Category Archives: Manufacturing

Could the Fateful Four Bring Down Your High-Tech or Automotive Supply Chain?

Today, Resilinc announced that leading global supply chains have become dependent on the same small group of sub-tier suppliers – concentrating the risk and significantly increasing the potential for crippling supply chain disruptions. Based on global supply chain mapping data that it gathered over the past year, which analyzed a subset of data from over 600 large and medium suppliers across 2,500+ sites spread over 50+ countries, Resilinc performed a detailed analysis in order to identify specific industry trends that could be used to create stronger supply chain resiliency plans.

This study, which focussed on the analysis of sub-tiers that often hide risks that go undetected by the buying organization, not only found that global supply chain risk tends to be concentrated in certain sub-tier suppliers and localities, but also found that many leading global supply chains, in the High-Tech and Automotive sectors in particular, have become dependent on the same small group of sub-tier suppliers.

In particular, the study found that in the High-Tech and Automotive supply chains, the vast majority of suppliers are dependent on sites that are owned by just four suppliers and that more than 50% of all sites analyzed are located in just four countries: Taiwan, China, the USA, and Japan. Who are these four suppliers that can control the fate of your entire High-Tech or Automotive Supply Chain? Taiwan Semiconductor (TSMC), with an 83.8 B market cap; Amkor Technology (AMKR), with a 926 M market cap; ASE Inc, with a 191.5 B market cap ; and United Microelectronics (UMC) with a 5.2 B market cap. With a combined market capitalization of over 281 B, these fateful four suppliers have a commanding control of your High-Tech and Automotive Supply Chains.

For more information on how visibility can improve your supply chain resiliency, see the IDC Manufacturing Insights on Arguing the Case for Supply Chain Resiliency in 2013 (registration required).

Optimization: Is It Time to Move Beyond Sourcing?

A big focus of this blog is, of course, Strategic Sourcing Decision Optimization (SSDO), one of the few advanced sourcing methodologies guaranteed to save your organization, on average, 12% if correctly applied (as demonstrated in two back-to-back studies by Aberdeen) and the doctor‘s speciality. But it’s not the only place you can apply optimization in Supply Management to save money. Another area, as covered a number of times on SI, is Supply Chain Network Optimization (SCNO). And, of course, some companies just focus on the intersection and do Logistics optimization. But this is not everything that can be done, or should be done, especially in an age where many industries now see The End of Competitive Advantage and don’t actually own physical assets, leasing them as need be to create the products and services desired by their prospective customers.

In this situation, what matters is Asset Optimization, where you optimize a one-time dynamic network to minimize sourcing, network, and logistics costs to minimize the total supply chain costs associated with the product you wish to produce. This is easier said than done. In sourcing, you are mainly considering bids, lanes, and associated costs to compute the optimal TCO (Total Cost of Ownership), and if lifetime costs and metrics are available, or TVG (Total Value Generated) with respect to a fixed situation. In network optimization, you are optimizing the location of owned factories, supplier production centers, warehouses, and retailers to optimize the distribution costs. But in asset network optimization, you have to simultaneously consider the network and associated distribution costs, the sourcing requirements and associated production costs, and the costs of using, or not using, the resources you already have available and contracts you have already negotiated. In addition, you have to consider the risks associated with each potential supplier and location, the sensitivity of the overall asset network to each supplier and location (and is there a single point of failure), and the ability to dynamically alter the network should a failure occur or customer demands change.

Plus you have all of the difficulties associated with each type of optimization. With respect to the network, there will be many alternatives for production site, each site will have multiple, and different, asset lines, and each asset will be qualified for a certain operation with respect to a certain product. In addition, some assets will be more efficient and cost effective, and unqualified assets will have a qualification/certification step, which will require limited manpower – a variable that does not need to be modelled in traditional sourcing or SCNO models. It’s a very difficult problem that requires modelling of multiple types of variables and constraints at multiple levels at multiple times. And this last requirement makes the model even more complex. In a traditional sourcing model, you don’t really need to consider “time”, as it doesn’t matter how often the trucks deliver your product, just how many trucks are needed to deliver your product as you are billed FTL or LTL by the delivery. And it doesn’t matter what production schedule the supplier(s) use(s) as long as your products are ready on time, so only the total volume need be considered. But when you are dealing with production models, especially when trying to dynamically construct and optimize an asset network, production schedules are significant. If a certain location only has 30% of capacity left available and can only schedule it during a given timeframe, that has to be taken into account. If some of the products have to be delivered before they can complete the first production run, then there has to be a location that is able to do so. And if a continual supply is needed over nine months, the production cycles should more or less line up with minimal overlap as, otherwise, inventory costs would soar.

It’s a complicated problem, but one that is becoming more and more important in fast moving industries such as fashion and consumer electronics — and one that most SSDO providers can’t address. But I’m happy to report that there are a few optimization vendors in the space who can. One is Algorhythm, in India, that has been doing SCNO for many years, and who has built up a lot of this capability over time while working for it’s global multinational clients such as Unilever. Another, newer entrant, is Trade Extensions, that has been doing SSDO for many years and, at the request of its major multi-national clients, including P&G and Coca-Cola, built up the capability in their solution with innovative new platform enhancements since SI last reviewed their solution in 2011 that make it very easy to define the models, run the scenarios, compare and navigate the results. A few of these enhancements will be described in a future post. Stay tuned!

China is Not to Blame for Our Manufacturing Woes

Laurence Edwards and Robert Z Lawrence of the Peterson Institute for International Economics, and authors of Rising Tide, Is Growth in Emerging Economies Good for the United States, have put a presentation based on their book online that, among other things, clearly demonstrates that China is Not the cause of our manufacturing woes. Given that 86% of North America based companies have a supply chain that relies upon key parts from China (as noted in the Risk Management Monitor) and that a number of prominent economists (including Samuelson, Summers, and Krugman) have stated that growing trade (especially with low-cost countries, with China being #1 for many years) reduces wages, welfare, and jobs, this might be hard to believe. But it’s true. In fact, China outsourcing has had essentially zero impact on North American manufacturing. How can this be?

Consider this chart which shows the manufacturing share in establishment employment from 1961 – 2010. When you look at the forecast based upon the fitted trend line of market share from 1961 to 1979, and the actual share of manufacturing employment, you see that the forecast was dead on! (Moreover, the trend has been repeated around the world – including Sweden, the Netherlands, and Germany.)

Manufacturing Job Trend

This data suggests that the reason for the decline in manufacturing is a common, pervasive, cause. Specifically, productivity growth. Automation is reducing the amount of labor required to produce goods. If the amount of labour required to produce goods decreases, the only way that jobs could retain constant is if demand increased. But this didn’t happen because, let’s face it, most people only want one fridge, one car, and one iPhone. (Yes, some people want two, or three, but not ten, or more, and when you consider the increase in manufacturing productivity over the last fifty years, for many goods, we’d have to buy ten to maintain the same level of manufacturing employment.)

But we could afford to buy more, as the productivity increases have, relatively speaking, brought many prices down (adjusted for inflation). So why haven’t losses slowed? Because we buy services instead. We eat out more, take limos, and pay carriers to give us 4G service. And that’s the real reason manufacturing jobs have declined, because service jobs grew. So, in this case, we can’t blame China, even though they have taken a very large amount of North American dollars over the past 30 years.

A Great Post on Home-Shoring on the Manufacturing Innovation Blog

The Manufacturing Innovation Blog recently published a great post on why you should be HomeShoring. And while they are choosing to use the less precise term of re-shoring, they are making the same point that SI has been trying to make for six years – for many of you, it’s probably time to bring manufacturing home (or at least back to North America as a starting point).

Asia is not the low-cast locale that it used to be. When you factor in:

  • steadily (and sometimes rapidly) increasing labour costs
    with senior managers in several emerging markets now earning compensation that matches or exceeds compensation for the same position in the Americas and Europe
  • the high costs related to supply disruptions
    as it can easily take 45 days to replace a lost shipment or correct a stock-out
  • quality and rework problems
    that are very expensive to fix when the defect isn’t noticed until the first shipment arrives in the Americas
  • intellectual property theft that is very common
    and the cheap copycats that sometimes hit the Asian market before your own product is ready
  • the costs of dealing with the bureaucracy and red tape associated with foreign (and even local) governments when off-shoring
  • steadily increasing transportation costs
    as the price of oil continues to rise, the price of insurance continues to rise as piracy increases, and carrier profit margins continue to rise as demand rises and supply stays steady
  • the cost of communication and management
    as regular travel and site visits are required, and airfare keeps going up
  • steadily rising utility costs
    as demand for energy is soaring in the developing world
  • the cost of non-patriotism
    and the inability to sell to governments and other agencies that have to “Buy American” (and frown on companies that produce all their wares overseas)
  • the other hidden costs that

the reality is that, when you do the Total Cost of Ownership equation, and also factor in the productivity you can get in a modern manufacturing plant with lean processes and a well educated workforce, it’s often cheaper to produce the product at home in America! Unless you’re talking Fortune 100 economies like scale, and are ordering millions of units like Apple does, you’re not getting Foxconn economies of scale and the 10% to 20% savings that lured you over there a decade ago just aren’t there anymore.

It’s time for North America to rebuild and strengthen its manufacturing role as the world’s manufacturing leader. The industrial revolution and the manufacturing era that followed is what allowed America to overtake Britain as the number one country in the world (in terms of GDP). I truly believe that if America does not immediately embark down the manufacturing path again, China will overtake America by the end of the decade. While it might be inevitable that someday China will overtake the United States of America as the number one producer of GDP with four times the population size and a mission to reclaim their former glory, there’s no reason that such a rise to prominence can’t be delayed for a couple of decades. But that will only happen if America focuses on what made it great, not pointless political agendas and filibustering in the Senate.

WOW! Finally a Decent Piece on Higher Education!

A recent press release over on Brookings.edu that summarizes a recent paper by Robert D. Atkinson and Stephen Ezell, who are calling on Congress to “Support the Designation of 20 ‘U.S. Manufacturing Universities”, is a breath of fresh air where the debate on (higher) education is concerned.

Despite what some academics might think, including Mr. McAfee who published this unbelievable post on the HBR blog site calling for us to “stop requiring college degrees” when every single job that doesn’t involve serving food is going more high tech every day, we need more college education, not less. The problems we have are a) it costs too damn much (which should not be the case because an educated society is a productive and innovative society, and if anything is going to be subsidized, it should be education) and b) we are giving too many people the wrong education. As those who follow me on Twitter will know (as I try to avoid the crushing weight of the fail whale), I do not lament the fact that “Liberal Arts Colleges are Disappearing”. How many English literature and classics PhDs do we need anyway? (The answer is not that many.) As long as we save the historians, so we don’t repeat the mistakes of the (recent) past, it wouldn’t hurt to have the number of literature and the philosawfical majors approaching extinction levels compared to the counts for science and engineering majors. (I’m not saying we shouldn’t study these disciplines, as we all should study them to a degree, but graduating tens of thousands of students when there are only so many teaching jobs opening every year is just a waste of money and potential all around.)

We need people focussed on science and technology and other pursuits that benefit the economy and them, especially where jobs are concerned. And to this point, after a decent grounding in the basic theory has been conveyed, we need programs with a strange focus on the practical. Even in Engineering, we only need so many designers — after that, we need manufacturers and maintainers. We need people with a grounding in the practical. Now, I know the academic among you will argue that university is about improving the mind and increasing the mental potential of the individual, the real world be damned, but lets face the fact that, right now, for the most part, we have no trade schools, we have no apprenticeships, and we have, in many industries, no other way of identifying someone who is likely to be intelligent and educated enough to do a job. The College / University degree is the passport to a job in today’s world, and its about time we had programs that were appropriate.

So the suggestion by Atkinson and Ezell that Congress should establish an initiative to designate 20 institutions of higher education as “U.S. Manufacturing Universities” as part of a needed push to strengthen the position of the United States in the increasingly innovation-driven global economy is one of the best, and most logical, suggestions I’ve seen in a long time. And since we are not going to return to the way of apprenticeship (which is the answer), let’s finally create the outputs that industry wants from Colleges and Universities. This doesn’t mean that all programs have to be practical, just that there should be practical options where they are needed and required by today’s society. It just makes sense. (So, as you all know, you can bet that Congress won’t do it. Especially since this would mean raising taxes to beyond the point necessary to prevent the budget reductions that are coming into effect that could cost America up to 1 Million jobs because the Republicans refuse to allow the rich to pay their fare share of taxes. But still, it’s nice to know that somewhere there are still some level, practical heads.)