issue: May 2005 APPLIANCE Magazine
International Appliance Technical Conference 2005
Engineering for the World
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by Lisa Bonnema, Editor
The “I” in IATC wasn’t lost on those attending the 2005 International Appliance Technical Conference. From Chinese outsourcing to Canadian legislation, this year’s engineering conference looked at technology from a global perspective.
Perhaps the most refreshing aspect of the 56th Annual IATC was the overarching attitude of perseverance. The appliance marketplace is changing, and manufacturers know it. But instead of complaining about reality, this year’s attendees were ready to soak up as much knowledge as possible, arming themselves with the technology and know-how to conquer a tough marketplace.
One of the key aspects of this year’s conference was that it approached technology from a global perspective—a critical component to being successful in today’s growing appliance industry. Authors came from all over the world to share their engineering expertise through technical papers that presented innovative approaches to both mature and new technologies. Topics ranged from new ways to diagnose noise sources and their transmission paths to sensorial testing and powerline communications.
Conference speakers reviewed topics that reached every corner of the globe. Attendees were reminded that engineering has no geographic limits, and that there is a lot more to consider than your local surroundings when designing today’s appliances. The hard realities of global material costs, overseas competition, and international legislation were all touched on at this year’s IATC, but the message of innovation and opportunity motivated attendees to keep pushing the engineering envelope.
Approximately 265 appliance industry engineers and professionals from 12 countries attended the 56th Annual IATC. Attendees enjoyed technical paper presentations, keynote speeches, and a supplier’s exhibition, all focused around improving the engineering of today’s appliances. Next year’s ITAC will be held on March 27-29, 2006 in Rosemont, IL, U.S.
Joseph McGuire, president of the Association of Home Appliance Manufacturers (AHAM), set the foundation with his opening keynote on challenges facing appliance companies selling to the U.S. market. “Certainly the basic challenge for a manufacturer is to survive,” Mr. McGuire told attendees. “To survive, you need to be profitable. To be profitable, you need to grow. And to grow, you need to innovate.”
According to Mr. McGuire, innovating in itself is a challenge because it requires investment in R&D. And compared to emerging countries, mature economies like the U.S. seem to be falling behind. As an example, Mr. McGuire reported that between 1995 and 2002, R&D spending doubled in China as a percent of GDP, while countries belonging to the Organization for Economic Co-Operation and Development (OECD) have only seen increases of about 9 percent.
Of course, increased investment is difficult when the cost of manufacturing in regions like the U.S. is so high. Pulling out some more useful facts, Mr. McGuire discussed a 2003 study performed for the Manufacturing Institute and the National Association of Manufacturers. The study revealed that external overhead costs experienced by U.S. producers add at least 22.4 percent to unit labor costs compared to U.S. trading partners—the equivalent of $5.00 per hour per employee.
“These differences are not wage cost differentials, but self-imposed costs essentially sanctioned by government,” Mr. McGuire explained. “They include corporate tax rate differentials, employee benefits, tort costs, energy costs, and regulatory costs. The cost differences vary by country, with the U.S. at the greatest disadvantage with China and in the best competitive position with France and Germany.”
Another challenge, Mr. McGuire noted, is that as today’s manufacturers try to branch out to other markets, certain international barriers make it hard to compete. U.S. manufacturers of hair clippers, for example, can’t sell their products to China without paying a 40-percent import tariff, while the U.S. tariff on the same product is only 4 percent, he said. Also, European advocates are pushing to ban the use of HFCs, which discriminate against American-style refrigerator designs that heavily rely on the refrigerant.
The good news, he added, is that associations like AHAM are taking on regulatory and international issues and are trying their best to educate policy makers and regulators on the impact they have on the resources that enable innovation. “Finding the balance points among technological feasibility and costs and benefits require serious analysis,” Mr. McGuire said. “Today, the question for regulators to answer is whether a policy idea will, because of its capital investment implications, cause a manufacturer to decide to outsource production in lieu of domestic developed investment.”
One effort AHAM is currently involved in is a waste diversion program for electrical and electronic products that is being developed by the province of Ontario. Similar to Europe’s Waste Electronic & Electrical Equipment (WEEE) Directive, Ontario’s program is the first waste program for appliances in North America. In fact, AHAM sees it as a precedent-setting program for other Canadian provinces and the states.
The main issue is that unlike Europe’s WEEE directive, the Canadian government is hesitant to impose a mandatory fee at the retail level to help manufacturers pay for any disposal costs. AHAM believes this fee is crucial to the success of any appliance “take-back” program and is working hard to convey that to Canadian regulators.
While challenges certainly exist in today’s competitive landscape—whether on a global scale or at the local retail level—Mr. McGuire concluded that it all comes back to innovation and differentiation. “The challenges are daunting, competition is fierce, but the appliance industry is also exciting,” he said. “It has embraced innovation, and consumers are finding new value in our products that touch their lives every day.”
In recognition of the best paper presented at the conference, David Chase (right), president and publisher of APPLIANCE magazine, presents Brian J. Stumm of ETCO, Inc. with the Dana Chase, Sr. Memorial Award for his paper, “Major Appliance Teardowns: A Review of Electrical Interconnection Results.” Mr. Stumm’s paper will be featured in the June 2005 issue of APPLIANCE.
Outsourcing to China
Another dose of reality came from Kenneth David, a professor at Michigan State University. His luncheon keynote, “Outsourcing: Outperforming or Outrageous,” focused on how manufacturers can gain control over outsourcing and offshoring operations that are affecting their businesses.
“My suggestion is that…we supplement cost-cutting strategy with a strategy of differentiation,” Mr. David said. “Differentiation in product and process and then, partnerships. If you can use those aims to increase your strategic position, including forming new partnerships abroad—not just having a distinct outsourcing operation—I think we are looking at a way of getting to sustainable competitive advantage.”
Mr. David then commented on why both the U.S. and Europe are outsourcing to China, whereas traditionally the U.S. outsourced to Mexico and Western Europe outsourced to Eastern Europe. “That is a phenomenon, but I also suggest that is also a symptom,” he said. “A symptom of change in education, which is something all engineers should be pretty concerned about.”
According to Mr. David’s data, North America has about 60,000 engineering graduates per year, Europe has about 40,000, and China has about 220,000. “And I’m being very modest on this,” he said. “Are we undergoing a commoditization of engineering technical knowledge if we get this increase in the global supply of engineers? I suggest we are. Do we retain a competitive edge in the U.S., in Europe, or is there a new competitive edge needed?”
Obviously, the main reason countries and companies are attracted to outsourcing, especially to Asia, is cost. Some companies, Mr. David said, believe that they can cut prices by 50 percent immediately by outsourcing to China. However, he continued, when they begin to add back in the costs, delays, and difficulties of shipping and other non-tariff barriers, there is a reduction in the quick attraction.
Mr. David said the key is to not outsource core activities that add to a company’s competitive advantage. Also, if a company’s product needs speed of delivery, flexibility of process, or customized response to the customer, it isn’t a good candidate for outsourcing. As an alternative, he suggests outsourcing activities that “can be executed effectively and efficiently in a standardized and undifferentiated manner as possible.”
Mr. David also said that cost is not a strategic reason to outsource. “I do not believe that the lowest cost strategy is a sustainable, competitive advantage,” he said. Instead, he suggested using outsourcing as a means of differentiation. “Business development and boundary spanning processes through a selected partner is the way to expand your market,” Mr. David said.
This, he explained, means that you have to offer your partner something in exchange in order to maintain that competitive advantage. It also means listening to your partners and avoiding time-consuming struggles over power. Mr. David brought home his point with a video that depicted a U.S. ship captain fighting with another “ship” to divert its course, only to find out in the end that the “ship” was actually a lighthouse. “Do you understand each other enough to get the job done and have you neutralized power enough to get the job done?” Mr. David asked. “This yields more effective cooperation [and] collaboration, which results in performance.”
Success in Europe
Opening up the final day of the conference was Davide Milone, director of Dishwashers at Indesit Company of Fabriano, Italy. Mr. Milone touched on how Indesit has used a new product development platform to achieve record growth in the last decade.
The European company’s major evolution began in 1996, when Indesit (formerly Merloni Elettrodomestici) decided to completely redesign its industrial strategy and product development by creating a washing machine platform. At the time, the company had three washing machine factories, all of which had different tooling and lacked synergy. In addition, the factories were producing two brands of washers, but Mr. Milone said there wasn’t a lot of differentiation between the brands in terms of design because of the product platform it was using. This led the company to approach the business from a completely new perspective.
First, the company added marketing and purchasing staff to its industrial design team, which traditionally included only quality, design, and engineering staff. Then, the company introduced a new platform concept. “The platform concept is not only product development, it is something more. It is a way to drive the business, a way to manage the business,” Mr. Milone said. “It is not only product development, it is industrial strategy, supplier strategy, resource planning, brand management, marketing management, sales planning. If you don’t have all of that information, you can not think as a platform.”
A platform is also “a living process,” Mr. Milone continued. “You can not set a strategy and say it is the strategy you will follow for 10 years. The market is changing and then you have to react.” A platform is also an opportunity to establish a common language throughout the company, he said.
As part of the platform, Indesit implemented four key product development drivers—components reduction and standardization to reduce complexity and costs; flexibility to create differentiation at the end of the production line; design for processing to reduce production time and labor costs; and, finally, the company brought electronic design in-house to protect its intellectual property and competitive advantage.
The company then divided the platform into three layers. The first layer—the cabinet—was where the company used its flexibility strategy to differentiate the aesthetics among the brands. The second layer was the washing group, which was where design for processing and standardization was implemented. The final layer, the controls, was where the company excelled in its knowledge of digital electronics, further differentiating itself from the competition and creating a value proposition.
The end result was favorable in all areas, Mr. Milone said. The company saw costs decrease more than 10 percent in 1999 compared to 1998. Business results also improved, with an average unit revenue increase of 5 percent and volumes increasing 20 percent.
Indesit continues to develop products based on the platform, Mr. Milone said, but remains flexible, making changes where needed. “A product platform is not one-dimensional,” he explained. “The platform has to consider the changing market.” It also needs to cover a wide price index and consider individual brands, he added.
According to Mr. Milone, Indesit’s platform approach and its digital control technology have allowed the appliance maker to speed up its time to market by 30 percent. Every 2 years, the company introduces a new product range, which Mr. Milone believes is exactly the speed Indesit needs to keep up with its competition.
A Global Strategy
Henry O. Marcy, vice president Whirlpool, closed the conference with some revitalizing comments to engineers about their role in providing value to consumers. He began by highlighting consumer trends on a global level, zoning in on saturation levels and what they could mean to an appliance company. “All of you probably know these numbers, live with these numbers every day,” Mr. Marcy said. “I wonder how often we see opportunity in these numbers, though.”
Why, he asked, is dryer penetration low in Europe? “Maybe it’s space, or is it something about the job that the product is doing and the value that it provides to the European customer that keeps that penetration so low?”
Mr. Marcy also said it is not only important to recognize new market opportunities, but to also recognize that needs change even among those consumers in mature, replacement markets. “Shifting demands driven by all aspects of our society are an opportunity for us to deliver different value to consumers,” he said.
Mr. Marcy reminded attendees that major appliances no longer have the “share of the wallet.” Today, the consumer’s first investment choices are TVs, cell phones, and DVD players. “They want to be connected on the Internet to the rest of the world,” he said. “The opportunity here is how we begin to take advantage of that same desire, that societal need for connectivity in our products.”
Even those consumers that are not brand-conscious may put value on something more than the price tag, Mr. Marcy said. “Cost-effective can mean many things,” he explained. “It can mean durability and reliability in addition to price on the shop floor.”
Perhaps nothing screams opportunity more than the “sea of white” appliances on today’s retail floors, Mr. Marcy said. “We do precious little to differentiate ourselves in the eye of the consumer,” he admitted. “Everyone who sees a BMW rolling down the road recognizes that BMW. If you put an Electrolux refrigerator and Whirlpool refrigerator in the back of the room, you probably couldn’t tell the difference.”
Mr. Marcy suggests that companies can add value and, in turn, differentiate their products through technology and design. Electronics, he reminded attendees, offers a huge opportunity for appliance makers to re-engineer the processes that consumers are hiring appliances to do.
“Everything that comes together to wash a person’s clothes is pretty remarkable,” he commented. “To design a machine to do that process is a complex undertaking, and like all complex undertakings, there’s a lot of choices you can make in terms of how you optimize the final solution. How do we take a step back as an industry and really remind ourselves to take a different look? To re-engineer, to reinvent perhaps, the processes that consumers are hiring our products to do, and use this wonderful set of richness, this great set of technology and opportunity that we have to deliver different, greater value to consumers.”
Design is another way appliance makers can differentiate themselves by making an emotional connection with the consumer, Mr. Marcy claimed. “I think you’d all agree that great design, both in terms of aesthetics and usability…really is part of the key to making a lasting relationship,” he said. “It’s the whole experience the consumer has with your product.”
This also translates to the retail floor, he added. “It’s more than just the product; it’s the environment that the product is displayed in on the shop floor,” he said. Using home goods retailer IKEA as an example, Mr. Marcy presented the idea of selling products in a vignette style as one way to further enforce the whole experience a consumer will have with a product.
In the end, Mr. Marcy said creating value means innovating at all levels—from new ways to approach consumer needs to the technology used to meet those needs and create value. Linear thinking in terms of efficiencies and cost are important, he noted, but the real opportunity is through non-linear thinking. “That is what is going to fundamentally change this industry,” Mr. Marcy said. “Innovation with respect to every aspect of the value chain would seem to be the key.”