The Big Debate: how to enhance the supply chain for growth

Posted on 31 May 2012

Do British SMEs get a big enough share of tier one contracts? Developing UK supply chains to enable growth was debated by 250 delegates and a panel of experts at the third National Manufacturing Debate at Cranfield University on Wednesday.

How can we enhance supply chains to help SMEs to grow?” was the fundamental question posed by Professor Raj Roy at Cranfield University, which hosted the National Manufacturing Debate for the third year.

When large companies prosper, they need small companies to help them fulfil new orders on time. But opportunities for SMEs in the UK are often missed when contracts come live, because they are not ready to ramp-up up production, more capex is required, accreditations are not in order or there is a shortage of skilled people to respond to demand.

Improving the visibility and communication in the supply chain was at the heart of the debate.

In the morning, a series of presentations were given on how to identify opportunities in the supply chain and find ways to support them.

Prof Rajkumar Roy, head of manufacturing and materials at Cranfield University, spoke of the need to help small companies, especially those with fewer than 50 employees. He advocated clusters and industrial collaborations to provide the ‘feedstock’ of orders. This was a view advocated by Karl Reddy, CEO of the Grant Thornton / MAS consortium, who said all support for the UK supply chain should focus on getting orders placed and transactions. Common sense perhaps, but this basic requirement is often overlooked in any talk of wider ‘industrial strategy’.

Chairing the morning session, Lord Alec Broers, ex-president of the Royal Academy of Engineering, said that “there is real movement” in relation to the development of a long term industrial strategy but added, “Government has made the right noises for two years but now it’s time for the substance.”

Iain Gray, chief executive of the Technology Strategy Board, launched the TSB’s High Value Manufacturing (HVM) Strategy at the debate. This was formed from a research project by the Institute for Manufacturing at the University of Cambridge, which revealed strategic themes and several core ‘national competencies’ in manufacturing. Themes included increasing and protecting the global competitiveness of UK manufacturing technologies by creating more efficient and effective manufacturing systems.

Mr Gray said the HVM strategy committed to doubling the TSB’s funding of HVM projects to £50m. He emphasised that projects were supported on tight, business case criteria such as the market need and proof of concept in regards to new innovations.

Tata shows its steel

Jon Bolton, business director of Scunthorpe-based Tata Steel Long Products, talked about the investments and improvements made by Tata Steel and Tata Group in its UK operations following the previous owner’s short term view of the businesses driven by producing quick investor returns.

Tata Group is the biggest foreign investor in the UK today, employing 45,000 people with revenues of £11bn. Mr Bolton lauded the resurgence of the UK automotive sector which has provided a welcome boost for his company at a time when the recession and eurozone crisis has weakened demand for European steel.

However, he expressed his dismay over the failure to create a coherent manufacturing strategy for the UK’s growing offshore wind energy industry which has led to potentially lucrative steel contracts were being lost with wind turbine towers being imported. Reports say that as little as 10%, and at most 30%, of the value of a wind farm is manufactured in the UK.

Lord Broers remarked that it was “scandalous that we haven’t been able to make more of the turbine and collateral used in British wind farms.”

The role of finance in enhancing supply chains was outlined by Barclays’s head of manufacturing Mark Lee. He presented a pro-manufacturing view from the banking sector. Barclays has 100 relationship directors, with an average of 18 years in arranging financial assistance to companies in his sector, which includes transport. He emphasised the choice of financial products available to companies beyond normal bank loans, including the Enterprise Finance Guarantee scheme, Business Growth Fund and the National Loan Guarantee Scheme, as well as support for exports.

He said that while Barclays has “a large number of lending commitments in the sector”, demand for borrowing was flat because of a difficult environment where half of UK exports go to the troubled eurozone. The value of sterling, still low against the euro, is likely to rise in the next 12-months but this would not have a strong effect on exports because it’s unlikely to even get close to pre-2008 levels.

Mr Lee said that Barclays was focused on working capital management to assist companies paying high prices for raw material and incurring other costs just to stay in business, especially as the ‘new normal’ for payment terms today was often 60-days or more.

Strategy, ‘do something different’ and picking winners

Karl Reddy, chief executive of Grant Thornton and the newly reorganised national Manufacturing Advisory Service, said that his approach to supply chain enhancement was “absolutely about the number of transactions.” He said that there should be more focus placed on helping companies make orders and generate cash flow.

MAS / Grant Thornton have devised a priority pyramid for how large OEMs select partners. The most common reasons for lack of engagement between SMEs and bigger manufacturing firms, was a lack of access to finance, technology and ambition compared to sectors like the digital industry, as well as problems around R&D misalignment.

When it comes to selecting new suppliers when an existing supply chain is already reliable, tier one companies’ basic point of view is one of indifference – “Why should I care?”. This needs to change to boost local supply chains while being sympathetic to tier ones’ price and delivery criteria.
On finance for growth, private equity still showed very low levels of investment in manufacturing, because the sector often showed the weakest level of performance for return on investment. There was a trend towards bond capital, which provided a debt solution but often within restrictive criteria , and there was a need for more creative finance solutions, Mr Reddy said.

He added that MAS and UKTI needed to do much more to promote sales of UK goods, which should include marketing and branding assistance.

The President of the British Chamber of Commerce Martyn Pellew gave a forceful talk on some of the disjoints in the UK business ecosystem. Despite cuts, he rounded on a public sector-heavy economy that was a burden on growth, where the bureaucracy required to administer some schemes costs more than the growth they were designed to generate. “The Regional Growth Fund, for example, now in Round Three, is expensive to adminster, but have jobs been created?” he asked. “Yes, but mostly for accountants to carry out all the due diligence needed qualify companies.”

He referred to current policy making being a “trade-off between politics and economics”, as business generating policies were often shelved in place of more voter-friendly ones. Exports, and to BRIC countries, needs to be a primary focus and continue improvement in this area after a BCC survey of 8,000 companies across sectors showed that 32% were actively exporting versus 22% in 2011.

Despite his anti-public spending position, Mr Pellew advocated spending more on infrastructure. He cited the job creation in Essex that resulted from marine terminal operator DP World’s £1.5bn investment in London Gateway that will now be able to handle 3.5 million containers a year. This project will create 2,000 direct jobs and 5,000 indirectly, Pellew claimed.

Market diversification to spread risk and transfer capabilities to win new business

Cosworth had to learn the hard way about reinvention and rebuilding its supply chain for growth.

In 2004 the motorsport engineering company was told by its single customer, Ford, that it would be leaving Formula One, a sink or swim moment. But CEO Tim Routsis had already laid out plans to leverage the Cosworth brand into new markets in aerospace, defence, electronics and data acquisition and monitoring.

Their strategy was to take cash from the core business and spin out into one of three areas: new territories, adjacent markets and high performance sport – “but only if we could understand the challenge properly and provide solutions based on our core engineering knowledge.” This approach worked: Cosworth is predicting 20% compound growth in 2012, the third consecutive year of such performance.

But Mr Routsis warned that 2012 is a year of uncertainty, as defence industries retrench. Cosworth has identified that smaller budgets will present opportunities in unmanned vehicle development. The cost of getting diesel into military theatre, for example, varies between $11 and $22 a litre, as Routsis emphasised the need for “things to go further than we’ve been used to.”

He warned of encroaching protectionism around the world, and that the UK had to respond to this, before finishing on the skills supply chain. “We need to feed bright, motivated kids into industry that want to make manufacturing and engineering their careers. Every job in engineering brings eight services and administration jobs with it.”

“Be bold, and do something different – today,” he told the audience.

PA Consulting corrals sustainable growth solutions from business leaders

The last presenter in the morning, PA Consulting’s Martin Smith, surprised the audience when he claimed that his company could not find a single report or work on generating sustainable growth that provided direct evidence from employer testimonials.

Mr Smith, a member of the management team leading PA Consulting, said that manufacturing and technology proliferation was often cited as vital for the UK’s economic recovery, “yet there was no consensus on the appropriate level of intervention required by Government, nor the appropriate roles of industry, academia, banks and venture finance in promoting growth.”

The consultancy, which he claimed differentiates itself from the competition in its devotion to technology (PA Consulting has a research lab in Cambridge), mobilised more than 100 business leaders in six fields to attend parliamentary roundtables to draw out the grass roots needs for growth. The sectors are: Advanced manufacturing; life sciences and healthcare; consumer products; ICT and electronics; small and medium-sized enterprises and agri-science, the latter a sector of fast growth in the 1990s.

The outcome of these roundtable debates, published in a book called ‘How to unlock sustainable growth in the UK’, were seven key recommendations for government.

The National Manufacturing Debate attracted nearly 250 delegates. A full report on the NMD will be published in the July issue of The Manufacturer, and a summary of the Debate will appear on shortly.