Supply chain challenges

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Magazine Article, Source : The Manufacturer
Zone : Supply chain and Logistics
Published : October 2004

Whether you’re processing peas or pharmaceuticals, working in aerospace assembly, churning out china, brewing beer or making bumpers, the supply chain is everyone’s abiding preoccupation, as John Dwyer discovers at The Manufacturer LIVE 2004

Aerospace is one of the UK’s most successful industries. It is also wasteful, arrogant, complacent and heading for big trouble unless it changes its attitudes to suppliers and employees. What’s more, readers who just read ‘aerospace’ and decided to read something else have just repeated one of the sector’s biggest mistakes.

Gary Ballard joined Rochester, Kent, based aerospace castings supplier Aeromet from automotive supplier Dana Corporation. Ballard, used to the lean-mad car industry, describes the waste he finds among aerospace companies as “unbelieveable”. “And it’s all low hanging fruit,” he says.

Ballard told industry leaders at Telford that the ‘primes’ – the aerospace assemblers – could eliminate a lot of waste and inefficiency if he and other suppliers could “sit down and talk to you organisations about how we do our business together. We want to get better but you can help us and make our lives easier. We’re able, and talented, but there’s real bureaucratic problems between our industries.”

Ballard can’t understand the industry’s failure to standardise across countries. A part for Airbus UK costs twice as much as the same part – for the same plane – for Airbus in Toulouse, says Ballard. The UK and French specifications set out different tolerances, processes and even routings for the same component.

Worse, the primes don’t feel they need to explain to the supplier why the specifications are different. They don’t want advice about making the part more uniformly or cheaply. And although short of skills, it’s beneath them to recruit from the automotive sector.

Phil Swash, plant manager at Airbus UK’s Broughton, north Wales, plant knows there’s a problem: “We need to learn from other industries. We have an arrogance in our industry that bewilders me.” He recalls a factory in Sunderland: “It’s close to Nissan, but it looks like the 1950s approach to manufacturing production.”

Greg Watts of Process Industries Centre for Manufacturing (PICME) says the chemical industry has just the same failing. Every industry needs to pay attention to stock turns, he says. “Retailers turn over their stock twice a day. The industry should want to know how they do that. The food industry could provide real lessons on on-time-and-in-full (OTIF) performance because they have to be good at it.”

Whatever the sector, the biggest supply chain issue is staying competitive when costs are rising and competition is forcing prices in the opposite direction. Retail food supplier Geest is caught in the same cost-price pincer: “The shareholders look for profitability,” says Brian McMonagle, manufacturing manager at Geest’s Langley Park, Lincolnshire, factory, “and the supermarkets are looking for lower prices.”

Geest set up a waste elimination project to reduce costs, reduce waste, improve customer service levels and increase capacity.

Geest’s manufacturing excellence team rated the performance at each factory then gave each an improvement plan. This, and the institution of standard performance measures across the group achieved real improvements. With the aid of a new ‘realtime performance management systems (Events Engine from MVI Technology) the exercise uncovered net machine efficiency (NME) – the same as overall equipment effectiveness (OEE) – of between 30 and 50 per cent, and there were large variations across shifts even on the same product. They found the production teams made what they decided rather than what was in the plan. You can stop that, but only if you know it’s happening.

Chris Lakin of Dupont, Teesside, reached a similar conclusion about waste and use of assets after studying how much inventory was lying expensively in the supply chain. “When we started looking at the supply chain we realised how complex it was. There were big opportunities to reduce costs.”

The supply chain was holding stocks because the plants, which were getting old, were unreliable. As plant reliability increased to 90 per cent or so, the amount of stock held in the supply chain reduced, from 20 to 30 days of sales to 10 or 11. “We have made big improvements in reliability but we need to continue with that.”

Different companies tackle the pincer in different ways. A current tactic is to use super-suppliers (SSs), top-tier logistics or sub-assembly suppliers put in charge of the rest.

Ross Bradley, executive director of the Farnborough Aerospace Consortium, points to Airbus to put the case for SSs quite simply: “Airbus recognised that some of the lower tiers of suppliers are better at managing the supply chain than their own procurement people.” For good measure, Bradley has a swipe at “the laziness of many procurement people.”

From the horse’s mouth, Swash describes a cutback in suppliers as “one of the concrete things you can do” to make a prime’s business more efficient. Airbus has cut back its suppliers from “hundreds” to 70. The plan is to cut them further back to 20, “because we were trying to do too much... We were not taking lightly the decision to pursue this course, but just take PPE equipment, safety and work wear. We previously had dozens and dozens of supply chain interfaces that were stopping us dealing with proper suppliers that were shipping us airframe parts. I’m not diminishing the importance of safety equipment, but we had to be focused, and we have a very finite resource.”

The problem, says Victoria Denton, a PA Consultant working with Yorkshire Forward, is that relationships between the super-suppliers and the suppliers they control are not good. The perception, she says, is that the SSs “are hard task-masters the primes have recruited [almost] to do their dirty work.”

Internal logistics was the key to a turnaround at Coors, formerly Bass. Still based in Burton on Trent, it is the second biggest brewer in the UK after Scottish & Newcastle.

Coors’s chief problem was that each department – sales, production, logistics and so on, worked ‘parochially’. Since 2000, service levels have increased from 97 per cent to 99 per cent plus. Coors now thinks of its supply chain “as a competitive weapon”, says supply chain director Martin Thomas.

A main reason is that Coors “has established a fully integrated process from end to end across the supply chain.” Logistics now controls not just deliveries but production as well. “You have to have an iron grip on demand to manage delivery effectively,” says Thomas. “That calls for discipline and responsiveness.”

But the car-makers are still the kings of logistics. Each year Ford’s premier automotive group (PAG) – Aston Martin, Jaguar, Land Rover and Volvo – manages 18,000 inbound part numbers from 700 suppliers in 50 countries and distributes 360,000 units to 50 countries. By appointing lead logistics providers (LLPs) and changing the way it pays for logistics, says PAG’s Mike Tickle, PAG claims to have cut logistics costs by a third.

PAG started the programme at Halewood, the Merseyside plant where Jaguar launched its X-type, in 2001. Until then, PAG’s logistics department hired different carriers for every movement by road, rail, sea or air freight.

Now PAG pays its LLPs – NYK and Exel – to provide a complete service for routes and parts incorporated into delivery plans and agree continuous improvement reductions in this cost per unit targets: “If they are able to go further than their commitment on cost reduction, that’s to their benefit,” says Tickle.

Over the last three years, Halewood has cut stocks by 55 per cent, mileage by 45 per cent and fuel consumption by 23,000 litres a week. Reduced waiting times have saved over £9 million a year.

A main reason is the information now flowing between parts suppliers and factories. PAG’s ‘stop call wait’ system means drivers are not allowed to leave the site without phoning the material planning team to confirm that the load is the one expected or, if it isn’t, to describe the variance. Stop call wait, says Tickle, means: “We know a lot earlier when we have part shortage problems.”

So the pressure to perform is now firmly on the tier one suppliers to PAG and others, even when, as in the case of bumper supplier Plastic Omnium (POL), the customer gives them only two hours’ notice of the product they want.

The key, says POL managing director Neil Houghton, is inventory management. “It’s all very well saying, ‘we’ve got two days’ stock’,” says Houghton. “What matters is how it’s composed.”

POL makes 700,000 bumpers a year for Jaguar, Land Rover and volume marques like the Astra. POL worked with consultancy Inventory Matters using a tool called advanced inventory management (AIM). AIM uses a combination of pareto analysis, economic order quantities and statistical safety stock to calculate how much inventory each batch size implies.

Among many other changes, POL used AIM to cut the number of colour changes in the paint plant from 40,000 a year to 16,000. This increased the availability of the right bumpers at the picking point to 99 per cent. And it cut down both POL’s costs and the amount of fire fighting they had to do.

Smart use of computer tools is also helping the chemicals industry. For many in the process sector, says Roberto Pagani of consultants A T Kearney (ATK), the answer to the pincer is off-shoring. An example was the government of Mumbai’s suggestion that it could help deliver a drug for $50 million that would cost $800 million to develop in the west.

But off-shoring is not a panacea, warns Pagani. “The business cases for offshoring are sometimes flawed, especially considering the key risks.”

The infrastructure is often not as good. The labour cost advantage is not a big part of the cost of production in a capital intensive business. Site closures back home are expensive. And the French Government is not the only one to start to react against footloose global capital.

Time, says Pagani, to focus on cutting the cost of operations and improving their productivity. ICI’s national starch and adhesives division (NS), based in Teesside, shows how.

Bob Earnshaw was pulled out of his functional role at NS’s Bondmaster business unit to run a manufacturing excellence programme: “Manufacturing cost and logistics costs as a percentage of sales were increasing alarmingly rapidly,” he notes. An important insight was the realisation that the right level of customer service increases revenue. Provide too much and profitability falls with no advantage.

More curves. This time Earnshaw and his team plotted revenue and service cost curves for different products and customers. The analysis showed a long tail of small customers who were taking “an awful lot of service for the profit they were making.” NS didn’t ditch these – it moved them to distributors, and “pulled more costs out of the organisation in doing that.”

World famous china maker Wedgwood knows all too well how cruel the markets can be. It invested Ä100 million over 15 years in plant automation only to find that its customers would not pay a premium price for a home produced product. When it didn’t pay back, Wedgwood closed two plants down and moved production to HanDan, 500km from Beijing, China.

Wedgwood’s manufacturing and supply director, Michael Wilcock, can tell you just how easy that was. All Wedgwood knew, he says, was that the unit cost FOB from China was 70 cents, compared with a unit cost of £2 in Stoke-on-Trent.

What it knows now, he says, is that: “It’s the total acquired cost that matters,” and that is not the same as FOB. FOB does not include goods inwards inspections, storage and handling, extra inventory, the cost of handling at ports, extra working capital, administrative costs, ‘introductory envelopes’ and dozens of other unforeseen costs in duties, quotas, and bureaucracy. Wilcock says frankly that, in making its outsourcing decisions, “We didn’t know what we were talking about.”

Now, Wilcock says as he looks back, “It’s a massive success. But it’s not easy. It’s very difficult.” To those thinking of moving, he advises: “Work out what it’s going to cost you to transfer in the first year, then double it.”

Wedgwood’s next step will be to export production of its fine bone china, but not to HanDan. “We know a lot more about the ceramic industry in China.” Wedgwood will move to ‘arms length’ contracts with competitive sources.