Alternative strategies needed to add supply chain capacity

Michael Minall, a director at global supply chain consultancy firm Vendigital, talks how manufacturers should look for alternative strategies when adding to capacity.

Michael Minall, director at global supply chain consultancy firm Vendigital

As manufacturing businesses across many industry sectors begin to report an increase in demand, there is growing concern that supply chains may not be able to cope and strategic supply partnerships are becoming even more critical as a result.

Over the course of the downturn some supply chains have stripped out as much as 40 percent of their capacity as a result of drastic action to right size to meet depressed levels of demand.

In the US new car sales dipped from 15 million in 2007 to about 8 million in 2012; this reduction in demand rippled down the supply chain and many suppliers were forced to cut jobs, close production lines and off load non-essential assets.

Now as confidence shows signs of returning on the back of some unexpectedly strong economic data and an upturn in market demand – as illustrated by the SMMT’s confirmation that new car sales in the UK in 2013 were the highest since 2007 – the question is ‘how quickly can supply chains be mobilised to meet growing demand?’ No matter how upbeat the economic forecasts and the latest demand figures, supply chains in the automotive sector, like those in many other sectors of industry, are unlikely to put capacity back on line immediately.

Residual confidence issues are likely to limit their rebound. While adding an extra shift or opening up a closed production line are relatively easy steps to take, a decision to invest in a new operational facility or new, hi-tech production machinery is unlikely to be quick decision. For this reason, some degree of lag in terms of the supply chain’s bounce back should be expected and this could hold back growth in the short term.

For some OEMs, a sustained focus developing closer strategic supply relationships could help them to overcome any shortfall in capacity. Despite the supply chain capacity concerns, Ford has recently announced plans to consolidate its supply chain by 40%, to a core list of 750 vendors, as part of a move to forge strategic supply partnerships with its Tier 1 suppliers, based on a more collaborative relationship.

Investing in closer, longer-term relationships based on early stage involvement gives the supplier a vested interest in supporting their customer’s strategic growth plans and this in turn makes them feel more confident about making investments.

In some sectors, such as the UK nuclear industry, it is likely that some capacity has shifted to industries where demand is less volatile and less reliant on public funding, such as the oil and gas industry.  However, it remains to be seen how easy it will be for them to switch back once funding streams for nuclear infrastructure projects are restored.

In the nuclear industry, for example, quality considerations and commercial arrangements can be more onerous and it is possible that some suppliers will have lost some of the skills necessary to fulfil such requirements. In fact, if left unheeded, this lack of skills in the supply chain could pose a very real threat to future economic prosperity.

Sir James Dyson has recently announced plans to invest £250m to expand his company’s headquarters in Wiltshire, creating jobs for 3,000 engineers. At the same time, he acknowledged that the current shortfall of 60,000 engineers every year in the UK was going to make that difficult. Clearly, we will need to see some significant investment from industry and Government going into engineering courses and promoting engineering career paths in order to address this skills deficit.

Another way that manufacturers can take action themselves to address the shortfall in supply chain capacity is to ditch the traditional buyer/supplier mentality, if indeed they are still thinking this way, in favour of forming flexible strategic partnerships.  To achieve this, they will have to stop pushing for the lowest price possible and dictating how much margin suppliers should expect.

This kind of cost-centric, short-termism will not inspire the confidence and the mutual trust necessary to support their plans for growth. Instead, smarter businesses are demonstrating that they are prepared to shift the boundaries of their business. They are doing this by proactively engaging a smaller number of ‘super suppliers’ to support their growth plans and treating them as if they are part of the business.

In practical terms, this could entail involving the supplier in R&D initiatives or supporting investment by awarding them a volume commitment for say the next five years.

Nurturing these key suppliers who are capable of supporting larger contracts effectively can move the supplier up the value chain, bringing benefits for OEMs in other ways too. By their nature, super suppliers are able to fulfil a production process to a stage that might previously have taken ten or even fifty smaller suppliers.The high volume nature of such contracts also means that there is a strong strategic relationship in place and this can be built upon as necessary.

As growth returns to a variety of industries, business success is going to look very different from how it did during the downturn. Instead of cost being king, strategic supply chain partnerships based on strong business relationships will be the distinguishing mark of any successful, fast-growing manufacturing business.

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