posted on 2/24/2010 12:20:31 PM
Manufacturers caught in the Great Recession moved quickly to cut supply and production. Now, as demand hints at a return, they’re challenged to synch their networks with the rebound.
The mood at Telesis Technologies changed markedly during the early days of 2009. The maker of laser and pneumatic marking systems was gearing up for a banner year of sales when the recession’s wrecking ball smashed its optimistic projections.
“We saw about a 50% drop in business almost overnight,” says Craig Benson, Telesis’ global supply chain manager.
The year 2009 had just dawned, and yet the Circleville, OH, company’s resolutions already lay in tatters. The abruptness with which demand disappeared “really did not give us a lot of time to respond on the supply chain side, as far as cutting off supply,” Benson says. Although Telesis prides itself on maintaining a pull-based production system, the model does include some buffer, and Benson was left with supply in the pipeline that he didn’t want and couldn’t use.
Telesis’ tradition of face-to-face interaction with its suppliers paid off during those frantic days, as the team reached out to makers of machined aluminum parts, pulleys, belts, diodes, and laser beam splitters and asked them to cancel orders and shipments. Ultimately, Benson says, “We did a pretty good job overall mitigating that issue.” Now, the company is busy navigating in a time of diminished expectations, hoping that by 2011 its sales will have recovered to 2008 levels.
Outside Circleville, the larger manufacturing world felt similar strains as the Great Recession eviscerated customer demand across a swath of industries.
Today, Tom Dixon of Getzler Henrich & Associates plies a bustling trade in the aftermath of that shift. In his role as a consultant to distressed companies, he finds that the top priorities for his clients — often manufacturers fighting to survive — apply to any industrial company hoping to brush itself off in the wake of a bruising recession: Get better information on supply chain operations and suppliers, reduce inventories, and find the best manufacturing locations from which to reach customers and produce goods at the lowest cost.
For manufacturers, right-sizing their supply networks is a shifting target in 2010, despite claims that the economy has entered a “new normal.” Patrick Furey, senior category manager at spend management software provider Ariba, says companies’ immediate reactions to the recession — reducing orders and seeking concessions from suppliers — persisted through 2009. Among Ariba’s customer base, he says he hears a common lament: “It’s tough for us to plan capacity because we can’t get a good view of demand out of the market, out of our customers.”
Kelly Thomas, senior vice president for manufacturing at JDA Software, which in January acquired supply chain software pioneer i2 Technologies, says that such uncertainty has prompted even greater interest in a practice that had already become cliché before the recession struck: creating greater visibility into the pipeline, a process often facilitated by sales and operations planning techniques.
Larry Lapide, a research affiliate at MIT’s Center for Transportation and Logistics, says such planning is critical to creating an efficient supply chain.
“My view is that [S&OP is] becoming even more important these days than before,” Lapide says. “Because it’s easy to plan when everything’s all right. It’s much harder to plan when things are dropping … or you don’t know when you’re going to rebound.”
As they work to better understand their customers’ intentions, goods producers are pulling a number of levers in a bid to ensure their near-term health.
Supplier Consolidation
Tim Markley, president of Markley Enterprises, an Elkhart, IN-based manufacturer of sales and marketing support products, including point-of-purchase displays, trade show displays, and large-format graphics, says the main difference between his company’s supply network in the wake of the economic slump is the number of suppliers he works with.
“If I have one vendor to contact for a dozen different products, it makes it a lot easier for me than to have a dozen products with a dozen vendors,” Markley says. “In the past, you probably felt like, ‘I’m going to be taken advantage of if I give too much to one guy.’ However, now everybody’s pretty hungry, so when you said to him, ‘I’ll give you this, but you have to follow my rules,’ they were all willing to do that because they need the business.”
Markley has even established consignment arrangements with suppliers that deliver as much as six months’ worth of supplies to his factory and charge him only as the product is pulled into production.
“I have a bigger supply of material sitting here, but I don’t have my money wrapped up in it,” he says.
Markley is not alone in considering the number of companies in his supply base excessive, Ariba’s Furey says. A typical purchasing manager, he says, might ask, “ ‘Do we really need 85 plastic injection molders? Can we do it with a much smaller number?’ The reality is that they probably can, and they can increase their buying power and partner with better long-term suppliers if they do that.”
Shoshanah Cohen, a director at management consulting firm PRTM, says some of the slimming of the supply base happened organically, as foundering companies were folded into more stable rivals. “You might leave one day and you have five [suppliers], and you come back the next day and it’s one company,” she says.
Dixon says supplier consolidation can be a smart move if done prudently. “Where you can do that you should do that, trying to deal with the select few instead of the many. But,” he warns, “there’s always inherent risk in doing that.”
Telesis looks at the supplier question from the opposite end of the spectrum. The company, which had relied on sole suppliers for many of its parts, has taken steps to build in redundancy as a stopgap in case of supplier failure.
“Now I’m looking at several different suppliers and saying, ‘I need you up and running just in case,’ ” Benson says.
Regardless of whether they’re bulking up or slimming down, however, manufacturers are hedging their bets more often these days.
“A lot of companies have placed a lot more emphasis on approved processes to look at the financial condition of these [supplier] companies on a much more continuous basis, with much more rigor,” JDA’s Thomas says.
The Lure of Nearshoring
“NAFTA and Mexico is certainly on everyone’s radar screen again,” says Nathan Pieri, senior vice president of marketing and product management at Management Dynamics, a purveyor of trade management technology.
Experts say a common reaction to the recession was for manufacturers that saw sales plummet to exert control wherever they could, and, in some cases, that meant reining in the supply chain.
“We did see a noted shift to sourcing closer to home as a result of the recession,” Furey says. “And the dollar’s weakness has [added] a little bit of fuel to the fire.”
Amit Sen, director of business consulting services for the Americas at IT service provider Patni Computer Systems, describes the case of a Patni client in the high-tech market. The company grew up selling its products in the United States and Europe, with a supply chain deeply rooted in China and Mexico. Now, as the tech company eyes opportunities in the BRIC countries, the supply equation is beginning to shift. Sen describes the thinking: “We now have to make sure that we have identical capacity in different parts of the world. It’s not about having capacity in one part of the world and shipping [globally], because it is becoming too expensive.”
NCR Corp.’s experience illustrates the point well, according to Kevin O’Marah, chief strategy officer at AMR Research. For years, the manufacturer of ATMs and point-of-sale checkout systems followed a contract manufacturing model, mostly in overseas locations. But when that network became overextended, O’Marah says, NCR invested in a cutting-edge production facility in the Atlanta area. Now, he says, “They’re a lot more regionalized than they were before. And I think the recession probably high-lighted how important it is to be close to your local market.”
The ideal geographic footprint will vary by manufacturer, Thomas says. “The thing isn’t so much that one answer is better than the others; the answer always changes. You need to have processes in place to capture the new answer as the new answer comes up.”
Built into that answer should be an acknowledgment of one of the basic perils of transporting goods across long distances, MIT’s Lapide says.
“Oil prices are going to continue to be high, so I think that causes manufacturers to source closer” to home, he says. “For a while, manufacturers took their eye off the ball with oil prices,” but recent upward pricing trends may change that, he says. “My guess is they’ll come back to the Western Hemisphere [for production operations], not necessarily back to the United States.”
Controlling Inventories and Footprints
Back in Elkhart, Markley says his company’s belief in lean manufacturing has helped tame the supply chain disruptions caused by recent economic turmoil.
“We want to keep inventories down, and that is a big advantage so that you can use less floor space, have less handling,” Markley explains. “And I think the recession has caused us to look even more seriously at that. When things are going pretty well, you don’t have to push as hard and you’re still getting by.”
Telesis’ Benson also keeps a wary eye on inventories as he hopes for an economic rebound.
“It forces us to take a look at all materials in terms of their usage frequencies and see which ones are turning the most,” he says.
For instance, Telesis is working to cut inventories of “spares and repairs” — parts that don’t circulate through the supply chain often — as it increases stock levels for more-critical parts, all while keeping total inventory at $3 million, half of what it was prior to the recession. Creditors have initiated certain maximum levels of inventory, Benson says. “And, whether we like it or not, we’re tied in to what the banks want.”
Still, Lapide warns against a wholesale reduction in inventories. “You ratchet down the inventory for a variety of reasons, but … if you have it too tight, you won’t be the one getting the upside when it happens.”
And planning for that upside has captured a lot of attention recently, PRTM’s Cohen says.
“Over the last two to three months we’re starting to see our clients get worried about supply,” she says, in particular, whether they will have enough on hand to catch the rebound. “Whereas six months ago it was all about how you control the flexibility so you don’t get stuck with something you don’t want, and how do you make sure your supplier’s not going out of business.”
Meanwhile, the question of sustainability looms. Global manufacturers that sell into European markets are already on a forced diet when it comes to the carbon output of their production activities and supply chains, and their counterparts in the United States could soon be on the scale, too. Although climate legislation has taken a backseat to other legislative efforts, the U.S. Environmental Protection Agency is preparing new rules on greenhouse gas emissions, and some say it’s only a matter of time before companies will need to mitigate their environmental footprints more than they already do.
“There’s no question that manufacturers are preparing, and in some cases already reasonably well prepared, to begin to measure their environmental impact,” AMR’s O’Marah says (see DeepDive: Reader Poll).
And the timing may just be fortuitous, Patni’s Sen. The growing trend of supplier collaboration will help facilitate any greenhouse gas monitoring that manufacturers may be responsible for in the future. He even goes so far as to say that supply chain collaboration is “becoming sexy, because with everyone’s inventory sitting around, everyone wants to peek at it.” Goods producers working today to create electronic portals and information sharing between themselves and suppliers will have a foundation for the data exchange necessitated by any kind of climate regulation regime to come.
His Patni colleague John Vaughan, director of industry solutions for the Americas, believes that such collaboration will also determine competitive advantage. “The successful [manufacturers] we’ll see five years from now will be the guys who actually went backward into their supply chain and got real tight” with suppliers.
Manufacturer Markley served on a committee to help the Sustainable Green Printing Partnership develop its certification program, and says the greening of the supply chain is inevitable.
“I just think it’s one of those things that in this day and age you’re just going to have to do as a common process,” he says. “You’re not always going to get a benefit from it on the sales side; you’re going to get a benefit because it actually does reduce cost,” through reduced energy use and transportation expenditures, for example.
The Primary Concerns
The prognosis for 2010 is mixed. Some observers suggest that manufacturers should lock in contracts with suppliers early to ensure continuity of supply when customer demand surges. Others urge a more cautious stance.
After the carnage that greeted his company in 2009, Telesis’ Benson could be forgiven for displaying some bitterness. But if the scars are there, they don’t show. Even as he lists his main concerns: the lingering risk of supplier failure, the extended lead times caused by slim supplier inventories, and the ever-present threat of cost increases, he appears to take the challenges in stride. When he describes his business expectations for the next two years, the sentiment is simple. “I feel very optimistic,” he says.
Markley is upbeat, too: “I don’t think we’re all going to be real satisfied with how fast things are going to unfold, but at least, I think, it’s headed in the right direction.”
As he tries to strike a balance between shrinking inventory and ensuring that his company can meet customer orders, Markley says he’ll err toward having enough stock on hand to make sales.
“We’re all trying to be careful,” he says, “but at the same time we don’t want to miss any opportunities.”
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