Cyber physical age is dawning

Picture with Jane Godsell article

Australian businesses, policymakers and politicians need to throw out all their established ways of thinking about the manufacturing industry and ponder the prospect of a fourth industrial revolution called the cyber physical age.

That is the sage advice of Janet Godsell, who has provided advice to the British government on manufacturing policy and contributed to the development of supply chain strategies at a number of FTSE 100 companies. Godsell, who is in Australia to make a series of presentation, says the cyber physical age could mean abandoning more than 40 years of thinking about supply chains guided by the work of Harvard University’s Michael Porter. She defines the cyber physical age, which is a German concept, as the ICT convergence of technology and business processes.

Godsell cut her teeth in manufacturing industry at the Dyson vacuum cleaner company when it was a start-up. She draws many lessons from the Dyson corporate experience for her students at the University of Warwick where she is the professor of operations and supply chain strategy at Warwick Manufacturing Group. Dyson builds into its industrial processes the holistic plan of the business model to ensure each product is commercially viable. For example, the company studied the possibility of taking advantage of cheap Chines labour but analysis showed that it was more cost effective to manufacture in the United Kingdom given that the core product required the highest-quality injection moulding in Germany. This analysis involves an examination of the ‘total landed cost’ which takes into account all inputs in the supply chain.

At WMG, professors conduct research funded by manufacturing companies with the specific purpose of delivering solutions with a commercial application. WMG’s largest provider of funding is the Tata Motors subsidiary Jaguar Land Rover.

Big opportunities

Godsell says that the new approach to supply chains presents potentially huge opportunities for Australia because distance and wage costs are no longer a barrier to job creation. She cites the example of British American Tobacco, which now plans its entire global manufacturing and distribution from offices in the UK. She says that with the right combination of skills and government policy settings, Australia could be part of the transformation of global manufacturing industry. Godsell did concede that this government policy adjustment could involve changes in taxation to make Australia more competitive relative to other Asian countries such as Singapore.

During her presentation at the UTS Business School in Sydney, Godsell highlighted the minimal supply chain expertise on the boards of FTSE 100 companies despite the fact that 80 per cent of those businesses are about supply chains. Godsell says supply chains are now an integral part of the strategic thinking of global manufacturers and no longer a specialist function. Instead it has become a pervasive part of the social fabric of companies.

She says Porter’s work on value chains which tended to focus on differentiation or cost leadership are, in her opinion, less relevant in 2015. that poses a major challenge for academics at business schools around the worlds as Porter’s teachings remain at the forefront of many courses. Godsell says business education has fallen into the trap of a “copy and paste” approach to learning about business. This includes using case studies at the source of wisdom and mistakenly believing that good practice means doing what was done before.

Metcash mess

The disastrous asset impairments at Metcash and cessation of dividend payments will not come as a surprise to those watching the gasping last breaths of the independent grocery company. Metcash is dying thanks to a number of factors, the most important of which is the rapid expansion of German retailer Aldi.

The Aldi business model has worked brilliantly around the world. It is based on the principal that successful food and grocery business need a stable sales base for about 80 per cent of revenue. That stability allows the company to plan properly for the future and offer customers specials which cover the remaining 20 per cent of revenue. The specials are usually so attractive that customers will plan their shopping around the timing of the special events.

At the last surviving independent grocery chain Metcash was the obvious target for Aldi to attach. It was certainly a softer target that Coles or Woolworths. Metcash has become caught in a vicious downward spiral. As its market share has fallen, its economies of scale have been eaten away and its volume rebates have been cut. That feeds into margin declines, which, in turn, leads to financial instability because of pressure on the balance sheet.

Metcash is running as fast as it can with asset sales but the prospects in the operating business look dim. It could well get pushed out of urban areas where Aldi is expanding and be left with a chain of stores in regional areas. Chief executive Ian Morrice and chief financial officer Brad Soller will be faced with many questions about the future of the current business model at the next financial results announcement on June 15.

Twitter @TonyBoydAFR

Tony.boyd@afr.com.au