With the dramatic decline in manufacturing demand that followed the economic crash of 2008, manufacturers globally learnt just how difficult it is to turn around a global supply chain at short notice. They also witnessed firsthand the financial implications of failure to do so.
Despite the continuing signs of economic recovery, this lesson remains engrained in the memory of many companies and is one of a number of factors placing increasing pressure on manufacturers to localise their entire ecosystem in order to minimise their exposure to supply chain risk. The further the distance between the parties in the supply chain, the harder it is to maintain close collaboration, communication, and trust – thus the exposure to risk increases.
Another factor driving the localisation trend is labour costs. While emerging markets such as China and India have traditionally been attractive to manufacturers because of the lower wages, the latter have risen significantly in recent years, eating into already tight profit margins.
There is also the practical challenges supply chains face when operating in a global economy. These include fluctuations in foreign exchange rates, protectionist politics and other barriers to free trade such as local legislation and regulation associated with public health or environmental concerns.
A move to source goods locally not only eradicates these issues but helps businesses reduce transport costs and emissions, which is becoming a significant consideration for companies looking to address the sustainability agenda by lowering their carbon footprint.
As well as the practical considerations that need to be taken into account when managing a global supply chains, there is increasing concern about the risk presented by natural disasters, particularly in the wake of Fukushima. The Japanese earthquake had a devastating impact on supply chains in 2011, particularly for the automotive industry, where assembly plants worldwide were disrupted.
For companies that rely on global supply chains, a more localised approach to procurement and an investment in local suppliers can lower logistical costs and ensure reliable access to goods and services. It can also provide greater flexibility, efficiency and control. However, these benefits will not be realised unless companies are prepared to invest time and effort in nurturing stronger relationships with all their suppliers.
A recent study found that the average manufacturer in the UK has around 190 suppliers. Despite the supply (or value) chain being complex and comprising many parties, there remains a tendency for manufacturers to talk only to immediate partners. OEMs usually deal direct with their tier one suppliers who in turn manage their suppliers who in turn manage their suppliers and so on. Unsurprisingly, visibility of lower tier suppliers is regularly cited as their greatest management challenge by the, often multinational firms at the apex.
According to IBM’s most recent Global Chief Supply Chain Officer Study, many supply chain executives argue that their organisations are simply too busy to share information, or do not believe collaborative decision making is that important. Instead, they are focusing their efforts on strategy alignment, continuous process improvement, and cost reduction.
Certainly, the objectives of suppliers differ according to their position within the chain. OEMs and primes look for products at the right price, delivered on time and with the right quality. They also need stability in their supplier base, because establishing new relationships is not only a significant undertaking, but introduces risk.
Smaller firms also require stability, as they often have to invest relatively large sums to comply with the stringent quality, manufacturing and business standards set by OEMs and primes – making length of contract particularly important. This is why the ultimate aim for many smaller manufacturers is to move up the technology chain. By becoming a supplier of more specialist components, they are harder to replace.
So supply relationships contain within them a tension between, on the one hand the need for large firms to have the security of supply that having options in the market gives them, and on the other, the need for smaller firms to have the certainty of a settled stream of work which they need to make investment decisions. Resolving that tension can only be achieved through a recognition of common interest and trust. Both can only be reached as a result of a relationship based on constant communication. Relationships that consist of more than just despatching a batch of components and raising an invoice are far more likely to be sustainable in the long term.
One of the key aims of the UK Manufacturing Zone at MACH 2014 is to provide the opportunity for smaller manufacturers to network with blue chip companies operating in, among others, the automotive, aerospace, nuclear and medical sectors. As well as strengthening relationships between all levels of the supply chain, the UK Manufacturing Zone will provide smaller firms with valuable insight into the needs of OEMs and their future vision for supply chain manufacturing.
Communicating with clarity
Relationships based on trust and transparency are central to keeping the supply chain flowing and is the reason why informal contacts that are created at networking events like MACH 2014 can be so useful. Establishing the necessary communication paths, mutual understanding and respect however, entails more than simply telephoning or meeting with customers and suppliers every so often. It takes time, effort and close collaboration. It also requires effective two-way communication across the supply chain.
Manufacturers will need to meet on a regular basis to build an understanding of what the financial and technical pressures are, as well as the delivery pressures dictated by the progress of the schedule. Manufacturers will often share the same kind of technical and investment risks regardless of size. Nevertheless, they must meet regularly to understand those risks both up and down the supply chain, and who bears them, especially given that risks change over time.
Bringing the whole team into the equation, not just the sales manager and the buyers but the engineers and designers – who make a beeline for MACH because of its unique position as a technological showcase – can be the difference between a commercial relationship succeeding and failing.
Suppliers must provide clarity and transparency on their capacity and constraints. Crucially, they must be honest and avoid making promises they cannot deliver. If a supplier signs a contract that agrees a 300 per cent variation in volumes week-on-week, they should have this capacity available and not be surprised should the customer actually ask for it. Companies that over-promise are soon found out.
Likewise, suppliers must demand absolute clarity from their customers on their volume and schedule requirements. For example, if they order a specific number of components for a specific date, they need to check back once they have manufactured their products to ensure that the exact number of components purchased was used. If there is a discrepancy, the customer should be under obligation to inform the supplier immediately so that they can either increase their production, or scale back accordingly.
Problems occur when a delivery date is pushed back, brought forward or cancelled, or when an order volume is changed. If a manufacturer is not communicating effectively both upstream with its customers and downstream with its suppliers, then that change won’t be effected through the supply chain properly and there will be some members of the chain whose production will be out of sync with what is now required – something that can introduce considerable cost.
Rules of engagement
Entering into a well-designed contract from the outset helps cement a solid working relationship and establishes clear rules of engagement. Any issues surrounding penalties, litigation and NDAs can be addressed by making sure that the details of the contract are right for both parties. For example, smaller players can add clauses that set manageable limits on those liabilities, as well as new risks that are creeping into contracts such as liabilities surrounding inherent defects.
Smaller players need to understand exactly what the customer wants, needs and expects, and manage that expectation in the right way. It is not just about negotiating on price, but recognising the value that is being provided to the customer through a proactive approach to the relationship. Managing your suppliers should be about much more than just keeping them on time and to budget. Larger players have to understand the technical and business risks their suppliers face – after all, they can impact them too.
The key is transparency between supplier and customer. Fluctuations in one part of the chain will be felt up and down it. If there is visibility of potential pitfalls then they can be avoided or managed around. Sharing information at an early stage is essential so that plans can be put in place by all parties to make the best of situations that will inevitably occur.
This can prove essential when the unexpected occurs and conversations become more difficult. If time and money has been invested in a relationship, customers will be much more inclined to ensure that the relationship with the supplier survives intact following a particularly challenging situation. As such, the value of a solid relationship is most apparent during the stressful times when schedules change and place additional strain on the supply chain.
Moving up the chain
For smaller players looking to work with some of the industry’s largest names, the rewards can be great. They will likely be exposed to extremely high-quality techniques in areas such as lean manufacturing and design for manufacture, and total quality management. Much of this can drive continuous improvement within their own business, elevating their capability and credibility, additionally enabling them to attract more OEMs.
Although risks are also involved there are steps that can be taken to minimise these. Maintaining close relationships and communicating regularly with supply chain partners ensures firms can gain a good understanding of not only their requirement, but also of how they build products and what their cost drivers are. This also makes it possible for suppliers to assess what their impact is on their customer’s business. Likewise, suppliers must consider the impact on their own business should a customer want to double their output but they are unable to respond in time – despite having signed a contract confirming they could.
In essence, the longer your supply chain the more risk there is and the closer you suppliers are located to you the easier it is to maintain close collaboration, communication and trust. Having a forward view of the customer’s requirement through close collaboration helps to avoid any issues with capacity and schedules. This type of visibility should also be shared by manufacturers downstream, to improve stability and minimise supply chain vulnerability.
It is our hope that exhibitors and visitors alike will use MACH as an opportunity to forge closer relationships with their supply chain partners, which will pay dividends in the years to come.
About MACH 2014
MACH was established more than 100 years ago by the Manufacturing Technologies Association (MTA). It is the largest manufacturing event in the UK, attracting in the region of 450 exhibitors and more than 20,000 visitors. Taking place 7-11 April 2014 at the NEC in Birmingham, the biennial exhibition brings together the latest developments and best innovations to come from the manufacturing technologies sectors. New for this year, the UK Manufacturing Zone will showcase blue chip OEMs and tier one manufacturers including Airbus, Messier-Bugatti-Dowty and Rolls Royce. MACH provides manufacturers of all sizes and sectors the chance to network with key clients and prospects, gaining insight into their needs and future vision for the manufacturing supply chain. For more information visit www.machexhibition.com or register your interest here.
About the author
Graham Dewhurst is the Director General of the Manufacturing Technologies Association. Graham has a wealth of industry experience spanning almost thirty years in manufacturing.
Beginning his manufacturing career in 1979, Graham worked for the National Supply Company (a division or ARMCO Inc) before entering the manufacturing technologies sector in 1988, as Finance Director at Holroyd Machine Tools, from which he progressed to Divisional Finance Director for Renold Engineered Products in 1997 followed by Divisional Managing Director in 2001 for Renold Precision Technologies. During his time in the industry Graham offered a great deal of support and expertise to the MTA, latterly as Hon Treasurer of the Association. Graham became MTA Director General in 2007.