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Creating a framework for innovation in your supply chain

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Creating a framework for innovation in your supply chainIn many ways, concerns about supply chain management represent the broader issues manufacturers face in today’s global economy — improving quality, increasing efficiency, cutting costs, speeding delivery and enhancing customer service. All those qualities create an effective supply chain and directly contribute to a manufacturer’s success.

These issues emerged in a recent supply chain survey conducted by Grant Thornton LLP for the National Association of Manufacturers. Some 120 domestic manufacturers discussed the effectiveness of their supply chains and ways they could innovate and improve the flow of goods from supplier to customer.

“At the end of the day, it all hinges on staying competitive globally. That’s why I think so many manufacturers are focused on the supply chain, because it offers ways to increase quality and efficiency while lowering costs,” said Chad Moutray, chief economist for the National Association of Manufacturers.

These are exciting, but uncertain, times for the nation’s manufacturers. With newly elected President Donald Trump comes the hope of lower corporate taxes, reduced regulations and greater domestic job creation. But that optimism is tempered by worries that Trump’s policies on trade and immigration could hamper domestic manufacturers in the global economy.

“We’re obviously in a new era, and there’s a lot of uncertainty if you’re a manufacturer,” Moutray said. “Manufacturers are optimistic about pro-growth policies like tax reform, regulatory relief, a rethinking of the Affordable Care Act and a possible infrastructure package. At the same time, there are anxieties about trade, and people are looking to be on the right side of that from a supply chain perspective.”

The supply chain survey offers insight into how manufacturers are positioned on these timely issues and where they need to be to address future challenges. Among the findings:

  • The respondents, mainly small and midsized manufacturers, are optimistic about the future. More than 20% said they were very positive about their company’s business outlook, while 62% said they were somewhat positive.
  • When it comes to their supply chains, these companies admit they have significant room for improvement. Only 10% said they had a fully implemented strategy to optimize their supply chain performance. Meanwhile, 36% said they had only informal supply chain processes and little measurement of integrated tactical plans.
  • Some 48% said customer demand drove their supply chain strategy, followed by 26% stating that it was competitive pressure, 16% shareholder value, 6% capital management and 4% liquidity.
  • Almost 78% said they focused their supply chain improvement efforts on managing direct costs, such as labor, overhead, material costs and inventory. Only 17% said they focused their supply chain improvement efforts on managing indirect costs like waste, rework, warranty, on-time delivery or bad debt.
  • Respondents said they focused most of their supply chain efforts, and received the most benefits from, building closer relationships with a few key suppliers; centralizing procurement for improved supplier terms and compliance; and nearshoring suppliers for lower transportation costs and other benefits. At the same time, these companies expended significantly less effort on integrating their data systems with suppliers and using automation or robotics to streamline operations.

“The survey results suggest that many manufacturers are behind the curve and have a lot of room to grow. The good news is that many of them have identified the need to do something,” said William Hickey, Manufacturing senior adviser for Grant Thornton and former chairman and CEO of Sealed Air Corp.

Get a grip on your supply chain to navigate change

Rather than assuming a defensive posture because of policy uncertainty, manufacturers should be embracing supply chain strategy as a way to navigate the shifting terrain, said Brad Holcomb, chair of the Manufacturing Business Survey Committee at the Institute for Supply Management.

“There should be more energy spent on supply chain strategy,” Holcomb said. “Being nimble is going to very much be in vogue.”

Holcomb offers these suggestions on how companies can strengthen their supply chain:

•  Build a high-performance team to develop a strong supply base, improve quality and service, and develop a measurement system.
•  Develop a disciplined process to find the best suppliers.
•  Use competition to increase performance and reduce price. Have two regular suppliers of a product and one on the bench to create competition and drive results.
•  Set expectations and goals for suppliers to improve their performance.

Finally, Holcomb suggests manufacturers look at the locations of their suppliers to determine whether offshoring or onshoring is a better alternative.

“Companies should take a hard look at sourcing local — if not as a strategy, then as a precaution,” Holcomb said. “The message is: Be ready or even ahead of the game.”
Manufacturer optimism

The supply chain survey reveals that domestic manufacturers are upbeat about their future, buoyed by a healthy economy and the pro-business leanings of a Republican president and Congress. Indeed, 82% said they were either very positive or somewhat positive about their business outlook.

Consider Automated Industrial Machinery Inc. (AIM), the maker of machinery that bends metal to create components for the automotive, furniture, appliance and shelving industries. AIM, based in Addison, Ill., faces stiff competition from European firms, which due to the strengthening of the U.S. dollar, can sell products for 30% less. Improving its supply chain has helped AIM lower costs and reduce the time it takes to produce and deliver its sophisticated machinery.

AIM is hopeful Trump will come through on his pledge to lower the corporate tax rate, allowing the company to invest more money in R&D, new equipment and marketing, said CEO Constantine Grapsas.

“Lowering taxes would definitely help us,” Grapsas said. “We would reinvest the money — come up with new products that would make us more competitive.”

At the same time, Grapsas is worried about some of Trump’s trade proposals, which include tariffs, border taxes and bowing out of trade agreements like the Trans-Pacific Partnership (TPP). “We were disappointed the TPP did not go through because we were hoping to be able to expand our exports to new markets. But we are hoping for the promise of individual trade agreements with countries. This may be good [because] it will take down the import duty barriers many countries have for U.S. products and level the plain of import-export with them,” Grapsas said.

While acknowledging the importance of a strong supply chain, most survey respondents admitted they have plenty of room to improve their operations. Some 36% said they have an informal supply chain process with little measurement, while 12% have formulated a strategy but struggle with implementation. Only 10% have a fully implemented supply chain strategy, while 42% are working toward full implementation.

Supply chain strategy includes lean efforts

Optimizing the supply chain is a huge opportunity for manufacturers, but something that is more challenging for small- and medium-sized companies trying to run their day-to-day business, said Jeff French, Grant Thornton’s Consumer and Industrial Products national managing partner.

“Companies do have action plans around the supply chain, but either have trouble formulating a strategy or trouble implementing a strategy,” French said. “I think companies tend to focus their energies on other areas like developing a good sales structure, marketing or improving customer service.”

One company that prides itself on its optimized supply chain is O.C. Tanner, a global employee recognition and engagement company that provides technology solutions and manufacturing capabilities for its more than 4,000 customers. At its global headquarters in Salt Lake City, Utah, O.C. Tanner manufactures unique, custom awards for some of the largest global brands.

The company, currently in its 90th year, has worked hard to streamline its supply chain — from improving the sourcing of precious metals used to make rings or lapel pins to modernizing its production to allow same-day delivery, said Gary Peterson, executive vice president of supply chain and production. “It used to take three months to fulfill an order. Now it’s the same day,” Peterson said.

O.C. Tanner has accomplished this by cultivating close relationships with its suppliers, allowing for timely delivery of raw materials such as aluminum, precious metals and acrylics. The production line has been revamped to place needed materials next to the machinery, in what Peterson calls a mini factory. In the past, materials were located throughout the plant and needed to be gathered, slowing production time, he said.

The focus on lean manufacturing and a lean supply chain has helped O.C. Tanner cut down on the so-called “eight wastes,” such as wasted motion and waiting. Employees also are encouraged to write down suggestions on ways to improve the supply chain.

“We’ve made huge gains in efficiency and speed,” Peterson said. “I think the customer expects it. Nowadays, people are used to going online and having the order shipped immediately. I want people to buy a custom good and have it shipped immediately.”

Customer demand a big driver

Many manufacturers feel that customer demand drives their supply chain strategy. Some 48% of survey respondents ranked customer demand as their top choice, followed by competitive pressure at 26% and shareholder value at 16%.

For example, Manhasset Specialty Co. Inc., the maker of music stands, has made its supply chain decisions based on customer needs and beating the competition, said Dan Roberts, president of the company, based in Yakima, Wash.

Most people take for granted the humble music stand, which holds the pages of written music for musicians in the grade school gymnasium and those on the professional stage. Manhasset has been making music stands since 1935, and is renowned for its patented Magic Finger Clutch, which eases height adjustments and allows the stand to hold up to nine pounds of paper.

“Asian competitors began making cheap imitations of its music stands, so Manhasset decided that it needed to improve its supply chain to remain competitive even though the company’s products are clearly superior,” Roberts said.

“The student trumpet player takes the stand for granted, but the band director doesn’t.  If schools buy inferior stands and after a couple of years they’re faltering, [schools] have to replace them. Manhasset has the reputation for having a quality product that lasts for years,” Roberts said.
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Manhasset set about delivering a quality product at a competitive price by building relationships with its suppliers of raw materials — the steel, aluminum, nylon and other goods used to make a music stand. It has multiple suppliers lined up to deliver goods, and the company regularly reviews its options for materials. Manhasset also found suppliers closer to home, and 95% of its components are made in the United States. “It was important for us to improve our supply chain and constantly review it to make sure we continue to make a quality product at the most affordable price,” Roberts said.

Reaching greater efficiencies in its supply chain allowed Manhasset to make a significant decision in 2012: it replaced the 10-year warranty on its music stands to a lifetime warranty. “You can’t make a greater statement about the quality of your product than a lifetime guarantee,” Roberts said. “Improvements to our supply chain made it possible for us to be competitive and continue to produce a product the company is famous for.”

Managing costs

Manufacturers primarily use their supply chains to manage direct costs, according to the survey. It’s easier for a small- or medium-sized company to focus on direct costs, such as labor and materials, than on indirect costs like waste or bad debt.

“It’s understandable how a small- or mid-cap company would focus on direct costs. They don’t have the people or systems of a GM or a GE, for example, to analyze the indirect costs. But looking at those indirect costs is an opportunity for these companies,” said Ward Melhuish, Principal for Advisory Services.

Michael Goeringer, president of Arc-Tronics Inc., in Elk Grove Village, Ill., spends a good deal of time worrying about direct costs. Arc-Tronics, the maker of electronic components and circuit boards for the aerospace, military and medical industries, constantly monitors customer orders and the flow of raw materials to keep down costs and speed production. “Our strategy is to try to minimize the fluctuations and level out production,” Goeringer said.

Arc-Tronics has employed new methods to accomplish this, including meeting with customers regularly to anticipate their future needs and trying to determine just the right amount of inventory to hold in stock, Goeringer said.

Technology has also helped keep costs down. Arc-Tronics has added new machinery that has greatly increased the number of components it can produce, reducing labor costs and speeding up delivery times. “We’re not only competing with lower-cost labor in China and Mexico, but in Wisconsin and Indiana, too. Technology helps us keep our labor costs down,” Goeringer said.

Forecasting the future

While the Trump administration has pledged to enact some pro-business initiatives — lowering corporate taxes, reducing regulations and replacing the Affordable Care Act — survey respondents express concern about the new administration’s trade and immigration policies and how they could disrupt their supply chains.

Manufacturers interviewed as part of the survey strongly supported open trade policies, acknowledging that some of their suppliers and customers, or both, were based in foreign countries.

“Even if companies say they have a supply chain strategy, it could be tossed up in the air with the next policy change,” Melhuish said.

In addition to worries about the disruption of the global supply chain, Trump’s pledge to keep and create jobs in America concerns manufacturers. They already must pay higher wages than their foreign competitors. And manufacturers have a tough time filling factory jobs with American workers.

“We have a shortage of labor to fill manufacturing jobs,” said Hickey, Grant Thornton’s manufacturing senior adviser. “We need to do a better job with apprenticeships and technical training to make sure we turn out the right people to do the job.”

Adopting a well-thought-out supply chain strategy could strengthen the supply chain and ultimately lead to the manufacturer’s greater success.