Leveraging the Supply Chain
Dell does it. Johnson Controls does it. Toyota does it. Do you do it?
Leading manufacturers have improved the efficiency of their assembly lines and boosted profitability by focusing on how they interact with suppliers and customers.
Traditionally, supply chain management was synonymous with logistics and the movement of materials. Today, it carries a broader definition, encompassing the management of materials, information and funds from the initial raw material supplier to the ultimate consumer. Coordinating all three components results in a much smoother operation and achieves greater efficiency, while improving customer satisfaction.
The goal of supply chain management is to ensure that sourcing, production and distribution are accomplished at the lowest possible total cost. Anywhere from 40 percent to 70 percent of costs are typically embedded in the supply chain. And, total supply chain costs can vary by as much as 6 percent of annual revenues between companies in the same industry sector. Three key components of overall supply chain management costs are order management, materials acquisition and inventory carrying.
"Contrary to popular belief, ‘supply chain management' does not mean ‘dump your inventories on your vendor,'" says Rebecca Morgan, president of Fulcrum Consulting Works Inc. (Cleveland). "The supply chain goes both directions and more than one level deep. Supply chain management looks at taking cost out of the manufacturing process, not just shifting it somewhere else.
"A lot of people incorrectly think that ‘supply chain management' only means looking backward toward suppliers," Morgan points out. "In reality, the supply chain requires people to look forward and backward.
"Your company's efforts to succeed in the marketplace will go no further than the capabilities of the weakest link in the chain," adds Morgan, who says manufacturing engineers play a key role in the process. "If you have poor quality suppliers, you cannot be effectively successful. Similarly, if your customers are not willing to participate in enhancing the effectiveness of the chain, they may well be the wrong customers."
Supply chain management cannot be ignored in today's increasingly competitive world. "Globalization is driving the trend toward supply chain management," says Pierre Mitchell, director of supply chain research at the Hackett Group (Atlanta). "The supply chain is a key area where companies are focused on driving down cost and improving effectiveness. But, you can't just assume that what you've historically done still works in today's business climate."
Through supply chain innovation, Mitchell says manufacturers are transforming the way they compete in the global marketplace. However, flexibility is difficult to achieve in the face of shorter product life cycles, increased customer demand, global competition, outsourcing and offshore production.
"Manufacturers' supply chains are becoming enormously complex as a result of three forces: Intense pressure that companies face from cost reduction; the promise of new markets; and rapid product innovation," explains Gary Coleman, global manufacturing industry leader at Deloitte & Touche (New York). "These elements will continue to create an increasingly fragmented network as companies' engineering and manufacturing activities become more dispersed."
Follow the Leaders
The leading companies in all industries view their supply chain as a strategic asset. According to research conducted by Pittiglio Rabin Todd & McGrath (PRTM, Waltham, MA), manufacturers with superior supply chain practices are 40 percent more profitable than other manufacturers. Specifically, they have 22 percent fewer inventory days of supply and a 28 percent inventory cost advantage. They also have 44 percent lower obsolescence for raw materials, work-in-progress and finished goods.
"There is a proven correlation between applying more advanced supply chain practices and supply chain cost and profitability performance," says Joseph Roussel, a director in PRTM's global supply chain management practice. "Our benchmarking shows that companies with more mature practices enjoy a 20 percent to 30 percent cost advantage over companies with less mature practices."
The electronics and consumer goods industries were early adopters of supply chain management practices. However, other industries, such as medical device manufacturers, have started to focus more on the process.
"Billions in operating margin and trillions in market capitalization separate supply chain winners from losers," says Kevin O'Marah, vice president of research at AMR Research (Boston). "Supply chain management cost says more about next year's profits than last quarter's earnings."
AMR Research recently compiled a list of the top 25 U.S. companies with world-class supply chains. Dell Inc. (Round Rock, TX), Johnson Controls Inc. (Milwaukee) and Toyota Motor Manufacturing North America Inc. (Erlanger, KY) ranked in the top 10, along with retail giants, such as PepsiCo Inc. (Purchase, NY), Procter & Gamble Co. (Cincinnati) and Wal-Mart Stores Inc. (Bentonville, AR).
O'Marah points to International Business Machines Corp. (IBM, Armonk, NY) as a good example of how manufacturers can harness the benefits of supply chain best practices. In 2002, it began to tie all the pieces of the supply chain together. "This required managing more than 30,000 suppliers, offering 78,000 products and operating 13 manufacturing plants in nine different countries," says O'Marah. "IBM transformed its supply chain from a cost of doing business into a competitive advantage."
The results of its transformation have made a significant impact on IBM's business. Over the last 3 years, IBM has reduced cost and expense by more than $12 billion. Inventory levels are at a 30-year low, while the amount of sales is increasing. In addition, IBM has increased intra-division parts reuse from 2 percent to more than 50 percent. At the same time, annual part number reductions range from 20 percent to 38 percent.
New Technology Tools
New technology is radically changing the way products get from the raw material supplier to the parts supplier to the assembly line to the consumer. The Internet and various information technology tools have given IBM and other manufacturers the ability to integrate software applications and databases with business processes. According to ARC Advisory Group Inc. (Dedham, MA), the worldwide market for supply chain management software is expected to grow 7.4 percent annually over the next 4 years.
In addition, radio frequency identification (RFID) technology is revolutionizing supply chain management. It helps manufacturers optimize supply chain effectiveness by increasing the visibility of material flow, collecting real-time data, improving forecasting and production processes, and smoothing out the ebb and flow of supply and demand.
John Fontanella, vice president of supply chain management at AMR Research, says "RFID is answering questions that companies aren't asking yet, but should be in a demand-driven supply chain. Its true value hasn't been realized yet. As experience and confidence grows, RFID will be used to build progressively more complex, revolutionary processes."
The move toward RFID is being fueled by Wal-Mart, which also spurred the development of bar coding 20 years ago. Using RFID technology to track inventory could save the consumer products industry billions of dollars annually.
For instance, AMR Research claims that the supply chain loses 4 percent to 6 percent of total sales as products move from the assembly line to customers. Half of that loss results from failure to restock popular items and much of the rest comes from lost or stolen items.
According to Fontanella, RFID technology allows consumer goods manufacturers to capture accurate information about the location and status of physical objects and track them as they move from the assembly line to the retail store.
"This capability increases the efficiency of individual processes and asset utilization, enhances forecasting and inventory accuracy, and improves the ability of companies to respond to rapidly changing supply and demand with a high degree of certainty," says Lyle Ginsburg, managing partner for technology innovation in the products operating group of Accenture Ltd. (Hamilton, Bermuda). "Companies that wait to use this technology will not only miss out on significant cost savings today but also risk losing their future competitive edge."
According to Ginsburg, new technology tools can dramatically improve production operations, asset utilization, forecasting and inventory accuracy and, ultimately, customer satisfaction by pinpointing the location and status of products as they move through the manufacturing and retail value chain. "These improvements can increase the quality and efficiency of the entire supply chain and lead to significant savings in areas such as inventory and labor costs," explains Ginsburg.
"In the on-demand era, the real opportunity is about how you design a business and all its supplier relationships in ways that really haven't been possible until now [because of technology]," claims Bob Moffat, senior vice president at AMR Research. "Advantage will flow to companies that embrace this new model and demonstrate the ability to simultaneously excel at the fundamentals of supply chain and leverage next-generation management practices."
The Role of Engineers
Unfortunately, many manufacturers still don't understand the basics of supply chain management and how to use it to boost productivity, eliminate waste and reduce time to market. But, engineers can play a key role in helping their companies understand the importance of a solid supply chain.
"Any good manufacturing strategy has to address the supply chain and the value of manufacturing in the supply chain," notes Fulcrum Consulting's Morgan. She says key questions that engineers should consider when developing a supply chain strategy include:
- Who are our key suppliers?
- Whom do they depend on?
- Who are our key customers?
- Do they have a strong plan in place?
- Can the critical components of our supply chain work together for mutual success?
Morgan suggests starting with one or two key suppliers and one or two key customers. "Each company in the supply chain has the right-in fact, it's a responsibility-to be demanding," notes Morgan. "But, each must also be willing and able to contribute to the overall success."
Often, manufacturing engineers only focus on solving mechanical problems. Most engineers talk to vendors about material problems or equipment issues. But, they are not exposed to the entire supply chain.
"Engineers are often not encouraged to talk to many customers and suppliers," claims Morgan. "Traditionally, a lot of purchasing folks don't want that."
When Morgan previously served as a purchasing agent, she says she didn't want engineers coming around. "Engineers traditionally are in a problem-solving mode and are not focused on the cost of the solution," she points out. "That type of mentality often provides a big opening for suppliers to jack up the price."
However, cross-functional teams are an essential ingredient of efficient supply chain management. Morgan says successful companies typically include representatives from all areas of the company, including manufacturing engineering.
"Today, engineers must take a holistic view," adds Adrian Gonzalez, director of the logistics executive council at ARC Advisory Group. "Manufacturing is a key part of the value chain.
"Engineers should take the competitive landscape into account and focus on what the end customer is asking for," explains Gonzalez. In the past, he says manufacturers were in charge. "They had the leverage in the market," Gonzalez points out. "But, now the table has completely turned. The leverage today is at the consumer level. As a result, traditional assembly processes must evolve to be more flexible, nimble and responsive to marketplace demands.
"Engineers must understand the big picture," warns Gonzalez. "Even though they view the world narrowly, they must understand what's going on upstream and downstream. Engineers should understand why manufacturing is an important piece of the supply chain puzzle."
Gonzalez, a former engineer at Motorola Inc. (Schaumburg, IL), says he didn't have a good appreciation for upstream and downstream activities and how they impacted his narrow world. "Globalization adds complexity to the supply chain," adds Gonzalez. "Supply chain management will become even more important as things become more flexible on the plant floor. That means there will be less room for error."