Characterised by lower fixed costs, increased efficiency and scalability, and an overall ability to improve competitiveness and profitability, the asset-light business model is a great fit for manufacturers. The model itself allows organisations to focus on core competencies and outsource non-core activities - such as production and logistics - to other companies.
Apart from the obvious business advantages, the model's popularity has been driven by the business climate brought on by the pandemic. The sudden and widespread disruption highlighted the need for businesses to be flexible and agile to survive and thrive in times of uncertainty. Meanwhile, the economic impact of the pandemic was putting pressure on companies to reduce costs and increase efficiency to maintain profitability. In addition, the highly disrupted global supply chains made it difficult for companies to access the resources and expertise needed to operate effectively.
Savvy operators quickly realised that this perfect storm of challenges was greatly subdued by the asset-light business model, allowing them to be more agile and responsive to changes in the market, lowering their profit volatility. But its rise in manufacturing can be equally attributed to digitisation imperatives, the need to meet customer demand, and the capital requirements behind growth.
In this article, you'll learn the advantages of an asset-light business model and the technology foundations central to successful asset-light operations.
Let's begin by exploring the advantages of an asset-light business model in more detail.
Reduced TCO
The asset-light business model typically involves outsourcing the production of goods to other companies rather than owning and operating production facilities. This approach dramatically lowers the fixed costs - such as storage, transportation, and maintenance - and capital expenditures typically associated with purchasing and operating specialised machinery and production facilities.
Increased flexibility and agility
By carefully managing and monitoring the outsourcing process, manufacturing companies can reduce the impact of unexpected events on their profits. For example, if a manufacturing company is outsourcing production to a supplier who then experiences unplanned downtime, they can switch to other suppliers to maintain production levels and minimise the impact on the bottom line.
The model also introduces more flexible customisation capabilities. For example, manufacturers can source the needed parts, modify the designs with their suppliers as required, and then customise the product in-house by applying their own intellectual property.
Support for innovation
By outsourcing capabilities – whether people, process or technology - manufacturers can focus on their core competencies, such as product development and innovation, while also being agile enough to capitalise on new opportunities.
Access to expertise and resources
Working with a network of suppliers and partners can provide manufacturers with greater access to the resources and expertise needed to continue operating in a challenging environment without hiring new talent. In addition, a wider range of expertise and specialised resources allows manufacturers to improve the efficiency and quality of their operations.
Transitioning to an asset-light model with cloud ERP
There's little doubt that asset-light strategies provide pathways to fuel growth and strengthen financial profitability in the manufacturing sector. But manufacturers must establish new processes and adopt supporting technology to transition to an asset-light model and effectively harness the advantages.
Modern manufacturers already use cloud ERP to automate and streamline operations and improve efficiency and productivity. This is because cloud ERPs solve many challenges for manufacturers by offering complete visibility across the supply chain, providing a robust, unified system that breaks down operational silos and gives manufacturers total control over manufacturing, logistics and operational supply chain right through to the sales.
When introducing the asset-light manufacturing model, cloud ERP is just as vital for supporting new agile and resilient business practices.
A comprehensive cloud ERP includes modules for procurement, manufacturing and inventory management and brings all of this data together and consumable in the form of dashboards. With real-time access to production data, asset-light manufacturers can make informed data-led decisions around production schedules, inventory levels, and resource allocation and identify and quickly remediate potential bottlenecks and disruptions in the supply chain.
Access to a single communication platform and data sharing also facilitates better collaboration with external partners - such as suppliers and logistics providers - helping manufacturers optimise their supply chain and improve the efficiency of their production processes, even when dealing with the complexity stemming from managing multiple outside parties.
In addition, cloud ERP is invaluable for managing an asset-light manufacturer's overall financial health and making informed business decisions. For example, capabilities such as budgeting, forecasting, and financial reporting can be used to support cash flow projections - estimates of a company's future cash inflows (revenues) and outflows (expenses). With these tools, manufacturers can better understand their financial performance, identify trends and opportunities, and plan for and manage product demand fluctuations.
For example, suppose a manufacturing company knows that demand for its products tends to fluctuate over time. In that case, it can use cash flow projections to anticipate these changes and adjust production levels with third parties accordingly. This avoids overproduction, which can be costly in terms of materials, labour, and other resources. By keeping production levels in line with demand, manufacturers can save money and increase profits.
As manufacturers look to run leaner, more agile operations, cloud ERP has become a defining technology helping them achieve their growth and competitiveness goals.
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