Room to Grow

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Manufacturers have significant room for supply chain improvement.

By Jeff French

These are exciting but uncertain times for manufacturers. They are optimistic about the prospects for lower corporate taxes, reduced government regulation and greater domestic production and job creation. But that optimism is tempered by talk of trade barriers, tariffs and border taxes, issues that could challenge their global supply chains.

Concerns about supply chain management represent the broader issues manufacturers face in today’s global economy — improving quality, increasing efficiency, cutting costs, speeding delivery and enhancing customer service.

These topics surfaced in a recent supply chain survey conducted by Grant Thornton LLP for the National Association of Manufacturers. Some 120 domestic manufacturers discussed the effectiveness of their supply chains, and ways they could innovate and improve the flow of goods from supplier to customer.

Results of the supply chain survey offer insight into how manufacturers are positioned today and where they need to be to address future challenges. Among the findings:

* The respondents, mainly small and midsized manufacturers, are optimistic about the future. More than 20 percent said they were very positive about their company’s business outlook, while 62 percent said they were somewhat positive.

* When it comes to their supply chains, these companies admit they have significant room for improvement. Only 10 percent said they had a fully implemented strategy to optimize their supply chain performance. Meanwhile, 36 percent said they had only informal supply chain processes and little measurement of integrated tactical plans.

* Some 48 percent said customer demand drove their supply chain strategy, followed by 26 percent stating that it was competitive pressure, 16 percent shareholder value, 6 percent capital management and 4 percent liquidity.

* Almost 78 percent said they focused their supply chain improvement efforts on managing direct costs, such as labor, overhead, material costs and inventory. Only 17 percent said they focused their supply chain improvement efforts on managing indirect costs like waste, rework, warranty, on-time delivery or bad debt.

* Respondents said they focused most of their supply chain efforts and received the most benefits from building closer relationships with a few key suppliers, centralizing procurement for improved supplier terms and compliance, and nearshoring suppliers for lower transportation costs and other benefits. At the same time, these companies expended significantly less effort on integrating their data systems with suppliers and using automation or robotics to streamline operations.

In short, the survey results suggest that many manufacturers have a lot of room to grow. The good news is that many of them have identified the need to take action to strengthen their supply chains.

Manufacturers Worry About Supply Chain Disruptions

The supply chain survey and follow-up interviews with respondents reveal that domestic manufacturers are upbeat about their future, buoyed by a healthy economy and the pro-business approach of a Republican president and Congress. Indeed, 82 percent said they were either very positive or somewhat positive about their business outlook.

At the same time, manufacturers worry that some of President Donald Trump’s trade proposals — which may include tariffs, border taxes and canceling trade agreements — could disrupt their global supply chains.

For example, a Midwest metal manufacturer interviewed as part of the survey said he faces stiff competition from European firms, which, due to the strengthening of the U.S. dollar, can sell products for 30 percent less. Improving his supply chain has helped the manufacturer lower his costs, and reduce the time it takes to produce and deliver his products.

The manufacturer is hopeful that President Trump and the GOP will come through on their pledge to lower the corporate tax rate, allowing the company to invest more money in R&D, new equipment and marketing. At the same time, the manufacturer also is worried about the administration backing away from trade agreements, like the Trans-Pacific Partnership, because it will affect his supply chain.

Customer Demand Drives Supply Chain Decisions

Many manufacturers feel that customer demand drives their supply chain strategy. Some 48 percent of survey respondents ranked customer demand as their top choice, followed by competitive pressure at 26 percent and shareholder value at 16 percent.

Another of the survey respondents was a West Coast music equipment manufacturer who has witnessed increased competition from rivals with inferior products and a lower price. The manufacturer has been successful delivering a quality product at a competitive price by building strong relationships with his suppliers of raw materials — the steel, aluminum, nylon and other goods.

The company has multiple suppliers lined up to deliver goods, and regularly reviews its options for materials. It also sourced suppliers closer to home in order to have more control over quality, and 95 percent of its components are made in the United States.

Manufacturers Use Supply Chain to Manage Costs

Manufacturers primarily use their supply chains to manage direct costs, according to the survey. It’s easier for a small- or medium-sized company to focus on direct costs, such as labor and materials, than on indirect costs like waste or bad debt.

A Midwest electronics manufacturer said in the survey that he spends a good deal of time worrying about direct costs. He said he constantly monitors customer orders and the flow of raw materials to keep down costs and speed production.

The manufacturer has employed new methods to accomplish this, including meeting with customers regularly to anticipate their future needs and trying to determine just the right amount of inventory to hold in stock. Technology has also helped keep costs down. The company added new machinery that has greatly increased the number of components it can produce, reducing labor costs and speeding up delivery times.

Manufacturers Seek Ways to Strengthen Supply Chain

Adopting a well-thought-out strategy can strengthen the supply chain and ultimately lead to the manufacturer’s greater success. Rather than assuming a defensive posture because of government policy uncertainty, manufacturers are trying to embrace supply chain strategy as a way to navigate the shifting terrain.

Manufacturers are strengthening their supply chains by:

* Assembling high-performance teams to create a strong supply base, improve quality and service and develop a measurement system.

* Employing a disciplined process to find the best suppliers, whether domestic or foreign based.

* Using competition to increase performance and reduce price, such as having two regular suppliers of a product and one on the bench to create competition and drive results

* Setting expectations and goals for suppliers to improve their performance and monitoring that performance, then working with them collaboratively to continuously improve the performance for the benefit of both parties.

Finally, manufacturers are reassessing the locations of their suppliers to determine whether offshoring or reshoring is a better alternative. Companies are taking a hard look at sourcing locally — if not as a strategy, then as a precaution. The rationale: Be ready or even ahead of the game.

Jeff French is the National Managing Partner of Grant Thornton LLP’s Consumer and Industrial Products practice and leads the firm’s Manufacturing practice. He has more than 29 years of experience and has worked with companies on a variety of complex technical matters, corporate and liquidity challenges, and infrastructure issues. Jeff can be reached at jeff.french@us.gt.com.

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