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"Sage provides business software, services and support to small and medium sized businesses. Whilst our heritage
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Source : Sage
Managing Business Risk in Industrial Equipment & Supply
Business Risk is also known as :
Business Analysis ,
Business Impact Analysis,
Business Risk Analysis,
Business Risk Management,
Enterprise Risk Management,
Risk Assessment Process,
IT Risk Management,
Business Risk Analysis.
Table of Contents
- Multi-Faceted Business Expansion
- Product and Service Level Reliability for Customer Satisfaction
- Due Diligence Bidding for Contract Profitability
- Procedural Compliance for Environmental Regulations
- Minimizing Risks in a Solutions-Driven Industry
- About Industry Directions
- About Sage Software
Few industrial companies were prepared for the swift economic decline in 2001. The losses led to
industry-wide cost control measures including off-shore sourcing. Wise companies also implemented
greater risk management oversight. As the economic cycle rebounded and customers once again
invested heavily in capital equipment, industrial companies should continue to be careful of risks as
they pursue expansion opportunities.
In the current growth phase, industrial companies have been expanding into new regions, industries,
product lines, and services. At the same time, they have been dealing with industry-wide changes
that pose additional risks to their business. The primary risks faced by industrial manufacturers and
- Rapidly expanding into new areas to maximize growth opportunities while minimizing exposure
to losses and write-offs
- Winning and maintaining business since the bar has been raised for product quality as well as
delivery and service reliability
- Bidding profitability on complex product and service contracts that carry penalties for poor
- Ensuring full compliance to all environmental regulations around the globe
Companies that fully recognize the extent of the risks can put strategies, policies, and systems
into place to manage them. Integrated enterprise systems that provide end-to-end functionality,
visibility, and controls across expanded industrial operations can give companies the upper hand
in risk management.
Multi-Faceted Business Expansion
When companies are preoccupied with growth, they are more easily exposed to risks taken to meet
expansion goals. On the one hand, there is the risk of not expanding fast enough to capture more of
the market and on the other of having idle capacity and excess assets from over-expansion.
The industrial supply chain has changed dramatically in the past fifteen years and become more
complex. It has shifted from a supply chain that sells and services equipment to one focused on
solving customer problems and offering full service solutions based on traditional core capabilities
and an eye towards higher margins.
Industrial OEMs, component suppliers, and distributors of maintenance, repair and operations (MRO)
items continue to expand on their vision to be full service solution providers on a global basis. This
doesn"t just mean new services. The industry is expanding in four directions to open new doors to
growth opportunity and maximize niche specialties. They are regional, vertical, product line, and
service expansions (see Figure 1).
Companies are moving operations closer to their customers for improved collaboration on product
designs and greater responsiveness. Regional proximity ' whether in the US or other countries '
increases customer satisfaction and local competitiveness. While global growth is a vision for many
mid-market companies, some are initially expanding operations into under-served regions of the US.
Then they are slowly and carefully acquiring companies abroad to expand globally with local expertise
and relationships. If there isn"t enough business to sustain the operations, return on investment is
at risk during regional expansion. This could occur during an unanticipated economic downturn, a
change in political climate, or as the result of poor due diligence.
To minimize the risks associated with moves into new regions, successful companies are integrating
all of their operational systems under one information infrastructure. To ensure new units perform well,
they are also putting workflow management and performance measurement in place. Many are also
developing more flexible processes that can respond quickly to changes in the market, often under a
Lean initiative. Leaders are implementing collaborative demand and inventory planning solutions that
support multi-site visibility across their growing number of facilities and partners (see Figure 2).
Many industrial companies are expanding into new industry-specific applications that leverage niche
areas of expertise. Diversifying hedges against an economic downturn in any one segment and can
also provide fuller solution coverage to conglomerates. In addition to industrial customers, many
companies now serve automotive, aerospace, utilities, commercial suppliers, and OEMs.
The risk is spreading the organization too thin without the infrastructure to support it. New applications
require industry-specific skills and expertise in R&D, sales, customer service, materials management,
logistics, and field support. Not only does this mean hiring enough of the right people and getting
them indoctrinated in the organizations" processes, it also means ensuring everyone in the
organization is fully in the loop and capable of supporting new business processes and expectations.
This requires a scalable enterprise system that integrates every facet of the business into a single
information platform with standardized and flexible processes as well as financial and operational
performance monitoring (see Figure 2).
Product line Expansion:
Many industrial companies are expanding their product lines into full-scale operational solutions.
Others are also choosing to add complementary products to their flagship lines such as accessories
for their machinery, which gives them an advantage of being a one-stop supplier for specific types of
equipment or industrial environments.
Either strategy puts companies at risk of carrying high inventory volumes ' much of it slow moving.
The danger is ending up with excess inventory during economic declines. To minimize the risk of
inventory shortages and write-offs, industrial companies can learn lessons from the consumer goods
sector. These firms are accustomed to high volumes and large product lines, and have turned to
event-driven demand and inventory planning functions as well as market analytics to determine
profitable product mix (see Figure 2).
A solution provider stance nearly always entails offering services. Component manufacturers now
offer consulting and design services to assist OEMs in developing new applications with their
products and reaching their goals cost effectively. Many OEMs offer full product lifecycle support to
end customers, from design to installation and service to removal. Some OEMs also offer field and
depot services that extend beyond maintaining their own equipment to any type of equipment in a
Many MRO distributors now see themselves taking on the responsibility of guaranteed MRO supply
chain replenishment and site maintenance. In these new roles, the risks are far higher. In taking
responsibility for the performance in customer operations, there are high financial penalties and loss
of multi-year contracts in the event of under performing or missing agreed service levels.
To ensure that customers are fully satisfied, industrial companies need software with integrated
functionality that supports their new business processes and collaborative business relationships.
Component suppliers need R&D capabilities such as integrated project management, collaborative
design, and product configuration management. OEMs need ways to beef up end-customer
experiences through product lifecycle management and post-sales field service management. MRO
distributors must oversee customer processes including service contracts, supply replenishment, and
asset maintenance management (see Figure 2).
The pressure to innovate and expand beyond core competencies puts strain on an organization to
put new processes, performance measures, and skill sets into place quickly and efficiently. In some
cases this occurs through acquisitions, in others through rapid internal growth. Those companies
that have scalable and distributed enterprise application infrastructures will have smoother transitions
whether they are growing into new functions or new sites.
Product and Service Level Reliability for Customer Satisfaction
As with so many other industries, the industrial markets are dealing with rapidly changing
technologies, evolving industry standards, and aggressive cost saving agreements with their
customers. In addition, buyers now demand outstanding performance of their equipment, including
higher up-times and lower total cost of ownership, and they are turning to equipment manufacturers
and suppliers to deliver superior reliability or pay a penalty. This is the new standard of excellence.
Industrial companies pride themselves on their ability to innovate quickly and leverage their specialized
expertise to deliver next generation, customer-driven solutions. Many are expanding into specialty and
high performance product lines for greater competitive differentiation and higher margins. Most have
built long term relationships with their customers and are considered trusted partners. Therefore, they
can"t afford to deliver anything less than the highest quality products, parts and services necessary
to ensure their customer"s operations run smoothly with minimal cost and down times. This creates
tradeoffs that the industrial supplier must balance, as shown in Figure 3.
One of the largest challenges in all of that is doing it at an acceptable cost. One answer has been
low-cost country sourcing for many high-volume parts. The challenge is that lead times have
skyrocketed. This is a serious trade-off for companies to consider. In the solutions environment, the
risk of missing a delivery of either spares or new products is high, and companies need good supplier
visibility and communication to avoid problems.
Failing to meet customer expectations in products and services or to innovate or deliver faster than
the competition puts companies at risk of lost revenues and lower competitive standing in the market.
Unlike in the past, prospects and customers are more willing to end relationships and find new partners.
To avoid this fate, successful industrial manufacturers are beefing up their business strategies and
systems to ensure higher product and service performance levels. Leading MRO suppliers have
also invested in next generation technologies to ensure greater operational cost savings, supply
fulfillment reliability, and consistent parts quality. Both manufacturers and distributors are adding new
system capabilities to standardize, integrate, track, and optimize business processes across their
organizations and out to customers and suppliers (see Figure 4).
Due Diligence Bidding for Contract Profitability
For many companies the challenge isn"t getting the opportunity to bid. It is to bid profitably. Most
mid-market companies don"t have the systems in place to determine if they are bidding with accurate
information. As a result, companies are exposed to losing money on projects or long-term contracts.
Bidding on capital contracts involving engineered-to-order equipment has always been complicated.
It has become far more difficult due to the added service component of a solution, often based on
specified Service Level Agreements (SLAs).
SLAs identify the performance levels that must be attained for specific tasks (e.g., scheduled
preventive maintenance) as well as outcomes (e.g., asset uptime). At one time, SLA contracts were
straightforward and paid on the basis of time and materials for the tasks, but that is no longer as
common. Instead, asset owners now want service contractors to put some skin in the game.
Payment is often correlated with demonstrable savings from reduced cost of equipment ownership,
asset utilization, higher production yields, lower operating margins or reduced plant safety violations.
If savings and output are improved as promised, the industrial service provider is fully paid. If they
are not improved (or if any aspect of the SLA is missed), the customer partially or fully withholds
payment ' and sometimes imposes stiff penalty fees.
SLA contracts offer lucrative margins and profits. Non-compliance to terms can have the opposite
effect: lower margins and penalties. To minimize the risk of losses, successful companies conduct
bidding analysis and due diligence up front to ensure they know every aspect of the customers"
operations from the number of tasks required to the current costs and performance levels. Once they
win the bid, the company must maintain tight controls on resource efficiencies and costs by means
of sourcing strategies and project management. Resources are the biggest cost in service contracts,
so to maximize profits, companies must get the right resources to the right job on time and with
Engineer-to-order equipment contracts also pose considerable risks. Many companies don"t know if
they are missing valid sales opportunities, pursuing unprofitable ones, overbidding, or failing to deliver
products that satisfy customer requirements. What it takes to reduce these risks are informed decision
makers across the sales, engineering, manufacturing, and service organizations that can collaborate
within an integrated infrastructure to develop a profitable solutions-oriented bid, as shown in Figure 5.
Industrial companies need accurate information from across the organization and actual costing from
similar projects, variant product structures, rules-driven parametric product configurations, estimating,
and proposal management. After the bid they also need contract management, strategic sourcing,
engineering change management, and product lifecycle configuration management. Without these in
place, manufacturers are at risk of pursuing and building equipment at a loss and diverting resources
from profitable projects (see Figure 6).
Procedural Compliance for Environmental Regulations
Those in the industrial sector are quite familiar with environmental regulations, as they relate to the
safety and health of workers and contamination to the environment. Companies have long been
subject to federal, state, and local environmental laws and regulations including the use, discharge,
and disposal of hazardous substances that affect air, ground, or water quality. They are always at
risk for a violation due to an operational mishap, releasing hazardous waste at an existing or formerly
owned site, or acquiring a business that is out of compliance.
New environmental regulations legislated by the European Union (EU) now impact industrial
producers and distributors who sell products with electronic components. Those most affected
are industrial suppliers and sub-assembly manufacturers. The directives include the 2005 Waste
Electrical & Electronics Equipment (WEEE) law, which puts responsibility for equipment disposal on
the manufacturers, and the Restriction of Hazardous Substances (RoHS). RoHS went into affect in
2006 and restricts the use of six hazardous materials in products produced and sold in the EU. Other
countries are following suit, including China, South Korea and Japan (see Figure 7).
In the US, California has been the first state to recognize the mandates and passed a law that restricts
products according to the EU mandates as of January 2007.
To reduce exposure to a health, safety or environmental lawsuit, most companies have put
measures in place to monitor and improve their operations and to continually train employees on
proper procedures. The risks are further reduced when compliance procedures are systematized,
monitored, and documented as part of the enterprise solution. These include procedures for
managing inventory, monitoring inbound parts, working with suppliers, tracking products through
their lifecycle, process documentation, and full disclosure of the use or release of hazardous
materials and substances (see Figure 8).
Minimizing Risks in a Solutions-Driven Industry
Industrial manufacturers and distributors are facing a number of risks as they expand their business
scope and shift further into operational improvement services. Most companies are being careful
not to grow too quickly or to take on contracts that stretch their capabilities beyond their core areas
of competence. Yet problems and unforeseen situations are inevitable when pursuing new ventures
and customers are less forgiving than they were in the past.
Customers are demanding more from their equipment and service providers, continually pushing
for lower operating costs. Industrial equipment manufacturers and MRO distributors cannot afford
to miss bidding deadlines, delivery dates, product specifications, or service level agreements.
They also can"t afford the penalties of being out of regulatory compliance. Those who don"t put
processes and controls in place to meet customer and regulatory requirements risk significant
What the smart industrial equipment and supply businesses recognize is how to leverage an
integrated enterprise infrastructure to maximize profits while minimizing exposure to risks. Leverage
is possible with a system that offers operational scalability, process flexibility, deep functionality,
real-time visibility, performance monitoring, and corrective action responsiveness.
About Industry Directions
Industry Directions is an independent market research firm that delivers expertise on business
processes and IT solutions. Its expertise enables companies to optimize their participation in
manufacturing-supported value networks and gain strategic advantage. To learn more, visit:
About Sage Software
Sage Software supports the needs, challenges, and dreams of more than 2.7 million small and
midsized business customers in North America through easy-to-use, scalable, and customizable
software and services. Our products help manage a complete range of business functions including:
accounting, operations, customer relationship management, human resources, time tracking,
merchant services and the specialized needs of the Industrial Equipment and Supply Industry.