19 April 2012
A material world
Manufacturing agility relies on the right levels of raw material being held in the right place. How can manufacturers balance the pros and cons of holding stock in the factory, in a nearby warehouse or at a supplier site on the other side of the world? Laura Cork reports
Just in time, or just in case? That's a question many manufacturers are mulling over. Management of inbound material stock levels wasn't always this complex, but lean manufacturing combined with the surge in offshoring to lower cost regions has meant sourcing from firms that used to respond in hours and now struggle to respond in weeks.
The automotive industry, regarded as the shining light of lean, has JIT all sewn up... but this can be superficial, according to one expert. "It simply means key component manufacturers set up manufacturing or consolidation sites adjacent to the OEM's factory – effectively JIT from over the fence," says Paul Wilson, director at logistics consultancy Davies & Robson.
Wilson recalls a previous role when he worked for logistics business TDG: "When Honda started making cars in Swindon, TDG was nominated as one of two suppliers for JIT delivery to trackside. We were pretty much told we'd need a warehouse next door and what happened was Honda's key suppliers began to move to industrial parks around Swindon. While we did collect from UK ports, most collections were around Swindon, and we sorted, sequenced and delivered to lineside. It was JIT, but in reality it pushed inbound materials out of Honda's field of vision."
The pull of a major automotive OEM is obvious, but not all OEMs have the same draw. Indeed, in some sectors the tables have turned and manufacturers have moved closer to their suppliers. Wilson cites an example of a furniture manufacturer who made desks, stands and the like. In the last three years, the business has moved production to China, as Wilson explains: "A lot of raw materials came from China, so the firm had to build up stocks here to allow for delays and shipping time.
"Eventually, they decided this was unsustainable and moved manufacturing to China. Now, products arrive here in flat packs, some of which is sold in packs, the rest is assembled here before delivery to customers. However, this has caused more problems – quality issues mean they need to assemble samples regularly to check for faults."
Quality issues will soon outweigh any financial benefit, he believes. In fact, for many manufacturers of fairly low-value goods, Wilson reckons the tipping point is imminent.
Quality has "radically changed" levels of materials held at precision engineering business J J Churchill. This 132-man, £23.5m business in Market Bosworth machines parts for aerospace, powergen and high–horsepower diesel OEMs, including Rolls-Royce and Cummins. As MD Andrew Churchill says, lead times, value of materials and space were the three main factors for raw material stocks. Now, it's quality: "Usually, we perform at 100% quality, 100% in-full on-time, but last year we dropped off that perch precipitously in the rebound from the recession." The fault lay further afield than Churchill's factory – the supply chain was not sufficiently robust to cope with the upturn, he says. Castings and forgings businesses were hit very hard by the downturn and lost core labour; many went bust. When orders picked up, they were without the required expertise to produce at the same volume. "So when we placed orders, we found that either we couldn't get a commitment for delivery or, more often, we'd receive a commitment but the product wouldn't arrive on time. When it did arrive – late, so we were already late to our customer – we'd machine it and find it was porous."
Last year was "tortuous", so Churchill asked key casting and forging suppliers to hold consignment stock. Few would, but J J Churchill's biggest supplier of non-ferrous castings agreed – under pressure: "They built two to four weeks' of stock. They recognised this business was worth millions to us and to them, so they were prepared to do it."
Most others wouldn't, however, so Churchill admits he's "quietly built a buffer stock here". Where possible, it's raw material to ensure lowest possible value. "But because of quality problems with castings, we've been forced to machine about a month earlier than we'd typically like, just to find out if the castings are good so we have time to order replacements."
It's hardly toeing the lean line, but the medicine has worked. Quality is back to 100%, even if that means cash is tied up: "We have no net borrowings so it's an option I can afford to consider. Plenty of others can't," he adds. The flip side is the ability to respond immediately to a spike in demand: "That's worth something."
Space is not an issue either. The firm owns the freehold of its site and is putting up a new 13,000 sq ft building, "part of which will be for warehousing of stock we previously wouldn't have held here".
Churchill is adamant that higher inventory is right for his business: "Production is optimised because we can schedule on the basis of stock that's here, not a hoped-for delivery. Set-ups and strip downs can be planned according to what material is in, which will make us leaner," even if that means tying up expensive floorspace for raw material.
It is a balance, he admits. "We're in a high labour cost economy – we can't change that, so we have to play to our strengths on high tech and high value add, and take on highly skilled people for that. That means we won't be the cheapest in the world, which means we absolutely have to be 100% on quality and delivery. Without that, we won't retain or win work.
"Yes, there's a cost attached to what we're doing, but it's a no brainer if we want to have sustainable manufacturing in the UK."
Share the pain
Greater collaboration throughout the supply chain is a far better route to success than merely pushing the responsibility for stockholding back to suppliers, advises Kirsty Braines, partner at business improvement consultancy, Oliver Wight.
Picking up on Wilson's 'JIT over the fence' point, Braines says the automotive JIT model is not always as efficient as it seems. "Often the 'power player' in the supply chain demands delivery in this way, but it's not always the most efficient method for everyone and some suppliers carry a lot of the cost and are forced to run tight margins."
Instead, she urges, get internal planning and control in order first. Only then can manufacturers apply lean thinking to the supply chain. Old silo mentalities – whether within the department or the factory – are outdated: "The action of your business ultimately affects others in the supply chain, and can even impact the entire supply chain," Braines comments. "One additional part or variant, for example, may be negligible for your business, but the cumulative effect can be widely felt, as added cost and complexity is 'bull-whipped' across the supply chain.
"You have to think horizontally... start thinking less about 'me' and more about 'us'," she urges.
What about J J Churchill's example, where it tried to insist on consignment stock at suppliers who weren't delivering on quality? "Just because a supplier is important to your business doesn't necessarily mean you are of equal importance to them – you need to determine the value to them," Braines says. As Andrew Churchill said, the work was worth millions to both parties; a clear cut case.
Medicine for 3PLs
While several logistics players own and run warehouses where they consolidate inbound parts deliveries for manufacturers and feed direct to the lines, "others are quite happy just running trucks and sheds," says Paul Wilson of logistics consultancy Davies & Robson.
However, 3PLs could do more: Wilson points to DHL and its management of NHS Supply Chain. "DHL produces the catalogue and manages stock levels for more than 600,000 products ranging from teabags for canteens to spares for MRI scanners." Early teething problems have been ironed out and, "with another year under their belt, DHL will have something really important to share with manufacturers – the ability to manage and potentially take on financial risk of inbound stocks," predicts Wilson.
More could follow this lead, he adds: "If larger 3PLs start to help manufacturers at either end of the factory with inventory management and its cashflow, there's a huge opportunity for both parties as margins on trucks and sheds are pretty poor."
Davies and Robson
DHL Supply Chain
DHL Supply Chain
Oliver Wight EAME
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