From high volume to high value
Over the last couple of decades, global competition, and an increasing tendency to outsource and offshore manufacturing operations, have driven a race to the bottom in terms of the prices companies can charge for their products. To sustain their profits, these companies are mainly focussing on maintaining or increasing their production volumes.
This approach – the commoditisation of goods – has served many manufacturers well, but that might all be about to change. To maintain and improve profitability of commoditised products, the target market for a given product must grow correspondingly or new outlets have to be identified and deployed.
Population growth has been a key driver in this but has been declining significantly in EU, Northern America, Japan, Russia and China at an increasing rate over the last few decades. By the end of the twenty-first century, the United Nations predicts that the world's population will only grow by 0.1% a year.
Further, in developed countries, populations are ageing and therefore consuming differently. Added to which the preferences of younger demographics regarding how they buy things are shifting, moving to subscription-based models for goods and services, for instance.
One of the potential answers to this conundrum and to remain a competitive manufacturer and achieve growth is to decommoditise products: to shift from producing high-volume products with a low-margin business model to manufacturing products with high added value that target specific end-user needs. In this way, profits can be sustained with lower production volumes.
This process of decommoditisation can be observed in several industries and in many ways. In the petrochemical industry, new business models such as Chemical Leasing are exploited to disrupt the ways in which products are manufactured and used. Circular economy business and organisational principles are being harnessed in combination with new technologies to manufacture high quality products from recycled material. In the fast-moving consumer goods (FMCG) sector, companies are responding to the needs of ageing populations by developing innovative products for the care industry. The food industry is also reacting dynamically to consumer demands, such as for low-calorie or gluten-free products.
Decommoditisation is not a simple process. For instance, listening to and understanding the needs of the end-user are important in order to create products that appeal. For some industries, such as the FMCG, where companies are only a step or two along the supply chain from their final customer, this can be feasible with the current available business processes and infrastructure. However, in some B2B industries, such as the petrochemical industry, the end-user is often far apart from the producer, resulting in a complex and non transparent supply chain, resulting in a difficult challenge in understanding the needs of the relevant end-users. Furthermore, adapting the current production facilities for producing the newly identified high added value products alongside the high volume commoditised products is also a challenging task.
How digital twin supports decommoditisation
The process of decommoditisation can also carry significant risks, but digital technology can be used to mitigate the risks by understanding the requirements of the end-users, and to simulate the required process changes at relatively low costs. Digital technologies enable companies to build, test and simulate different scenarios, providing fresh insight and improving communication along the supply chain to better understand the emerging demands of customers or to identify and engineer the issues stimulating reversed logistics. Think about digital twin tools such as augmented and virtual reality (AR and VR), which allow businesses to run simulations, realise performance improvements and design better products, all within a secure digital space with limited risks and resources.
As a result of employing these digital methodologies, supply chains and processes can be optimised, existing facilities can be adapted based on simulation results and coping strategies can be developed. Of course, once a company identifies and exploits a new niche, it can be guaranteed that competitors will soon muscle in. Innovation, then, needs to be constant.
Royal HaskoningDHV is a global leader in engineering solutions for digital transformation and its High Performance Production Sites programme has the expertise to keep your company ahead of the game as you look to decommoditise your products.