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The Confluence of Facility Planning and Supply Chain Strategy

An efficient, cost-effective supply chain can be achieved by considering logistics early in the location decision process and continuously sharing information.

Richard J. Maturi (November 2012)
According to Mickey North Rizza, vice president of Strategic Services for BravoSolution, a supply-management consulting firm based in Chicago, “Commoditization of many products has driven companies to countries such as India, China, and Africa to obtain low-cost manufacturing and low-cost component parts.” Rizza points out that companies need not only consider component parts and raw material suppliers, but also the drive to get to market faster at a lower price.

“Companies must balance the desire to get lower off-shore production costs versus the advantages of being closer to their customers. For example, despite lower production costs in China, Chinese computer-maker Lenovo Group recently announced it would begin manufacturing PCs in North Carolina in order to be more responsive to its U. S. corporate customer base and improve its visibility in the U. S. market,” says Rizza.

On the same day, Germany’s ThyssenKrupp was forced to admit a major supply-chain failure when announcing its decision to sell its high-tech steel plant opened in Alabama in 2010 at cost of $5 billion after incurring a $1 billon loss for the first three quarters of 2012. ThyssenKrupp attempted to supply the Alabama steel facility with low-cost steel slabs from its Brazil plant. A shrinking steel market and high shipping costs put the final nail in the coffin for the ambitious project to gain a foothold in the U. S. market. With potential suitors for the plant bidding in the $1 billon range, ThyssenKrupp’s faulty supply-chain decision looks to cost them dearly as they try to shed their money-draining Alabama facility.

“Companies often fail to consider the critical risk areas in their supply-chain equation. It is essential that management thinks through what can go wrong and the implications of such failures to their total operation,” warns Rizza.

Security of Supply
“In the aftermath of the Japanese tsunami and other recent supply disruptions, security of supply is the key issue looking forward. Depending on the industry, manufacturers rely upon third-party suppliers for half or more of their value added. Firming up the supply chain can take several simultaneous paths including culling down the supplier list to those of strategic importance, developing multiple source relationships, increasing inventory levels, strengthening strategic relationships, and “going all in” with suppliers,” says George F. Brown, CEO and co-founder of Blue Canyon Partners, Inc. of Evanston, Illinois.

Brown advises assessing the implications of a supply-chain disruption on production and margins, determining the availability of alternative ingredients or suppliers, and developing strategic supplier relationships. “Large corporations and small companies my have thousands or hundreds of suppliers, but only a small number rise to the level of strategic supplier status. The days of squeezing the supplier for the last nickel of savings are over; it’s time to turn to strategic relationships that benefit both parties,” stresses Brown.

Impact on Facility Decisions
Such strategic supplier relationships impact facility planning and management decisions including development of co-located facilities, new product development in conjunction with suppliers, and housing supplier employees within manufacturing, engineering, and warehousing operations.

“Building these new strategic supply-chain relationships takes a new mindset on both sides of the equation. Concentrating on ‘Show me the Money’ metrics will deliver benefits to both parties,” points out Brown.

“Improving your inventory-turns metric can significantly cut costs, improve flexibility and improve cash flow,“ said Narayan Laksham, CEO and founder of supply chain software company Ultriva, headquartered in Cupertino, California. “In addition it can help cut down facility costs by reducing your warehouse requirements by eliminating the need for higher inventory levels and by moving strategic inventory to the shop floor instead of the warehouse.”

Laksham continues: “Cloud-based supply-chain software creates an open-loop process with orders generated as supplies/components are scanned while introduced into the manufacturing process. A quantum of lead times and trigger points generates the supply shipments so that the manufacturer receives them when required. This eliminates unnecessary inventory and downtime due to inventory shortages.”

“Manufacturers are beginning to learn that supply-chain management is more that just ‘leaning on’ their suppliers to shave pennies off the cost of a part, raw material, or component. Transportation and logistics should play a bigger role in the site selection process earlier in the decision-making process. Many larger corporations, like Caterpillar, work with their suppliers to set up supply warehouses and operations close to their production facilities to ensure supply without interruption. The new $200 million Caterpillar plant near Athens [Georgia] will provide 1,400 jobs, but we know it will also add several thousand more jobs as the supplier base builds out around that plant,” says Page Siplon, based out of Savannah as the executive director of the Georgia Center of Innovation for Logistics.

It should be noted that Siplon was recently appointed to the newly formed U.S. Advisory Committee on Supply Chain Competitiveness, which will act as a liaison between industry and government. The committee’s advice will also be useful in the development of a national freight policy and in executing the National Export Initiative, which aims to double U.S. exports by the end of 2014.

Information Sharing
“Manufacturers are walking a fine line trying to counterbalance the efficiency gains of manufacturing in low-cost overseas facilities against minimizing the risks and costs of timeliness, warehousing, transportation, and customer support. While it is difficult to assess the risk associated with each strategy component, it is also essential for core competitiveness and success of the overall supply-chain network,” further comments Douglas Kent, vice president of Avnet Velocity, part of Avnet, Inc., one of the world’s largest suppliers of electronics components.

“In order to achieve a successful strategic supply-chain relationship, you need to share, share, share, and share some more. The more information that is passed along the supply chain, the less risk exists of a supply-chain disruption. It sounds stupidly easy, but in reality it is hard to implement,” warns Roman Bukary, head of Manufacturing and Wholesale and Distribution for cloud-based business management software firm NetSuite in San Mateo, California.

“Don’t just send over orders to your supplier, help it plan in advance for your orders. Pre-negotiate purchases and scheduling. Make your supplier your partner. Encourage them to co-locate inventory closer to you to cut down lead times and increase inventory velocity. Today, it’s all about logistics; labor costs are no longer driving the facility location decision. You must manage inventory-in-transit effectively. In addition, supply-chain management is not only for large corporations; smaller companies can also benefit from the cost savings and flexibility derived from perfecting your supply-chain management,” advises Bukary.

NetSuite client Mountz, Inc. — a manufacturer and marketer of precision torque tools, control equipment, and measuring equipment — made the decision to relocate its three branch-based worldwide distribution centers to one facility in Alabama in order to increase throughput.

According to company president Brad Mountz, based in San Jose, California, “We are able to link all of our subsidiaries and facilities with the cloud-based supply-chain software. It’s a strategic part of our business in order to leverage growth. I was tired of being held hostage by computer programmers. They did not add any value to our organization…they were a drag. Now we have better planning, budgeting, and control over the supply-chain process. We have eliminated bottlenecks and improved delivery with less overhead. We eliminated the non-productive assets and redistributed that cash flow toward assets that would re-emphasize growth of our business.”

Perfecting your supply chain can take many forms, but always involves strategic thinking and sharing of information. Management must take an overall view of the business and supply-chain risks and rewards in order to perfect its supply-chain network and reap the benefits.
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