In the past few weeks, I’ve talked with three companies with a key objective to look at on-shoring components that have been sourced in low-cost countries for several years. The directive is coming from both the executive management and a Board of Directors concerned with risk management. The difficulty in resourcing some of these components is that it’s difficult to find suppliers with the capacity, scale and know-how to support the demands of large customers, because much of the industry has moved to low-cost labor countries. In some cases, whole industries were outsourced, like the tooling and electronics industries. Each industry has its own problems returning to domestic production.
The tooling industry saw many of its skilled tradespeople leave the industry, retire and they’ve failed to drive automation and capital expenditures in the absence of customers. Tooling has been sourced in Asia for more than two decades. To reshore, sourcing professionals must locate suppliers, help them gain skilled workers or encourage automation and scale up the capacity and capability to meet their demands. This is not a simple sourcing program and will take resources, time and capital to accomplish.
The electronics industry made significant investment in Asia, developed the supply chain and workforce in Asia. It, too, will take a skilled labor force, capital investment and supplier development to return sourcing to US factories. While these are just two examples of the difficulties in reshoring, many companies are now sounding the alarm to their purchasing and supply chain teams to build risk mitigation plans based on a new reality and changing environment.
As part of any market analysis, category managers must keep refreshing the Porter’s 5 Forces and STEEP/PESTLE (social, technological, environmental, economic, legal and political factors) market analysis to stay ahead of the rapidly changing dynamics. If you haven’t looked at reshoring, let the tariff imposed on Canadian softwood lumber be a warning that on critical components you may need a new strategy to locate domestic suppliers and understand what development must be done to make them capable should the need arise.
Are you prepared to develop a supplier?
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.
Posted in Auto Industry, Inside Baseball, Supplier Relations
Tagged automotive, cost containment, General Motors, global business, manufacturing, procurement, purchasing, sourcing, Supplier Relations, supply chain, supply management
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.
Posted in News Analysis, Supplier Relations
Tagged automotive, cost containment, global business, manufacturing, procurement, purchasing, sourcing, Supplier Relations, supply chain, supply management
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.
A seismic shift may be coming in the automotive industry.
“Not even two years after the delivery of the first Model S, Tesla Motors has transformed from fledgling start-up to arguably the most important car company in the world. We are not joking,” said Morgan Stanley analyst Adam Jonas in a quote to the LA Times.
According to the article, suppliers who once dismissed this manufacturer are now considering building dedicated lines and facilities solely for Tesla’s business.
At least four southwestern states are vying mightily to become the home of Tesla’s $5 billion gigafactory which will employ more than 6,000 people to produce enough battery packs by 2020 to supply 500,000 vehicles.
But suppliers and states aren’t the only ones to sit up and take notice. One of the largest automakers in the world, General Motors, established an internal “Team Tesla” to analyze that company’s culture and success. Managing and collaborating with suppliers is one key to success.
Dare we say the current may be shifting toward electric cars?