The Customer Returns to the Throne
KPMG: Crisis precipitates a change of focus for manufacturers in CEE

It’s a new era for manufacturers in Central & Eastern Europe (CEE) whose base has never been exposed to such dire forces, both within and beyond their control.

But according to the results of a survey of consumer and industrial markets manufacturers in CEE by KPMG - entitled Redefining business models: Colliding, Surviving or Thriving? How Consumer & Industrial Manufacturers in Central & Eastern Europe are navigating the crisis - their success or failure may not be contingent upon the global economic crisis but on what, or whom they place at the top of their priority list.

KPMG’s survey received responses from 100 companies from nine countries in the region. The Survey focuses on five key themes: Strategic and operational initiatives; Biggest challenges; Innovation & new product development; Growth forecasts; and Market share development.

“Just look for example at how Toyota is adapting,” says KPMG’s Tom McDaniel, who authored the study. “In the past their customers were always the top priority, but in more recent years they appeared to be more focused on growing their business and increasing profits. They were just too preoccupied with the latter instead of manufacturing high quality automobiles for their customers, that met their needs and were competitively priced.”

This goes for the CEE region’s manufacturers as well, says McDaniel. “If they’re too focused on operational processes at the behest of, for example, their customers they’re cutting off their nose to spite their faces.”

He continues “One response that we heard over and over in our Survey was that for these enterprises to define their own success they must look at the explicit indicators of their success, which means they must know their markets and their customers. In the context of the crisis it’s clearly a ‘fight or flight’ situation and very likely could result in many enterprises folding.”

But what might make for a terminal situation for some businesses in CEE can offer prime opportunities for others, according to McDaniel.

Manufacturing enterprises in the region must not be faring that poorly, at least according to the KPMG Survey’s respondents whose revenue growth appears strong in most markets; profits are also apparent in most cases, while employee numbers have decreased, if slightly.

“With a potential recovery right around the corner we were also curious to see how companies will approach the market as things return to normal. What we found was that while there’s some tenuousness, manufacturers in CEE seem to be saying that they are broadly optimistic. They’re telling us that they really expect to increase profits and grow market share in the next three or so years, but not necessarily at huge margins.”


In terms of costs, says KPMG’s McDaniel, what appears to be the biggest cost centre for a business may not always be the place to start slashing. According to survey respondents material costs appear to tower over both labour costs and the costs of overhead. But should they be the first thing to be cut?

“They may be well versed in reducing costs,” explains McDaniel of the region’s manufacturers, “but what they are actually able to reduce is another story. Just take material costs, for example, which most of our survey’s participants said they were focused on. While it may be possible to negotiate with suppliers to reduce some costs, doing that could cause problems further on up the road – global suppliers might decide it’s not worth the hassle to have to deal with smaller manufacturers who are rocking the boat on price. So maybe the benefits are only short term.”

He adds, “Reducing overhead costs might be a better way to go, perhaps taking on a shared service centre to take on back-office activities.”

Managing capacity is another key area KPMG’s survey considers; CEE manufacturers might also. Within this aspect, operational concerns, like the maintenance of high tech manufacturing machinery, can be exorbitantly expensive and best done in house to achieve competitive advantage.

“Just as an example of this,” cites McDaniel, “one of our survey participants was spending over EUR 1 million every year to have special technicians flown in from Germany to maintain sophisticated equipment at a plant in our region. By training local employees to do this, costs could be vastly reduced.”

One surprising result of the Survey was that organisational restructuring appears to be a low priority for manufacturers in CEE. “They also appear to be slow adopters of performance-enhancing processes like Lean Management or Six Sigma, which means that they are only partially feeling their benefits at this time.”

He adds, “They’re not a panacea for a company’s woes, however – enterprises need to focus on the overriding principals of these processes, not just the techniques, and management needs to fully back their implementation.”

While these processes can be highly effective, KPMG’s report alludes to the ‘smoke and mirrors’ aspect of how they are sold to management and points out the fallacy of one methodology being the perfect fit for all.

“Our conclusion,” explains McDaniel, “is that this is a time for reflection - manufacturers in CEE should take a look at their people, processes and strategic direction. If they are in a good position, they might be able to isolate a new market segment and seize it. Those that act now will likely find themselves well positioned in the years to come.”

“While there’s no ‘one size fits all’ formula as to how each and every enterprise should act, KPMG specialists can introduce well-tested methodologies to manufacturers in Central & Eastern Europe for helping them to evaluate all of these factors to help them either make it through the crisis or identify and capitalise on the opportunities that are out there,” he says.