is
and tasks. The integration of data (such as
already cutting development
CAD data, simulation results, work sched-
time and cost, but its future
ules, and project status information) with
holds even greater promise
tasks in the development process has much
to oƒfer. Key challenges in R& D manage-
ment, such as reducing development time and broadening technical expertise,
are forcing companies to integrate both their own core processes and their
development partnerships with other companies.

Successful developers are ahead in integrating engineering data manage-

ment (EDM) with other applications: 50 to 70 percent of these companies
have integrated calculation and simulation results and work plans into their
EDM systems, while for poor developers the figure is only 13 to 31 percent.
Successful developers also use EDM earlier in product development to
estimate product costs.

The integration of CAD and simulation databases can serve as a springboard

to faster, simpler communication with engineering partners. A 3D CAD
system with spatial geometric representation of objects is usually required
for this purpose.

Seeking to encourage superior “design to manufacture” – the design of

products to optimize quality/cost tradeoƒfs – more than 75 percent of
successful developers have built up interfaces between direct numerical
control (DNC) machinery management in the production area and CAD
databases, more than half of them with integrated functionality (allowing
the transfer not just of raw data but also of DNC programs). Among
less successful developers, only 40 percent have achieved this degree of
integration. The story is much the same in relation to the integration of CAD

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 MANUFACTURING’S USE AND ABUSE OF IT

and simulation applications in manufacturing and assembly, and with

development partners.

A comparison of companies’ goals for product development and the appli-

cation of new technologies in the coming years reveals that the gap between
more successful and less successful developers in the application of IT will
continue to widen.

Rule 3: Integrate IT into sales and customer service to boost

performance
Sales is traditionally an area of low IT penetration. Management attempts
to use management information systems to make the sales process more
transparent have been met with skepticism from sales staƒf. Even so, master
databases for customer files have become standard, as have order processing
systems that permit faster and more consistent order transfers. In addition,
over 60 percent of the sales staƒf surveyed are now equipped with laptop
computers and mobile phones, and many companies provide product and
price information in CD-ROM catalogs and other digital formats.

Companies whose sales performance is above average tend to use integrated

standard soƒtware more intensively, allowing them to integrate sales data to
a greater extent. Their sales information systems also provide direct access to
data on capacity and production scheduling,
so that the feasibility of any customer request
By using configurators, one
can be checked before an order is placed.
manufacturer was able to
replace a full 90 percent of
Some companies have gone further, allowing
special customer requests with
regular customers to enter their orders
a set of pre-costed variants
directly into EDI systems. Manufacturers of
standardized industrial products that carry
out more than 50 percent of their business transactions by EDI spend only
0.7 percent of revenues on back-oƒfice sales work. Those processing less than
50 percent of their orders via EDI spend twice as much. Companies with
more complex product ranges currently process fewer orders via EDI;
however, those processing more than 10 percent of orders via EDI achieved
a cost advantage of about 50 percent over companies that did not use EDI.

Most important, the survey suggests that the use of product configurators –
electronic tools that simulate the putting together of a product from thou-
sands of possible features – will make an important contribution to business
success in the future. During a sales pitch, staƒf will be able to show customers
the full range of products, variants, and types, calculate the price of the
product chosen, and agree a realistic delivery date.

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The advantages are obvious. Contracts for products that a company cannot
manufacture would become a thing of the past, as would most delivery delays.
Jobs could be scheduled on the spot, and products engineered at estimated
cost. By using configurators, one manufacturer was able to replace a full 90
percent of special customer requests with a set of pre-costed variants.

Rule 4: Use IT selectively to integrate order management across

the company
Purchasing, materials management, and production planning have long been
key areas for IT applications. By monitoring materials and comparing stock
levels against production requirements, IT can help organize orders eƒficiently.
Information systems are also indispensable for planning production jobs
down to the calculation of daily job lists for individual production areas.

Despite these advances, the “factory of the future” has yet to become a reality.
Many companies feel their production planning and control systems are
ineƒfective, inappropriate, and brittle. Companies with complex production
programs and small batch sizes complain that their production planning
soƒtware doesn’t cater for their needs. Even manufacturers of standard
products find their systems inflexible when orders are changed.

So how do successful manufacturers cope? The answer is that they know

when IT works and when it doesn’t. Surprisingly, while IT plays an important
role in other core operating processes, it seldom oƒfers much help with
production control at a detailed level. Almost eighty percent of companies
that excel at order processing dispense with IT-supported control at the
shop floor level, instead using simple Exhibit 4
organizational processes such as Methods of shop-floor control
Kanban (Exhibit 4). Their impor- Percent
tance as a substitute for IT increases Users of multiple
with the complexity of the produc- logics and systems 0 11

tion process. Successful developers Users of dedicated

systems for
also limit their customers’ flexibility shop-floor control
over scheduling orders: their “freeze 55

point” for placing orders in their 22

MRP system is much earlier, and
MRP II users;
once it is reached, they change orders shop-floor control
without IT
less oƒten to avoid disrupting pro- (Kanban, etc)
duction schedules. 78

Companies Companies
IT has an important contribution to with excellent 34 with poor
order order
make to purchasing and logistics. IT- processing processing
supported inventory management is

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MANUFACTURING’S USE AND ABUSE OF IT

Exhibit 5

Use of EDI by customers for order calls

Companies with excellent order processing
Companies with poor order processing

Share of customers with EDI link Work in process

% of customers % of sales
44 3.8
35 8.0
Share of orders transmitted by EDI Finished goods inventory
% % of sales
76 2.7
44 5.8
IT-based monitoring of overall process
% of companies surveyed
72
59

standard; what makes the diƒference is the monitoring of orders between a

company and its customers and suppliers via EDI. Although EDI is not
widespread on the supply side – suppliers of standardized goods are the main
users thus far – more intense use of EDI for customer order calls leads to
much lower logistical costs (Exhibit 5).

When it comes to service, companies with excellent performance stand out

not so much because of the IT equipment they use in the field but because of
the data and applications (such as diagnostic systems) they employ. Partly as
a result of this broader range of applications, companies with the best service
performance use their IT systems twice as intensively in the field (at 25 hours
per week) as companies with poor service performance.

Rule 5: IT applications in administration have reached

diminishing returns
Historically, administration – finance, accounting and control, and personnel
– was the first part of a company to apply IT. All businesses now use IT
extensively in this area, to the point that standard soƒtware seems to have
largely exhausted its potential for eƒficiency gains.

True distinction can be achieved, however, in the intelligent deployment of

executive information systems (EIS), which give senior executives daily,
weekly, or monthly updates on key dimensions of business performance.
High-performing companies have integrated EIS systems twice as flexible
as those of their low-performing peers, whose data and analysis capacities
are so poor that many of them could not even assess their systems’
eƒfectiveness for our survey.

In addition, the more advanced players use IT extensively in human resources

for staƒf development and assignment planning, and place greater emphasis

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on generating employee profiles and job descriptions. Emerging workflow

management systems may even create fresh administrative roles in IT to
manage and organize knowledge within the organization.

Rule 6: Create a customer-oriented IT service network to fit the

needs of the business
The transition from mainframe computers to distributed client-server
architectures is well under way. Though traditional mainframe and midrange
systems still control most operational applications at over 80 percent of
manufacturers, conversion continues to gain ground. About 20 percent of
companies surveyed have already migrated from a mainframe to a client-
server architecture; in coming years, many more plan to follow them.

Unfortunately, some IT departments are failing to keep up. Many staƒf prefer
the mainframe systems they grew up with, and are out of touch with the
possibilities of current systems. Worse, many of those trained as computer
specialists have spent their entire career cloistered in the IT department, and
simply do not understand what the business side wants out of applications.

Leading-edge companies have reinvented their IT service structure. First,

they create a network distributing IT service tasks throughout the company
in dedicated units, committees, and project teams, rather than assigning them
to a single department. They set up an information management group to
concentrate on IT planning and consulting,
including process redesign. Its head chairs a
Many computer specialists have
steering committee – comprising top man-
spent their entire career
agement, IT department heads, and members
cloistered in the IT department,
of a core user team – that makes decisions on
and simply do not understand
key corporate IT issues. The core user team
what the business side wants
brings together leading users from all areas
of the business, and defines user require-
ments in collaboration with the revamped IT department, which now con-
centrates on providing infrastructure and operating the system. Users also
play a critical role in adding pivotal resources to soƒtware implementation
projects, and sometimes even have their own soƒtware development staƒf.

Second, although third-party providers are a central part of IT service net-

works, IT stars are much more careful about what they outsource. Only 24
percent outsource core operational IT services such as running the computer
center; laggards do so at twice that rate. And when they do outsource, IT
stars rigorously monitor providers, assessing their performance through
external benchmarks and meticulous goal-setting, and paying close attention
to the negotiation of contract extensions.

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Third, IT stars are much more professional about their planning and control
processes, relying on their information management group with its close links
to top management. They understand their costs in greater detail; 53 percent
of stars were able to produce detailed cost structure analyses, compared with
just 7 percent of laggards. Poor players oƒten set IT budgets purely on the
basis of historical data, while stars conduct
zero-based budgeting, reassessing projected
Detailed planning allows
and current tasks every year.
top performers to develop their
IT capabilities deliberately
Most IT stars study the market systemati-
and systematically
cally to identify important innovations: 88
percent regularly invite vendors to make
product presentations, as against 46 percent of laggards; 36 percent assign
staƒf to watch the market, compared with 13 percent of laggards. Armed with
up-to-date information, they plan for the long term: 65 percent formulate
three- to five-year plans for hardware, soƒtware, and netware projects, as
against 37 percent of laggards. Similarly, 50 percent of stars are planning
major IT projects in the next three to five years, while only 25 percent of
laggards have such projects planned that far ahead. Such detailed planning
allows top performers to develop their IT capabilities deliberately and
systematically, instead of wasting energy on fire-fighting.

Rule 7: Introduce integrated standard soƒtware on a “fast

follower” basis (but redesign the business first)
In most situations, it is better to use functionally integrated standard soƒtware
than invest in proprietary solutions. Seventy-five percent of the implemen-
tation costs of the IT stars are devoted to integrated standard soƒtware,
compared to 42 percent for laggards. Pioneering proprietary soƒtware is the
right strategy only when it produces a clear competitive advantage, as with
some product-specific simulation soƒtware.

When to introduce integrated standard soƒtware is a key decision. A “fast

follower” strategy is the best bet: companies should wait until early soƒtware
bugs have been fixed and external consulting knowhow has become available
before making a commitment. But once new releases can oƒfer greater
functionality and user-friendliness, companies should act fast.

Over 60 percent of IT stars follow this approach; laggards tend to adopt more
reactive strategies. Because they also continue to use large parts of the old
soƒtware aƒter new systems are introduced, they experience many more
problems with compatibility.

The survey confirmed the importance of redesigning business processes

before new systems are introduced, rather than at the same time. The

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sequential approach followed by over 41 percent of stars (but just 24 percent

of laggards) reduces both project duration and costs by more than 50 percent.
It enables stars to refine their selection criteria for soƒtware and gain a better
understanding of how standard packages could be adapted to their needs,
thus avoiding the need for expensive custom programming.

IT stars apply to these projects the same planning and project control that
distinguishes them in other areas. Although they resort to external imple-
mentation partners twice as oƒten as do laggards, they tend to focus their
partners’ eƒforts on implementation and early pilots, and strive to involve
their own staƒf – users as well as IT managers – more closely in the roll-out.

Because they monitor IT milestones rigorously, stars stray from planned

cost far less than do laggards. Aƒter new systems have been introduced,
they monitor degree of use, evolution of users’ knowledge, ongoing
expenses, and improvements in business performance in order to pursue
continuous improvement.

By contrast, laggards oƒten fall into a downward spiral. Frequent failures

to meet objectives, combined with dissatisfaction among users, make it hard
to win support for follow-up projects. Problems are swept under the carpet.
Control over outsourcing lapses. The result is excessive spending for only
mediocre results.

The future
As ever, the future holds both opportunity and threat. On the one hand, new
technology will continue to enable IT stars to make quantum leaps in eƒfec-
tiveness. On the other, poor management of Exhibit 6
IT can result in a cost explosion. Routes to improvement

One systems manufacturer saw its IT Big spenders Stars

Standardization Review IT support
spending soar from 2.7 to 3.9 percent of sales of IT for business
processes
in just three years, an increase of 44 percent. IT cost control
Intelligent IT
Yet nothing in its applications portfolio had outsourcing
changed. The reason for the rise? Soƒtware
costs more than doubled as standard soƒt- Laggards Cautious spenders
Effectiveness of IT

Top management Top management

ware was introduced, then heavily modified involvement involvement
(especially in production and sales); as a Standardization
of IT
IT as internal
service provider
result, interfaces (70 percent of which were Planning/control IT support for
of IT projects business processes
specific to the company) had to be specially
programmed. Efficiency of IT

The road to improvement takes a diƒferent course for each of the four IT
cultures we identified (Exhibit 6). We believe that a laggard can become an

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MANUFACTURING’S USE AND ABUSE OF IT

star in two to three years, but only if it rethinks its notion of IT. Instead of
being regarded as a limited specialist task, IT must become a key concern of
top management. No longer simply a means of reducing manufacturing costs
through automation, it must be seen as a tool for optimizing almost any
business process. From an all-powerful, centralized data processing depart-
ment, a lean, customer-oriented IT network must emerge.

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