4 January 2010

As the regulatory landscape becomes even more complex for manufacturers, Lindsay James takes a look at the challenges of compliance and the solutions that are giving the most forward-thinking businesses competitive advantage.

Regulations are so entrenched in today’s manufacturing sector that it’s impossible to avoid them. From the Restriction of Hazardous Substances (RoHS) and The Waste Electrical and Electronic Equipment (WEEE) through to the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) and environmental regulations, manufacturers face a constantly changing regulatory environment that can be costly for them to adhere to.

“Regardless of which business you are in there is no escape,” says Karel Crombach, EMEA industry market development director for Microsoft’s Worldwide Manufacturing and Resources sector. “We now live in a transparent market in which we both sell and source from anywhere in the world. This means that regulatory compliance is having a significant impact on the manufacturing industry in particular.”

Thomas Lantermann, technical consultant at Mitsubishi Electric Europe, echoes Crombach’s thoughts, adding that the regulatory landscape is becoming more and more complex as time goes on. “Some of this can be traced to the lead shown by the pharmaceutical industry with the 21 CFR part 11 regulations,” he says. “Other industries such as water and power have regulatory obligations to ensure they are protecting the environment. The automotive industry requires vehicle component traceability for years after the parts have been installed to ensure the correct delivery of spare parts in the future.”

What’s more, as emerging markets such as China and South Korea have developed their own regulations – in some cases going even further than the EU – the situation created can be one of serious confusion for manufacturers. As more and more countries implement different regulations and reporting structures it becomes more difficult to confirm that a product has the right make up to be sold in one country or region, let alone all of them.

“Increasingly, manufacturers operate in the global economy, which increases the complexity of compliance,” says Craig Rode, Microsoft’s worldwide industry technology strategist for high tech and electronics. “Companies that sell globally need to ensure that they understand and abide by the regulations for each country or region in which they do business. Furthermore, complex supply chains which often span the globe mean that the responsibility for compliance is shared among many partners.”

Increasingly, manufacturers operate in the global economy, which increases the complexity of compliance

Craig Rode, Microsoft Rode puts this into context: “Imagine a product being sold in Germany,” he says. “This product is designed in the US and assembled in Japan from components manufactured in China and Vietnam. This product would have to abide by the environmental standards WEEE and RoHS. And the manufacturer would be responsible for compliance by its supply chain to these standards. On top of that, if any of the design could conceivably be used for a military application, the control of access of some of the engineering information would be impacted by the US International Traffic in Arms Regulations.”

Without the right technologies, manufacturers can spend unprecedented amounts of time collating information to work out whether they are compliant with regulations or not. Much of this information is held in disparate systems that contain silos of information.

Lantermann explains: “The problem is, most plants contain an accumulation of technologies assembled over a long period of time. Hence the challenge may not be collecting information, but being able to access it, share it and present it in an understandable way,” he says.

Andy Kennington, EMEA product marketing director at Siemens PLM Software concurs: “Requirements management is time-consuming and costly when customer needs and programme targets are spread across too many applications and information silos. In these instances, manual synchronisation is required to stay up to date. Companies need an integrated solution for requirements management that facilitates faster planning, immediate corrective action and total impact visibility,” he says.

Despite these challenges, the risks of non-compliance are great and can cost companies millions of pounds through lost market share, recalls and fines. Take the recent case of Mattel and its Fisher-Price subsidiary, for example. The companies were forced to pay a US$2.3 million civil penalty for importing and selling toys that contained excessive levels of lead, a violation of a 30-year-old ban on lead paint in toys.

Another example comes from Sony, who last year incurred significant losses when it had to recall six million potentially faulty Dell and Apple PC batteries. The estimated cost was between US$175 million and US$265 million. Sony estimated that the cost of replacing the batteries will deduct between 16 and 24 per cent of its predicted operating profit for the financial year.

In the food industry, UK chocolate giant Cadbury faced huge recall costs when it withdrew over a million chocolate bars in June 2006, which may have been contaminated with salmonella. As a result of this, Cadbury announced lost sales of £5 million and recall costs amounted to £13 million with a full-year cost estimated at £20 million. More recently, Cadbury faced further recall crises when the warning ‘may contain nuts’ was left off Crème Egg packaging.

Fortunately, for large, well-known companies like these it is possible to pay the fine and come out of the other side relatively unscathed. But for the smaller manufacturer, the arduous challenge of turning around a tarnished reputation can be fatal.

Because of this, technologies are constantly evolving to aid manufacturers in their quest for compliance. But how do manufacturers know which solutions to choose? “What is needed is a requirements management solution that can manage these risks and influence product decisions as early as possible,” says Kennington. “This should happen ideally while product development is actually happening rather than later in the product lifecycle where change becomes much more expensive.”

Lantermann says that the first step is to identify solutions that can communicate to a range of systems, so that all plant systems can be connected. “Secondly, there needs to be a way to take data from any of these systems and share it throughout the company,” he says. “Thirdly, it needs to be presented in a way that best suits the needs of the business so that issues can be identified and acted on immediately. Today, solutions exist that meet all these requirements. However, often the challenge is making them all function together. Hence a final step is to identify vendors who will take overall responsibility for the system, preferably without excessive cost.”

Rode says that by deploying the right tools, manufacturers can automate required tasks, collect, retain, and centralise information from disparate systems, and provide dashboards indicating compliance or non-compliance, giving corporate decision-makers the ability to determine if action is required. “The companies that make it easier for their employees to comply with controls, have a much better chance of success in meeting some of the above challenges in terms of buy-in,” he says.

Maryanne Steidinger, commercialisation director at Invensys, says that those manufacturers that implement the right compliance technologies can reduce the risk of product breaches and, in some cases, eliminate the chances of them happening altogether. “With much better systems of record, more sophisticated data storage and software applications that allow comprehensive ‘what if’ analysis, manufacturers can avoid many of the situations where a breach would occur,” she says. “If there are breaches then manufacturers can very easily access what happened, when it happened, how it happened and show agencies why it isn’t going to happen again.”

Companies that take on compliance efforts are finding that their newly implemented selling, manufacturing and service processes provide a competitive advantage. Properly implemented, these tools can reduce the manufacturing cost of quality and warranty management, while minimising the negative impact that recalls and poor quality have on the brand. The result is improved customer satisfaction and increased profits for the organisation.

“The benefits of these systems are manifold,” says Steidinger. “Not only do they require less sophisticated IT support to run reports, but they also allow for complete visibility into an organisation’s compliance status. Reports can be pre-populated and refreshed with real-time data, so these are really iterative solutions that can be run on a weekly, hourly, or even 15 minute basis.”

“These technologies provide a true window into all operations for those who need it,” explains Lantermann. “For management, they can get top level information such as production data, efficiencies and quality information, all presented in a way that suits them. Maintenance can track machine faults and plan repairs, ideally from a single desk. The end result is being able to see almost any parameter of the operation from the status of a photoeye to invoices payable, all from a single, unified information system. Moreover, being able to act on this information in a timely manner brings numerous productivity and hence financial and regulatory benefits. Conditions that may lead to substandard products being manufactured are identified as they occur and corrective action is taken. Potential regulatory violations can also be prevented before they happen. Overall, the enterprise runs more productively and within the law. And of course, this information is accessible anywhere in the world at any time.”

As time goes on, compliance isn’t going to go away, but with the right technologies in place it may get a little easier. “Complying with regulations will be even more important in the future,” says Microsoft’s Crombach. “More and more off-the-shelf solutions will have regulatory compliance features included and business intelligence will allow manufacturers key insight into their compliance status and enable customers to quickly respond to a changing environment.”

“As more manufacturers drive to become global players, and as their supply chains broaden, the complexity of compliance with regulations will continue to increase,” says Sai Sireesh Pachava, director of risk management and compliance industry strategy at Microsoft. “Governments will continue to create regulations around environmental, financial and business issues. Manufacturing firms will therefore have to invest in systems which automate and simplify compliance. Microsoft, with its partners, is well suited to provide affordable, easy-to-use solutions in this area.”

This article first appeared in the Winter 2009 edition of Prime magazine.

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