The Falling "Cost of Distance" and what it means for manufacturers

Ed Marsh | May 25, 2018

Reframing the disruptive technology debate - it's falling "cost of distance"

Introduction to SignalsFromTheOP

Guide to episode

  1. We often focus on disruptive technology without really understanding the business implications - "cost of distance" is falling and that could change manufacturing
  2. How might new technologies fundamentally alter the model of centralized factories that aggregate materials and components and then ship them out?
  3. How would that impact employment? Sales channel? What new global opportunities are created?
  4. What secondary effects should be anticipated? Declining industrial real estate values?
  5. Is your company positioned to at least consider these implications to your business? Via your customers' and their customers business perspectives?

Transcript follows

Hi, I'm Ed Marsh, thanks for joining me for this episode of Signals from the OP. Today we're going to talk about cost to distance, how it's falling, and what that means for industrial manufacturers. If you're familiar with the Signals From the OP series, you know that I tackle topics that are a little bit controversial, may not get a bunch of attention or discussion, but I believe have significant strategic implications for industrial manufacturers, and this is certainly one of them.

So if you and I were sitting together today in a room, and I asked you to raise your hand if you use Amazon Prime, I know a lot of hands would be going up. Mine would, I mean for me the realization happened one day when I ordered a $3.70 pack of highlighters to avoid driving 30 minutes to Staples. I needed them, needed them shortly, and that was the best answer.

This low cost of shipping, low cost, or no cost shipping has dramatically changed the way we make decisions as consumers. It's reduced the cost of distance for our consumer decisions. And, in fact, it's done it globally. I mean, my wife buys stuff through Etsy from around the world. It's happening in business too. Now, we think of it a little bit differently, but the implications of Manufacturing 4.0 trends are potentially much bigger, even though they may not be as obvious to us.

Karen Harris, who's the managing director of Banes macro trends group has been doing some really interesting work in research around this. If you find this an interesting topic, I suggest you look up some of the things that she has done. But when you look at this question, cost of distance from the perspective of B to me manufacturers, it's really interesting potential implications.

First, what does it even mean to be a traditional manufacturing factory? If a decentralized model potentially changes the way we think of factories. I mean factories were built as the centralized location, both in supply chain context, and geography, to facilitate the collection of raw materials, the creation of the product, and distribution to the end destination.

But what will 3D printing and block chain to the extent that authentication of quality and original source of important, what will those do to cost of distance, to manufacturing? How distributed will manufacturing actually become? Will we even have factories? That obviously has implications to the workforce. If the workforce no longer convenes everyday in a centralized factory, then employees could be disbursed, they can be in sales, or you know, they could even be individuals, spread around with 3D printer, doing their thing.

The difficulty that companies have hiring some of the advanced manufacturing skill sets, that really is one of the barriers to growth these days, that's going to diminish in importance as those skills are either less critical, because of automation, or less in demand because they're less centralized.

The centralized monitoring and remote trouble shooting of machines, combined with even some sort of a kind of call it a consignment, 3D printing program, to create replacement parts on a customers floor, means that the cost of distance related to services support falls dramatically. You may not even have to have field service technicians, maybe you have one, and in one location around the world as opposed to having them distributed, working out of their homes or offices, around the world.

How about the role of distance, or proximity in purchasing decisions. I mean if everybody can jump on a Zoom meeting, have a white board functionality, and other tools and be able to do business so they're synced together, then maybe we can make purchasing decisions that way. What's the role of sales channel going to be? I mean sales channel was originally conceived as a way to help manufacturers overcome the vast geographies and the cost of distance at the time.

If cost of distance isn't a factor and geography becomes irrelevant, than what's the role of sales channel? It becomes one of the distributing insights rather than informational products obviously. Global, global markets open up in huge ways as the cost of distance falls. It's a big opportunity for many American companies, who don't export nearly as much as they could. And then, those are kind of high level issues, first order issues, but there's a lot of cascading implications, many of the small and middle market industrial manufacturing companies I work with actually have a fair amount of the family wealth tied up not just in the business, but in the real estate itself.

The commercial real estate, the factory buildings, the warehouses, etc. If manufacturing becomes distributed, no longer centralized, what does that mean about the impact on commercial real estate evaluation? And if that falls, what does that mean in terms of wealth accumulation, and the families business decision making process. So there's a lot of really fascinating stuff that kind of ties into this. Now, obviously this brief video, and this quick exploration of the topic only just scratches the surface of what's a very complex set of questions and inter related set of considerations.

Nobody knows how it's all going to work out, we can't foresee what it's going to be like in three years, or 10 years. But, nobody should be excused for not thinking about it, not trying to anticipate it, not looking for opportunities for considering threats, just because we don't know for sure what it's going to be like.

Find a resource, or a couple of them. People that enjoy this, and have foresight, and do a lot of reading and research, they can complement your in house team that tends to focus on your day to day stuff, bring them in as a consultant, have them help you develop this thinking, and periodically revisit it. Create some lists of opportunities, some lists of threats, and think about ways that this falling cost of distance is going to impact your business, your market, and as I always say it's really important to consider your customers and their customers as well, because those are the early indicators, and those are where the opportunities and threats are really going to come from, that will impact your business.

If you like this kind of contrarian or slightly off beat look at some of the issues that are percolating up, that are going to impact industrial manufacturers from a strategic perspective, I'd welcome you to subscribe to these periodic video blogs. You can do that at, that's, I'm Ed Marsh, thanks for joining me.

strategy guide for manufacturers