Shifting supply chain strategies

Posted on 16 Dec 2009 by The Manufacturer

EEF's Steve Radley on Dutch car maker Spyker's decision to move to the UK as an exemplar of shortening supply chains

Dutch car maker Spyker’s decision to move production to Coventry last month to be closer to key suppliers is an example of how global supply chain strategies are changing. It also reflects well on supply networks in the UK automotive sector and is a good story about the UK’s place in global value chains.

Policy responses to the recession have been a theme of this column over much of this year — from how to minimise the damage to productive sectors of the economy to what’s needed to kick start growth. But as well as dealing with the here and now, we’ve been looking beyond the recession to what shape the UK economy needs to take in future and why returning to business as usual isn’t an option. Manufacturers have also been thinking about these questions from their own business perspective.

New research from EEF and BDO LLP, as part of our Manufacturing Advantage series, shows that the recession has provided something of a catalyst for companies to revisit how their value chains are structured and what their priorities are when growth returns. Some of this was going on before the global economic downturn as we saw a significant rise in competitive pressures from rapidly industrialising emerging economies; an increased impetus to reduce costs and increased volatility in the price of key inputs. But the upheaval in global markets and the reverberations of the financial crisis have had a profound impact on markets and suppliers and how manufacturers manage both in future.

In some ways the recession has done little to derail manufacturers’ ambitions and strategic priorities. Global growth, when it returns, is expected to continue much as before. The balance of growth will continue to be tilted towards emerging economies, particularly in Asia, providing both business opportunities and competitive challenges. But rather than adopt a new approach to dealing with these, companies expect to press on with the formula of design, development, quality and customer service that has served them well before the downturn. Delivering new and improved
products to an expanded customer base along with a portfolio of service offerings has helped companies maintain a competitive advantage and provided new revenue streams.

Onshoring trickle to swell

While company strategies appear to remain on track, the recession has thrown up some issues which have inevitably led companies to rethink how best to deliver those objectives. One of the biggest looks likely to be a reassessment of sourcing and supply chain strategies. The importance of high quality, robust suppliers was highlighted by last month’s decision by Dutch car company, Spyker, to shift some production to the UK to be closer to key suppliers. A positive reflection on the deep and sophisticated supply networks in the automotive sector in the UK and a good story about the UK’s place in global value chains.

However, in some other industries it is no secret that capacity in some parts of the supply base have been eroded in recent decades — one reason why manufacturers’ supply chains have become more global. Lower labour costs in emerging markets have also provided strategic sourcing opportunities. Increasingly complex product and production needs are another dimension which has added to the greater globalisation of supply chains.

For many companies this approach has served them well but for others, competing more on delivering innovative solutions, lower labour cost economies haven’t always lived up to their promise. Shifts in cost differentials and the ability of low labour cost suppliers to deliver on quality commitments have, in some cases, hindered rather than helped UK manufacturers meet their strategic priorities. We have therefore seen a trickle of activities back to the UK from emerging markets – it’s been a gradual but not insignificant trend and more is expected to follow.

More importantly, perhaps, will be supply chain holes that will have emerged as a result of the recession. More than half of companies we surveyed plan to re-evaluate their supply chain strategies as a result of the global downturn. Growing fears about the health of suppliers, both in the UK and overseas, has prompted companies to look again at how value chains are structured. In some cases this means further internationalisation of the supply base to hedge against future disruptions and developing deeper relationship with those closer to home.

Previous investments in IT solutions have helped companies better manage more dispersed customers and suppliers. However, the recession has identified some gaps in supply chain risk management and monitoring. The recession may have seriously dented demand but UK companies it seems are not standing still when it comes to making sure their supply chains are in order when it returns.

Steve Radley, director of policy, EEF, the manufacturers’ organisation