Guest Commentary

In this latest guest post, Douglas Macbeth of the University of Southampton School of Management argues that western economies can no longer afford to pursue a strategy of relentless offshoring - the costs and the risks are far too high...

Let us start with a few propositions which, in my experience, describe the majority of our manufacturing organisations – as well as many others.

• Procurement isn’t well understood at board level;

• There are not enough CPOs who are able to influence board direction and strategy;

• Short-term financial myopia drives decisions;

• Manufacturing is no longer seen as core to western economies – services are more important.

For many years, western companies have been moving away from manufacturing and have chased the world to find the latest low-cost country from which to source everything from materials to complete products.

But why has this happened?

To some extent there is a certain logic – labour and social costs are initially much lower in developing countries. But does anyone really know how to calculate the total cost of acquisition (far less the total life-cycle cost) of anything? And if not, what data is the decision maker using? While the concepts might be easy to grasp, extracting meaningful data out of ERP or traditional accounting systems is enormously difficult. Add multiple divisions and legacy information systems, and the quest for the Holy Grail looks simple in comparison.

Add to this the fact that the proportion of total cost which is accounted for by labour tends to be very low, and it is slightly puzzling why the trend for low-cost sourcing is so prevalent.

The reality is that the difficulties of offshoring are now well recognised. There is often a shortage of appropriate skills in the target location; infrastructures for physical logistics and legal structures to conduct western-style business transactions may be in short supply; time zones, culture, behaviour and attitudes are likely to require careful consideration and it will often be necessary to pay the costs of ex-patriot managers to help in the start up phases at least.

The alternative to the latter is to train up locals – a form of technology transfer which can create competition much quicker than you would like. And while some companies try and limit this by only transferring some of their capabilities, the same supplier might be building up skills across multiple orders. Who, apart from the supplier managers (and in some cases their governments), would have any view over the whole supply chain to see this pattern?

When we add to this the experiences we have just been through with the global financial system meltdown and we have the makings of a real catastrophe which will challenge the perceived wisdom of offshoring.

One major lesson for me from the banking crisis is that not enough people saw how interconnected the world’s financial systems were. Equally, no one had the appetite to perform a proper due diligence and risk assessment on the nature of the assets that were supposedly underpinning the whole house of cards.

However, before we criticise the bankers too much, how many of us can define our extended networks of suppliers and customers and have done a detailed assessment of where the critical risks are located and what mitigations are needed?

Wwe seem to be in the midst of a perfect storm. Some organisations are replacing bank lending to suppliers with their own financial support just to keep transactions moving, there are issues around currency fluctuations which are difficult to hedge against and the recent threat to business credit insurance threatens to further restrict the fluidity of supply chains. Without trust – or at least, insurance – how can any trade function, especially across international borders?

In addition, while there is talk about avoiding the threat of protectionism in international trade, the levels of taxpayer investment, and therefore future taxation, is at mind-blowing levels. It is no surprise that politicians are trying to control the effects of their investments to derive local benefits.

In the midst of all this, the environmental message seems to be getting heard more clearly. One of the features of this, however, will be measurement and concerns about carbon footprints and the true costs of transportation.

The opportunity for procurement to take centre stage here is clear – no other function has the potential to contribute so much. Risk assessment has always been part of the procurement process, but now we have to extend its horizons beyond the suppliers we are directly contracting with and into our extended networks more explicitly. We also need to be involved in the redesign of products to meet the challenges of extended life, reuse and repurposing that the green agenda will drive.

The fundamental need is to restructure supply chains to support these networks, which might still be international in part rather than simply chasing headline price reductions. It might also be necessary to repatriate some activities closer to customers to reduce the risks and costs of international transportation – companies might have a mixed model with different supply solutions for different channels of customer service, for example.

So, this article started by focusing on manufacturing rather than services. Surely we must by now recognise that the reliance of an economy on invisibles is inherently flawed – we must rebuild a balanced portfolio of activities. Of course we still need an effective and reliable financial services sector but we also depend on goods producers, transportation providers, energy and water providers to live our normal lives.

While some of the information and entertainment industries may be less concerned with some of these aspects since their dependence on physical location is less critical, for the rest, physical location must be a mix of close to source and close to consumer. And let us do that in a more considered way, informed by a vision of a more interdependent future.

And while I’m not suggesting that we should head for a state interventionist system (although that seems to be what is happening) rather, we need to redefine and then persuade our societies’ stakeholders that we need a more enlightened model which recognises and can work with interconnectedness and diversity in a dynamic and entrepreneurial way.

Are procurement leaders up to the challenge?

Professor Douglas Macbeth is director of business development, MSc global supply chain management and supply chain research, as well as professor of purchasing and supply chain management, at the University of Southampton School of Management.

PLM - Product Life-Cycle Management

A relatively new software-based technology—product life cycle management (PLM)—has been adopted by numerous manufacturers because it allows the collaborative design of products from anywhere in the world. Developers can tap into a central workspace and get access to part designs, bills of material, product specifications, production schedules, and other data. PLM includes elements of earlier computer-based technologies, such as computer-aided design, engineering, and manufacturing (CAD/CAE/CAM), as well as product data management (PDM), but PLM is much more of a supply chain solution because it allows the sharing of product information not only throughout a company's many offices but throughout the offices of supply chain partners and suppliers as well.

The Joint Strike Fighter (JSF) program, for instance, is a prime example of supply chain collaboration. This multibillion-dollar initiative to build a next-generation aircraft for both the American and British militaries includes Lockheed Martin as the lead contractor and fellow aerospace and defense manufacturers Northrop Grumman (U.S.), BAE Systems (U.K.), and Fokker (Netherlands) as major subcontractors. Product experts from these companies can tap into Lockheed's virtual workspace platform to work on their own piece of this massive international project. As many as 1,500 engineers can access the virtual workspace as heavy users, and another 3,000 can tap into it on a more limited basis.

Product life cycle management (PLM) technology enables manufacturers to manage and share complex design and production information across an extended enterprise, with the goal of streamlining the product development process.

Like aerospace companies, automotive and high-tech manufacturers have also been early adopters of PLM software because of the complex nature of their production process. However, given the increasing importance of developing new products and getting them to market as quickly as possible, consumer packaged goods and pharmaceutical companies have also turned to PLM as a supply chain best practice because, when properly deployed and managed, it can help reduce costs while increasing efficiency. Here are some examples:

Playtex Products, a manufacturer of personal care consumer products, outsources 70 percent of its manufacturing to seven facilities throughout North America. Tracking document routing and product record data was increasingly difficult because this information was maintained on any number of electronic systems, or in some cases, on paper. By standardizing on a common PLM platform, Playtex enjoyed a 98 percent improvement in its document routing time. Time-to-market improved significantly as well, contributing in part to added revenues in the neighborhood of $20 million annually.

Regulatory requirements from the FDA as well as legal bodies in Europe have become more demanding for pharmaceutical manufacturers such as Roche Diagnostics. Roche was having difficulty stepping up its quality management processes because its quality data were scattered among a dozen nonintegrated systems, with much of that information being shared via fax machines rather than over a computer network. By implementing a PLM solution throughout the company, Roche has been able to automate its documentation process, which helps the company manage its growing product lines as well as satisfy the government audits.

At Eaton's Hydraulics Division, a maker of hydraulic products for farm and construction machinery, it frequently took up to 10 days to distribute CAD files throughout the company. The process began with the transfer of completed drawings to microfilm, which were then sent to the main library and duplicated so they could be sent to other sites' libraries. Not only did it take too long, but the error rate was as high as 6 percent at some of the libraries. A PLM solution capable of storing and retrieving more than 70,000 imaged documents has not only made the microfilming system obsolete, but it has also shaved the wait time from 10 days down to a mere three hours.

Six-Sigma - Motorola's Learns to Measure Quality

Supply chain manufacturing concepts often seem to emerge fully formed out of nowhere, and while there have been numerous short-lived trends du jour, in reality the legitimate best practices have gestated for many years, sometimes for decades. There's nothing new about lean manufacturing or the Toyota Production System, for example, even though they're currently popular buzzwords. The TPS, after all, emerged in Japan shortly after World War II ended, and in fact was based on concepts popularized even earlier in the twentieth century by Henry Ford. So even though lean is at the top of many people's minds these days, the only thing truly new about lean is the acceptance it's finally gained in the United States.

Another manufacturing concept that is frequently associated with lean is Six Sigma, a structured, quality-centric approach to manufacturing. It began at Motorola in the 1980s as a way of improving the quality and reliability of its products, which would enable the company to deliver a consistently high level of customer service. Based on quality initiatives developed by the Japanese, Motorola's Six Sigma program—like the TPS—involved every employee in the company.

Six Sigma is a measure of quality that strives for near perfection, which is defined as no more than 3.4 defects per million opportunities.

Motorola learned from the Japanese that "simpler designs result in higher levels of quality and reliability," explains consultant Alan Larson, a divisional quality director at Motorola when Six Sigma was launched. The company also learned that it needed to improve manufacturing techniques "to ensure that products were built right the first time."

The term Six Sigma refers to the idea of near perfection, defined as six standard deviations between the mean and the nearest specification limit. In practice, this means a product or process can have no more than 3.4 defects per million opportunities. Six Sigma, like the SCOR Model, focuses on five areas: define, measure, analyze, improve, and control. Six Sigma programs typically use statistical process control (SPC) tools to monitor, control, and improve a product or process through statistical analysis.

To achieve the desired result of enabling continuous improvement, rather than merely putting a temporary bandage on a problem, Larson recommends that every department, group, and unit within a company complete the following six steps:

* Identify the product you create or the service you provide.
* Identify your customers, and determine the customers' needs.
* Identify your suppliers and what you need from them.
* Define your process for doing the work.
* Establish metrics for measuring the goodness of your process and feedback mechanisms to determine customer satisfaction.
* Ensure continuous improvement by establishing a team that measures, analyzes, and completes focused action items.

Proponents of the Six Sigma approach typically cite its lack of ambiguity as a major plus. The Six Sigma methodology applies a mathematical precision to what might otherwise be highly imprecise supply chain processes. A corollary benefit comes when a company insists on getting commitment from every employee, and requiring everybody to focus on the better good for the entire supply chain.

"Getting our business units to accept change has been accelerated because we're talking a common language and common methodology through Six Sigma," observes Lori Schock, site supply manager with Dow Corning, a manufacturer of silicone-based products. "It removes the doubting Thomas attitude because it is a common process based on facts."

Srinivasan' s 14 Lean Principles

Lean is not a quick fix. When 771 managers and executives were asked by the Lean Enterprise Institute to identify the biggest obstacle to implementing lean at their companies, nearly half (48 percent) said it was, "backsliding to the old ways of working." It's also revealing to note that when asked how far along they were with their lean implementations, more than half (53 percent) characterized their companies as being in the early stages. So while a lot of lip service is being paid to the idea of lean manufacturing, there remains a sizable gap on the execution end.

Lean manufacturing is a management philosophy focused on eliminating waste, reducing inventory, and increasing profitability.

As a result, companies continue to seek guidance in how exactly a lean operation should be set up, and just as importantly, how to maintain it. Mandyam Srinivasan, a professor with the University of Tennessee, has identified 14 principles that companies should follow to build and manage lean supply chains:

1. Measure any improvements in subsystem performance by weighing their impact on the whole system.

2. Focus on improving the performance of the lean supply chain, but do not ignore the supply chain's business ecosystem.

3. Focus on customer needs and process considerations when designing a product.

4. Maintain inventories in an undifferentiated (unfinished) form for as long as it is economically feasible to do so.

5. Buffer variation in demand with capacity, not inventory.

6. Use forecasts to plan and pull to execute.

7. Build strategic partnerships and alliances with members of the supply chain, with the goal of reducing the total cost of providing goods and services.

8. Design products and processes to promote strategic flexibility.

9. Develop performance measures that allow the enterprise to better align functions and move from a functional to a process orientation.

10. Reduce time lost at a bottleneck resource, which results in a loss of productivity for the entire supply chain. Time saved at a non-bottleneck resource is a mirage.

11. Make decisions that promote a growth strategy and focus on improving throughput.

12. Synchronize flow by first scheduling the bottleneck resources on the most productive products, then schedule non-bottleneck resources to support the bottleneck resources.

13. Don't focus on balancing capacities—focus on synchronizing the flow.

14. Reduce variation in the system, which will allow the supply chain to generate higher throughput with lower inventory and lower operating expense.

Lean without Silos

To Tom McMillen, director of global logistics with automaker General Motors, implementing lean practices is a continuing adventure. The company is constantly coming up with new ways to optimize its supply network and remove waste in the process of moving parts from its suppliers to a GM assembly plant. "Throughout our organization, lean practices allow us to reduce inventory in plants and streamline business practices. The benefit is more efficiency and productivity in our supply chain."

Taking the supply chain view is the approach Toyota has taken all along, but it's a difficult lesson for many American manufacturers. In the past, too many companies have looked upon the Toyota Production System (TPS) model—the definitive lean manufacturing model—as a departmental solution suitable only for the plant floor and the production line, observes Jim Matheson, a professor with Stanford University. What's more, this short-sighted thinking comes despite Toyota's insistence that lean should be embraced at the enterprise level to guide future growth from senior management levels on down.

The TPS is based on the concept of continuous improvement, which is reinforced by a corporate culture that empowers employees to improve their work environment. "Things that are running smoothly should not be subject to any control," observes Teruyuki Minoura, a senior managing director of Toyota Motor Corp. "If you commit yourself to just finding and fixing problems, you'll be able to carry out effective control on your lines with fewer personnel." That presupposes an environment where people have to think, which is why Minoura says the "T" in TPS can also stand for "Thinking."

The success Toyota and other automotive companies have achieved with lean techniques is being monitored by other industries as well. For instance, Moen, a manufacturer of plumbing products, has studied world-class lean operations with the intent of introducing lean practices and standardizing work within its manufacturing facilities. "We're trying to find the best fit for our operation and determine how much change we can bring about within our organization, and how quickly," says Scott Saunders, Moen's vice president of global supply chain.

Part of that change is being accomplished by having teams determine the best manufacturing processes, document those processes, train each other on those processes, and then implement a plan where they all agree to follow those processes. It's easier to run lean in a self-contained plant, Saunders admits, so it's important to get input from operations managers as to the best way to do the work. Running lean throughout the supply chain, which is where Moen expects to enjoy the most benefits, requires evaluating every step within the manufacturing cycle.

Silos & Supply Chains - Part 3

When aerospace manufacturer Boeing committed itself to lean manufacturing, it sent teams of workers to various automotive plants around the world to learn the best manufacturing practices from companies such as Porsche and Volkswagen. The aerospace industry is considerably more parts-intensive and labor-intensive than the automotive industry—a typical jet has more than 3 million parts—but Boeing still learned plenty about job scheduling and just-in-time manufacturing. Those lessons have been put to good use in streamlining what is arguably the most complex manufacturing supply chain in the world.

Boeing has been devoted to lean principles since the early 1990s, and one of the company's key goals has been to eliminate waste and the costs associated with it, whether it's wasted time, wasted production materials, wasted labor, or wasted money To reach that goal, the company has substantially reduced its supply base (down by 65 percent since 2000), and now partners only with those suppliers that can provide the best in terms of capability, quality, delivery performance, and collaboration, explains Nonna Clayton, vice president of supplier management for Boeing's Integrated Defense Systems group.

Boeing's lean consultants work directly with suppliers and train them so they can implement lean on their own, Clayton notes. Additionally, suppliers are encouraged to attend lean conferences and symposiums, as well as participate in manufacturing extension partnerships where available. Through a process known as value stream mapping, Boeing has been able to reduce its procurement costs while helping its suppliers identify areas where they can drive out costs as well. With value stream mapping, a company begins by defining the current state of how a process is being done. Then it focuses on where it wants to be and identifies areas of improvement that will bring about that desired state. Using this process, one cable supplier to Boeing has been able to cut assembly time by 44 percent while increasing productivity by 27 percent. It's all part of Boeing's program goal of keeping the flow of information, requirements, products, and services free of waste. In that situation, everybody in the supply chain ends up a winner.

Silos & Supply Chains - Part 2

Dell's strategy hinges on having visibility into the latest supply and demand trends. The company posts its hub-level inventory on the Web, enabling suppliers to check their inventory levels at the hubs, since materials suppliers aren't necessarily the same set of companies as those at the hub. Dell issues forecasts through its supplier extranet, and suppliers commit back to Dell, based on those forecasts. Dell then works from that information, covering any deviations from what it asks for against what a supplier or a set of suppliers can promise.

Suppliers maintain inventory in their hub facilities located near Dell's assembly plants. Dell sends orders to the suppliers on a rolling basis, and factory-scheduling software generates material requirements every two hours per facility. Those requirements get posted to Dell's supplier Web site, and the hubs then pick, pack, and ship the materials to Dell for the next two hours of production. The result is a built-to-order computer.

"The more we know about the capabilities of the supply chain and our suppliers, the better decisions we're going to make for our customers," Hunter observes. In practice, that sometimes means that Dell makes a better choice for a customer than it does for itself, at least for the short term. Lean manufacturing experts James P. Womack and Daniel T Jones have observed that there is "a logical disconnect" between what Dell does for its customers and what it ought to be doing for them based on cost effectiveness.

"Because the short-term spikes in demand can be several times long-term demand and extra capacity is very costly, it is not practical for Dell to maintain enough capacity to respond instantly to every swing in the market," Womack and Jones explain. To be able to respond to individual consumers who want their own customized computer at a good price, then, Dell tries to create customer demand by changing the prices on optional features or even entire systems based on how many or few of any given item the company has.

What sometimes happens, though, is a consumer will request a system that includes components Dell doesn't have readily on hand. Rather than requisitioning a part that might have to be shipped via air freight (by far the most expensive transportation mode), the computer maker will instead substitute an upgraded component it has in stock. The consumer gets a better computer, though the wait for the system will be longer than originally expected. In effect, Dell will take a loss on the cost of the components if it can save on transportation costs and in the process keep a customer happy. And it's been Dell's ability to "cost-effectively supply exactly what its customers want" that has made its supply chain best-in-class.

IBM Corp., another computer industry leader, spends roughly 50 cents of every dollar of revenue on its supply chain, which based on 2005 sales of $91 billion, represents a supply chain spend of $45.5 billion. Big Blue refers to its on-demand supply chain, which Nick Donofrio, executive vice president of innovation and technology, explains is one that can sense and respond to customers' demands and to changes in the marketplace—no matter how frequent and sudden.

"In the past, manufacturing was a rather isolated activity," Donofrio says. "It was located at or near the end of the supply chain. The manufacturing team didn't get involved in anything until after the product had been designed and developed, the planning and forecasting had been done, and the customer had placed the order. That model is history. It will never suffice for today's customers who demand instantaneous response to their inquiries. What's required now is the complete integration of manufacturing into the overall supply chain, as well as the integration of the overall supply chain itself."

IBM's transformation to an on-demand model didn't happen overnight. A key factor in its integration was a razor-close examination of how an order moves throughout its system. "We looked at how we could integrate logistics and inventory, and what we needed to purchase from suppliers," Donofrio explains. "By embracing the e-business model, we were able to deploy capabilities that would increase efficiency of our supply chain, and strengthen our relationships with our suppliers and customers. We were able to link customer-facing systems, such as order entry, order scheduling, and confirmation, to the supply-facing systems that drive procurement, warehousing, manufacturing, distribution, and invoicing." In short, IBM now ties together all of the relevant "plan, source, make, deliver, and return" elements of its supply chain.