UpFront: Innovation Drives Profit

Recent visits to builders of manufacturing equipment indicate that the managers of those companies regard technical innovation as key to future sales, and to gaining share of market. More specifically, they see technical innovation that offers a gain in productivity for customers as key to their futures, and the futures of those customers.This situation continues a trend that has been in place for some time, and shows no sign of abating.

Which raises a question.What is more important, mechanical obsolescence or technical obsolescence? Manufacturing companies have a massive inventory of manufacturing equipment that is relatively new and well-maintained. Conventional financial management advises using equipment until, so to speak, the wheels fall off. Justification of a purchase of new equipment becomes very difficult if the only criteria involved are financial, but basing such a decision on financial issues may be a serious mistake.

Technical obsolescence results when advances in manufacturing equipment technology, materials, or process design enable a significant reduction in production cost. Continuing to use equipment that is still mechanically sound when innovative, more-productive equipment becomes available may be considered financially wise, but this practice can place the company in a very vulnerable position.

Consider: During the post-Civil War era in the US,Andrew Carnegie slugged his way to the top in the steel industry. Carnegie was a financial guy who worked with good technical people, and apparently he paid attention to them. When new technology or new equipment was available to Carnegie Steel Co., if the new technology/equipment could reduce the cost of producing steel, it was purchased. The key, therefore, was process. If the new equipment/technology could make the steel production process more efficient, it was acquired. To be sure, steel production is not like discrete-part production. But the point to keep in mind is Carnegie's emphasis on process.

Granted, today's tax code pushes everyone toward a purely financial view of all acquisitions. But manufacturing companies don't exist to produce financial reports, or to conform to accounting standards. The objective of a manufacturing company is to produce products or components that can be sold at a profit. Price is controlled by the market—your company can't charge more than the market will pay—so profit is market price minus cost. Reduce production cost (i.e. improve productivity), improve the process, and you increase profit.

This argument does not imply that the financial guys at your company should be considered enemies. Rather, they are making decisions based upon criteria that exclude consideration of technical innovation's impact upon the production process.The argument to make to them is that improving the production process reduces unit cost, and therefore directly improves the company's profit potential.

This article was first published in the December 2009 edition of Manufacturing Engineering magazine.