By Steve Yahn
Managing their extensive supply chains is the greatest challenge facing large manufacturing companies today.
"I think that addressing their supply chain network is really the last frontier of major cost reductions for leading companies," said Jeff Dobbs, a KPMG partner and global sector chair and U.S. leader for diversified industrials, based in Detroit.
"It's a long, complex process," he said. "If you went back 20 years, many big companies were vertically integrated; they made everything from screws and bolts to the car."
Then somebody had the great idea that maybe that wasn't the best way to serve a growing and global client base, so they spun off companies around core competencies and core products. But that system eventually laid the foundation for today's supply-chain-management problem: Too many tiers in the network below Tier-1 suppliers.
And too many manufacturers do not have visibility of their supply chain beyond Tier-1 suppliers, according to a 2013 KPMG survey of manufacturing executives. More than half of the U.S.-based respondents (54 percent) said they lack visibility, compared to 49 percent globally.
Moreover, according to the survey, only 9 percent of the 335 respondents said they have complete visibility of their supply chains. That number is even lower among U.S. executives, with only 7 percent claiming complete supplier visibility.
Linda Conrad, New York-based director of strategic business risk management at Zurich Global Corporate in North America and a supply chain specialist, said: "One of the main things we've done with companies, especially if they have suppliers overseas, is to help them map further down their tiers. You have to be sure you can track all the way down."
Conrad said she had just spoken with a client in pharmaceuticals who said the company is looking at creating a serial number that runs from the initial raw materials all the way through the final product.
Focusing on improvement up and down the supply chain is important because much of the disruption that is caused in the supply chain comes in tiers below the Tier-1 suppliers.
"We've started a disruption database in which we've kept track of publicly available information on corporate disruptions for the past 12 years, and the results show that 40 percent of the disruptions occur below the direct suppliers," Conrad said. "That's really part of the reason why Zurich developed an all-risk supply chain insurance policy."
Andrew Maul, White Plains, N.Y.-based executive director of IT applications for Avon Products, said that, as you go down into the tiers of your suppliers, getting them all aligned becomes very complicated.
"That's a process problem," he said. "Everybody has conflicting positions when you want to get your interests aligned."
Another problem, Maul said, is communication technology is often lacking.
"As you go down into the tiers of the supply chain, the lower tiers have less sophisticated technology. And I know for a fact when you communicate with the guys who are providing sand needed for silicon in computer chips that you often can end up communicating by email or in many cases even by fax," he said.
"That's because you've pushed your supply chain up to the lowest cost denominator in most cases. It can still provide a quality product but you've pushed it out to places that may not have the infrastructure that we in West have a familiarity with," he said.
KPMG's Dobbs said more large manufacturers are putting their supply chains at the center of their business strategies to serve as the foundation for operational efficiency and collaborative innovation.
"Obtaining real-time visibility across all tiers in the supply chain can significantly increase speed to market, reduce capital expenditures and manage risk," he said. "Moving toward a demand-driven supply chain is probably the single most important step a global manufacturer can take today."
Supply chain innovation, he said, is a key to future success for large manufacturers.
"With new data technology proliferating to enhance partnering, share efficiencies and visibility, we'll start seeing some breakthrough innovation in manufacturing, not only to the products but also to the process," he predicted.
Zurich's Conrad noted that virtual vertical integration is an emerging new trend in the field.
"This means you are trying to virtually integrate your whole supply chain, considering them almost internal, from the component parts all the way out to the customer," she said.
"If you treat the sub-tiers as your own, you would have a better continuity plan and you would know more about working conditions and those sorts of things. Hopefully this will help people know where their exposures are and assist them in doing a better job of mitigating them," she said.
To improve a company's supply chain, Avon's Maul suggested picking suppliers that have robust technologies that can communicate in an efficient manner. "Not faxing, not emails, but rather some sort of messaging communication technology using automated messaging so a company can get notified when the supplier is running short of product.
"With this technology, you can send automatic messages to your supplier to help them get word down to other suppliers," said Maul. "That's a key part of the communication: speed."
Especially with large companies, they can't rely on their Tier-1 suppliers to be the sole managers of their suppliers, Maul said. "You've got to work together. You've got to treat your suppliers the way you treat your customers."
YAHN is a former editor with Advertising Age.
May 20, 2013
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