Cuddle up tight

Does it still make sense to have world-spanning supply chains in a climate of economic downturn? Ruari McCallion finds out if new models are emerging

Back in 2000, a small Philips microchip factory in New Mexico suffered a fire. It wasn’t a large blaze, the factory wasn’t destroyed and no lives were lost but there was a lot of smoke damage — and that wasn’t good news for the sensitive equipment used in chip manufacture. The factory supplied specialist chips for mobile phones to the two market leaders at the time: Nokia and Ericsson. Nokia had established a supply chain situation that monitored risk and this particular supplier had been identified as critical. As soon as it picked up the news, it got on the phone and bought up Philips’ entire inventory. Two months later, Ericsson had problems with its supplies. It called Philips but could not get anything for six months. The action was very damaging to Ericsson’s mobile phone business.

That situation predated the current economic downturn by several years but it is a signal example of the nature of supply chain risk and a relevant anecdote in today’s environment.

“It isn’t always possible to change suppliers at short notice,” says Laurence Dupras, director of supply chain services, Europe, at Bearing Point. “What you can do is put in place short-term contingencies. Toyota has been looking at all its suppliers with regard to risk — both countries and areas. It’s looking also at building up inventory in critical points.” Which is something of a surprise: Toyota is known for taking inventory out of its system.

“In exceptional situations, under risky and emergency conditions, we may consider asking a distressed supplier to put a certain safety stock in place, in order to prevent an unexpected disruption of our production,” says a spokesperson for Toyota. “This should then be seen as more corresponding to European standards (three to five days’ buffer), in opposition to Toyota’s normal lean standards.” This exceptional practice is intended only during a period identified as heightened risk — that is, right now.

“Toyota has control of its supply chain,” says Dupras. “It has been running lean and using the supply chain to steady the business. It feels that, by running buffers at critical points, it will continue to do that. There is not the case for all companies in the auto industry but Toyota understands its supply chain.”

Orders have collapsed in part because the value chain is stuffed with goods ordered in a totally different economic climate and based on demand forecasts made some time ago. Manufacturers are caught in something of a cleft stick. On the one hand, a supplier going down in China or a fire in New Mexico may leave them without components vital for production; on the other hand, no-one wants to be building up inventory. The challenge is to ensure that the supply chain is both secure and able to respond to market changes.

Shortening the supply chain
“Companies that are best in class, like Dell, for example, will use less working capital if they’re agile,” Ms Dupras says. “A shorter supply chain means less working capital and means they can play on service levels as well as price.” Different strategies are emerging — or rather, becoming more apparent. Dell, like Toyota, makes its products close to its markets —and has suppliers geographically close to its manufacturing plants as well. That doesn’t necessarily mean right next door, as in the manufacturing parks; rather, the whole supply chain is compact. It makes monitoring easier and means the OEM can respond faster. BMW is another example — it has brought its engine manufacturing for MINI over from Brazil to Birmingham.

Another company — a Tier One auto and aerospace bearing firm — is continuing with a strategy of shortening its supply chain and bringing suppliers closer to its manufacturing point. “It is thinking of the risks but also of the competitive advantage to be obtained by doing something different,” points out Ms Dupras. The company’s three criteria are price, quality and lead time, which is service levels. “Its philosophy has been that, in terms of quality, it has been number one. It accepts that it won’t necessarily stay there; its suppliers supply competitor companies. On price, it doesn’t want to get into a price war but it strives to control its own costs. On service levels, it can compete by making its supply chain shorter.” If the company achieves that, it can demonstrate to its customers that it is a reliable partner — that risks involved in the chain have been reduced. “It has brought its cycle times down 80 per cent and is seeking to get a further two-thirds out. It is promising to deliver any product, anywhere in the world, within 10 days.”

Shortening the supply chain will not eliminate risk completely but can make it more manageable and understandable. Consulting group Aon has said that global supply chains are becoming more vulnerable to potential disruption; it now identifies 58 ‘at risk’ countries — a 42% increase over last year. Some are obvious, like Zimbabwe; but Burma, Georgia, Iraq and even Guinea-Bissau have been added. Is it an argument for bringing manufacturing back to Europe in general and the UK in particular? There are indications that it’s worth considering.

Reverse trend
“Companies we work with are seeing order losses,” said Richard Holland, of TBM consulting. “They’re having to make some redundancies but we have advised them to insource back from China.” Improved effectiveness means they have a lot of productivity to soak up. “Where companies can do so without capital expenditure, they are doing. It’s more difficult where machinery has been sold off.” Ah, yes. The danger with the outsourcing trend during the 1990s and into the early years of this century was the risk of going into ‘corporate liposuction’ — sucking out the nerve network, as well as the fat. A lot of outsourcing was done without a coherent strategy and the danger is that the infrastructure reaches a tipping point. There may be interest in looking closer to home in order to become more agile, responsive and secure but are the resources available?

“A lot has gone from the UK, which is hardly surprising; the country has been relying on the service industries,” says Ms Dupras. “And some ports in the UK, where imports arrive, are struggling for capacity.” She recently spoke with a large European auto manufacturer, which indicated that capacity issues disincline it to invest in this country. But there’s still eastern Europe, which remains competitive, and the possibility of a scenario that would, quite recently, have been thought unlikely.

“We’re seeing an active increase in the pace of true globalisation — more companies with more functions across the globe,” she continues. “For example, China’s cost advantage is slowly eroding and Chinese companies are establishing subsidiaries across the world.” As the Christian churches once sent missionaries across the world and are now recruiting pastors and priests from the emerging economies to serve in the First World, so we may see Chinese, Indian and other companies establishing operations in the UK and continental Europe. Not necessarily OEMs, but at the supply level. So don’t close down that fastener factory just yet.