Manufacturing Today: Innovate or be Commoditized

Today I read an interesting article in Chief Executive magazine by J. P. Donlon about Dow Chemical’s CEO Andrew Liveris’ winning formula for driving manufacturing at Dow Chemical. Mr. Liveris’ message for fellow US manufacturers:” rethink your role in the evolving global supply chains and partner with others in training and developing the workforce you will need for the future.”

As I work with clients in the US, it is interesting that, for many in procurement and some areas of manufacturing, there are no strategic plans that exist beyond the next quarter. The focus seems to be in the near term and immediate. I dedicated myself in my new business to build strong category strategies linked to a strong strategic planning process. Some of the key priorities lacking in many manufacturing companies are acquisition of talent, developing the workforce to meet future strategic needs and the understanding of management of the supply chain and value chain. The other key message that I got from reading the Chief Executive article is that Mr. Liveris believes “manufacturing today means you’ve got to innovate faster than they commoditize you.”

After looking at many business strategies, supply chain strategies, and category strategies, I can say that there is no strategy if it doesn’t lead to topline growth, innovative new products, innovative processes and continuous development of  purchasing and supply chain business teams.

Looking at Dow’s success as a growing $57 billion company with 201 sites in 36 countries, a lot can be learned by their strategy of continuous reinvention of manufacturing to meet the needs of end customers.

Are you focused on innovation or will you be commoditized?

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The cost of being a bad customer

If John Henke’s calculations are accurate, General Motors could boost its operating income by $400 million per year just by improving its relationships with its suppliers. For Ford the number is $327 million, and Chrysler, $308 million.

We are not alone in claiming that suppliers don’t give their best stuff to their worst customers, but Henke, who is a Ph.D. and president and CEO of Planning Perspectives, Inc. has finally projected a dollar cost for bad relationships. He’s been studying supplier relationships and cost concessions within the automotive industry for many years, and he developed an index to measure it.

For the first time ever, however, Henke used proprietary data his firm has collected, public records, and media reports to calculate the costs when suppliers do such things as shift their innovations, A-Team support, or added value service to other customers. Foreign automakers have been able to take advantage of those shifts and have saved significantly over time as a result, according to Henke.

You might quibble with Henke’s formula, but the conclusion is pretty solid for any manufacturer in any sector. Beating up suppliers on price is a short-term tactic, not a long-term strategy for profitability. Are the Big Three listening? Here’s an Automotive News video report with Ford’s chief purchaser sounding like he’s read the study and is trying to catch up, while Toyota’s purchasing chief is taking steps to shore up his declining supplier scores.

 

White House endorses quicker supplier payments

One of the maxims of this blog is, “Suppliers don’t offer their best ideas to their worst customers,” and one of the quickest routes to the category of “worst customer” is stretching out payments to 60, 90 or  120 days — as has been fashionable in the automotive and other industries. We generally applaud the idea of thinking like a CFO when you are a supply manager, but too often the finance-department led idea of pushing the cost of money onto suppliers by delaying payments results in tighter margins for the supply base that stifle reinvestment in equipment or research and development.

Apparently President Obama has come around to our thinking on the topic because he recently endorsed an organization of companies that have pledged to pay suppliers quickly, or help them find lower cost working capital.

In the White House announcement, the Administration claims its QuickPay program of paying small government contractors quickly has saved them $1 billion since 2011. The private business version of the program, called SupplierPay is an opportunity not just to save money, but to create better relationships that foster innovation.

 

Thoughts on the Chinese economy

The Chinese version of the ISM PMI® has ticked up from negative to positive territory, according to reports such as this one on Bloomberg.com.

A preliminary June Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.8, up from 49.4 in May. An index above 50 signifies expectations of growth, and Chinese leaders are giving themselves credit for stimulating the economy without resorting to drastic measures.

A survey of analysts by Reuters came to a similar conclusion about the growth of the Chinese economy. More reporting of a stronger Chinese economy comes from the South China Morning Post.

We do a significant amount of work in China and the business environment there is unique, but it has matured since the days when U.S. automakers, for instance, were almost demanding that suppliers source from there. Large Chinese companies are not just focused on exports, but meeting growing domestic demand. They are adapting more sophisticated sourcing strategies of their own, and even investing in manufacturing plants in the United States, as described in this article in The Detroit News.

The strength of China’s economy and the rapid change in sophisticated sourcing is evident in  increasing  demand for development programs, certification programs and alignment with key universities in China.

The maturation of Chinese companies does tend to reduce their cost-competitiveness, but it also introduces elements of stability that mitigate some risks from sourcing at a great distance. Economic indicators that show slow, steady growth are also good signs of stability.

 

Calling all auto suppliers: fed money ripe for plucking

“An opportunity to hit the accelerator on U.S. auto manufacturing growth” is how Energy Secretary Ernest Moniz characterized the Advanced Technology Vehicles Manufacturing Loan Program (ATVM) and the $16 billion in low-interest financing that is available to support efficient-vehicle programs.  While auto suppliers have always been eligible to participate since Congress created the ATVM in 2007, none have secured funding to date. Well, it’s about time the feds recognized that innovation comes from the supply chain as well as OEMs.

Moniz announced in a speech last week that the program is being overhauled to make it easier to fund production of technologies such as lightweight materials, efficient engines and low-friction tires.  The changes also include legal clarification to show that suppliers are eligible for the program, a promise to respond more quickly to applicants and the creation of a new on-line application portal.

Roland Hwang, director of the transportation program at the Natural Resources Defense Council, weighed in and said focusing on suppliers is appropriate because automakers are increasingly depending on them to help meet new fuel economy standards, which can strain the suppliers’ finances.

Ford Motor Company, Nissan, Tesla Motors and Fisker Automotive all have participated in the loan program.  Auto suppliers, it’s your turn.

 

Five Predictions for 2014

The ISM Manufacturing Index this month showed that the overall U.S. economy has been growing for 55 consecutive months. The manufacturing sector has trended positive for seven straight months. Employment numbers aren’t terrific, but they aren’t terrible either. These are generally favorable signs for business — but they suggest higher pressure on buyers to contain costs. Based on our experience and work with current clients, here are five predictions for the year ahead.

1) Buyers will see increasing pressure on pricing as industries with tight capacity or depressed margins attempt to improve margins.
2) Buyers will find longer lead times and reduced capacity as suppliers have left industries as a result of recession and remaining suppliers are enjoying higher margins based on high demand and low supply.
3) Talent management and development will be critical to the success of supply chain management success.
4) New government regulations in health care, energy, banking and other sectors will increase complexity, compliance and cost.
5) More procurement and supply chain leaders will reach the C suite.

How does this match what you are seeing?

GM Chooses new CEO with Supply Chain Experience

If you weren’t already convinced of supply management’s role in developing and driving overall corporate strategies in global companies — take a look at what General Motors just did.

The board of directors for General Motors took a bold step this week by naming a woman as the company’s Chief Executive Officer, replacing Dan Akerson when he retires next month. Here’s the GM News release.   Mary Barra will be making history as the first woman to ever lead GM — or any global automaker — as Chairman and CEO, and that’s certain to receive plenty of attention.

It’s also very important to look at her experience because she is a 100% GM insider. Barra rose through the ranks at GM as an engineer and engineering manager, starting as a co-op student at General Motors Institute (now Kettering University).  She was named the senior VP for product development in 2011, and a few months ago, also assumed responsibility for GM’s global purchasing and supply chain organization (with a promotion to executive VP).

That last step — tying together global product development with global supply chain sent a very strong signal that GM expects to deliver innovative products through its relationships with suppliers. Selecting the executive holding that dual position as the CEO over others who have managed brands or regional operations says a lot about GM’s strategy for the future.

Ford seeks innovation from partnership with minority supplier

We regularly write about using your supplier base to bring innovation to your company, but here’s a twist on that theme. According to Crain’s Detroit Business, Ford patented a process for welding aluminum, then shared it with a supplier to develop the technology for production. The deal was made under the umbrella of minority supplier development because the supplier is minority-owned. But it also takes advantage of the supplier’s knowledge and experience. Who better to take an idea from the lab to the assembly line than someone who is already fabricating aluminum in production volumes?
There was a time when automakers would develop a new process from beginning to end, then simply dictate to suppliers how it would be implemented. In practice, that approach only gets you to the starting line. Sharing development responsibilities sets a better foundation for improvements even after the process is production-ready.
Automakers have a bad reputation for supplier relationships, so it’s good to see evidence of more collaborative approaches.

120-day payments? Maybe not in the UK

A few years ago when the global economy was in a funk, companies could point to their own cash-flow problems as they extended their payment cycles to 90 or even 120 days. That’s a pretty hard case to make now that the economy has been growing for more than four years straight (according to the ISM Report
On Business™).
Nevertheless, it’s apparently not that uncommon still. In fact, British Prime Minister David Cameron has started talking about legislating limits to late payments. Here’s the coverage a Twitter follower of mine found in The Guardian.

Pushing payments out to four months certainly gives a boost to factoring companies, which will advance funds based on invoices. And it may help a company to winnow out weaker suppliers for components or services that are easy to source. However, for critical parts or strategic suppliers that are bringing your company innovations or unique value — slow payments are a good way to dry up the working capital your suppliers’ need for expansions, replacing equipment or R&D. Or worse, drive them to take their unique value to your competitors.

Lessons from Walmart on corporate social responsibility

Walmart has taken some huge steps over the last few years to position itself as a socially responsible corporation, and recent stories suggest how difficult it can be to choose a virtuous path.

We know that Walmart was part of an effort to address the horrible tragedies in the garment factories of Bangladesh. The company hired a firm to audit the conditions at its supplier factories, and it recently posted on its website the reports on 75 different factories.  That’s a remarkable act of transparency that puts some weight behind the company’s commitment to changing conditions in the garment factories. Women’s Wear Daily described the action as the first among retailers in the Alliance for Bangladesh Worker Safety.

Countering that positive note, however were the claims from a European consortium of clothing companies that the Alliance was not doing enough because it was simply offering loans to make factory improvements while European firms were making outright grants. The Europeans called it essentially a case of the Walmart and other American companies riding on their coat-tails. Here’s The New York Times coverage.

The situation suggests why it’s so difficult for many corporate leaders to launch and maintain socially responsible initiatives. You try to do the right thing to get a controversy behind you, and it only raises expectations. The discussion doesn’t end, it merely changes focus. The lesson here is that the reasons for corporate social responsibility have to go deeper than scoring PR points. The scrutiny doesn’t stop when you announce a plan to “do right,” it only intensifies.