If a shattered economy isn’t bad enough, reports Colin Chinery, sterling exchange rates and the spectre of global supply chain disruptions is putting further pressure on UK manufacturers, who are having to take a closer look at their supplier strategies.
Maintaining good relationships with suppliers is vital, says Marion Luckhurst, supply chain director at VT Group, the UK defence company. But the reality is that suppliers are often fearful of disclosing their troubles until it is too late.
“We have said, ‘Come and talk to us. Don’t be afraid.’ We think of it as a two-way street: when things are going well they can help us if we have worked through the bad times.”
The bad times are here, yet a survey by the Management Consultancies Association finds only one in eight of Britain’s top companies is planning to work with its suppliers to get through the recession. Less than a third have good relationships with them, while more than a third are failing to adapt their supply chains to changing economic conditions.
Nigel Issa, associate partner, operational optimisation at Atos Consulting is unsurprised. “I work with three big corporations, household names, and I would say one is definitely working with its suppliers, collaborating and competing, another has always had a much more hands-off approach, competing on costs, and the third is really struggling with the whole concept. In the ideal world people want to say they are working with their suppliers and all the rest of it, but in reality very few do.”
Where there is co-operation Issa sees a “collaborate and compete situation. On the one hand they are sharing, far more clearly and regularly, long term business plans with their suppliers. But against that they are re-contracting much of the work based on changing demand profiles and the cost challenging implications of available supplier capacity.”
Sterling kicks imported components
But like VT’s Marion Luckhurst, Mike Kimberley, chief executive of Group Lotus — whose current success makes it a rare exception where a global car company is expanding — believes that supply chains should be based on mutual trust.
“It’s not always a question of quality and cost. For example we’ve had a fabulous mutual trust with Toyota since they helped me save the company in 1983 and became shareholders, to the extent that we take their engines which we recalibrate electronically, producing far higher performance results with much lower C02s and better fuel economy than they are getting themselves.
“We share that, it’s a mutual win-win and a mutual trust. Factors like this have to come into the supply chain decision making.” Kimberley says that for British manufacturing the most damaging affect on the global supply chain is the weakness of sterling. “Of course there is a positive. It helps us significantly in our engineering consultancy high technology business where the cost for a project from, say China or the US, is much less. But at the same time we are a global sourcer; wiring harnesses for example, are out of China, soft tops on the convertible Elise come from India, instrument panels South Africa, the supercharging system from California.
“All these things were set up to optimise supply chain and bill of material (BOM) costs for our vehicles. What’s happened now is that the weakness of the pound is making these items horrifically more expensive in respect of the dollar, the euro in particular, and — since we buy our power trains from Japan — the yen even more so.”
Lotus take the view that this will balance back out, but how soon will depend in part on government action. On this point Kimberley is not optimistic. “Unlike the Germans, the French and the Italians, there’s a total lack of understanding of British industry in government and in the City and its contribution to wealth creation. It has frustrated me all my life.”
Develop a cadre of suppliers
Nick Sanders, former CEO of Redditch-based CompAir, a company which designs compressed air systems that has made supply chain management strength a core part of its strategy, says two factors have been driving sourcing strategies.
“Firstly the desire to bring on-line quality suppliers from low cost countries, who for some components at least, are more price competitive than the supply base in developed economies,” he says.
“Secondly, to reduce the number of suppliers so that leverage is increased on the remaining suppliers and overheads are reduced by having to maintain approvals and monitors for fewer suppliers.
The rate of supplier failures has increased sharply in recent months and this will probably go higher, says Sanders. It is happening with both local and low cost suppliers.
The need now is for businesses to develop strategies where they maintain ‘dual capability’ for components they buy, rather than ‘dual sources’. He adds: “By
this I mean they develop a cadre of suppliers for each component type they buy; some will be low cost, others will be local. These suppliers don’t need to manufacture the same part at any one time but they do need to make similar parts and have the capability to take on new parts quickly in the event that one of their competitors fail. This means customer businesses need to spread their business around a little more than a proper low cost strategy might dictate and often hold duplicate sets of tooling.”
Businesses that were alert to this risk a while ago now have a balanced supply chain that should withstand the recession, says Sanders. “The most successful will be those who recognize the need for this supply chain robustness and can move the quickest in the event of supply chain failure.”
If it ain’t broken…
For Howard Goff, managing director of Tewkesbury-based Exception, the UK’s largest electronics offshoring business, a surprising trend over the last few months has been the degree of retrenchment in supply chains.
“In the global electronics market we have seen manufacturers very much sticking to proven and tested quantities when it comes to global sourcing — if anything, reducing their orders in line with demand. In a word, manufacturers have stuck it out with supply chain partners they know, assuming they have had a strong relationship in the past.”
It is a view shared by Mike Kimberley. ”We don’t intend changing our major overseas suppliers. To do so costs a lot of money and you start dealing with someone you don’t know. In our industry you have to test fleets of cars for hundreds of thousands of miles — 70% of budgets go into amologation and testing — and if you need more cash to change the supplier. So if you’ve got a good one you stick with it, whether in France, China or wherever.”
Exception’s Goff notes a significant move towards just-in-time and build-to-order, as opposed to maintaining buffer stocks. “In terms of inventory levels, we have seen these reduce markedly in recent months as OEMs cut right back on stocks to make themselves as lean as possible.
“Inevitably, this development has put greater strain on unsophisticated, overstretched supply chains where poor visibility and delivery uncertainty have exposed some inefficient practices. In many ways, the recession has forced manufacturers to focus more on their supply chain operations, to ensure reliable and predictable delivery of parts and components on a scheduled basis.”
A closer look at local production
Jeremy Praud, a UK partner at consultants Lauras International, says global re-adjustment means that some of the cheap manufacturing options overseas,
with a supplementary set of extra costs such as capital tied up in stocks and transport, are becoming less attractive.
“This means that businesses are going to have to focus on productivity and deriving benefit from here — the old way of getting better at what you do rather than the magic wand of moving to another country where it’s cheap.
“Businesses are starting to look at what they are doing, with a true cost analysis, as opposed to more of an estimate where they look at the cost of manufacture without understanding all the costs associated with being a long way from their market. And this is focusing the mind.
“I think it’s a 12 week turnaround to get something to Asia and back again — that’s an awful lot of stock, and a lot of cash, just sitting there. When cash was cheap and easy to get hold of, companies took that for granted; now that it’s tied up, suddenly there’s a real opportunity to get a handle on this, and the case for doing it abroad no longer as good as they thought it was.”
Companies doing well, says Praud, are those knuckling down and making improvements happen. “Some people are holding off making decisions and are just treading water; others are looking at it as an opportunity, and if they can get their costs down just a little they will have the prospect of growing volume and taking market share off the competition.”
“The key point,” says Issa at Atos Consulting, “is share your demand forecast and supply plans with suppliers. You don’t need necessarily to give any commitment but at least your suppliers will have a better visibility of where the business is going in the longer term.”