Regional Supply Chains: A Win for OEMs and Their Locations
Regional sourcing is helping manufacturers save time and money; with that in mind, savvy suppliers are moving closer to the end users of their products.
Q1 / Winter 2013
“Buy It Where You Build It”
Issues such as shipping time and costs, and the additional inventory that must be stocked to mitigate all the risks involved with global suppliers, have added exponentially to the overall cost of manufacturing, creating the strategy for regional sourcing. Streamlining this lengthy pipeline — through strategies such as Toyota’s model of “buy it where you build it” — is the goal of many supply chain managers. That’s not to say that all manufacturing is coming back to North America, or that the U.S. will once again become the manufacturing powerhouse it once was. It does, however, provide a model that says it makes sense to have suppliers close to the manufacturing plants in the countries in which those goods are sold.
Toyota, for example, is projecting that it will build more vehicle models in North America “as a hedge against a strong yen,” and in 2012 announced plans to hire some 3,500 workers and invest $1.6 billion in its North American manufacturing plants. Erlanger, Ky., where Toyota’s North American headquarters is located, and the states of Kentucky and Michigan, where Toyota has engineering facilities, have benefited from the company’s decision to manufacture in North America, one of its largest markets.
A shorter supply chain reduces the costs of transporting goods from the supplier to the manufacturer, and during a period when fuel hit record highs earlier in 2012, having suppliers close-by saved both money and time. It also means less inventory sitting on the shelf, in crates on a ship in the middle of the ocean, and in warehouses in Asia ready to be shipped. Over the years during which major OEMs went offshore to manufacture, the lean practice of the “just-in-time” inventory model became one of “just-in-case.”
Having regional suppliers also means flexibility in the supply chain. In many industries, such as automotive for example, quantities vary with demand. Regional suppliers can adjust their production schedules to meet the demand of their OEM customers. More plants in more strategic locations regionally mean that inventory carrying costs are less for both the OEM and the suppliers.
Regional Suppliers Winning the Game
As OEMs locate smaller, more focused manufacturing plants throughout the United States, they have encouraged their suppliers to locate facilities nearby. Industrial Molds Group, a supplier of molds, and its sister company, Pyramid Plastics, which provides molded plastic components, made a commitment to locate a facility near their Tier 1 customer’s automotive systems assembly facilities in Mexico and the Southwest.
When approached by their customer to bring the parts supply closer to its assembly plants, Rockford, Ill.-based Industrial Molds Group agreed to site a second injection molding facility in San Antonio, Texas, to service the customer and help shorten the company’s supply chain. Tim Peterson, vice president of the family-owned company, comments, “Obviously we can’t put a facility next to every customer’s plant, but given the customer requirements and the opportunities we see in that region, we believe it was a good business decision.”
Lou Longo, partner with Plante & Moran, PLLC, a CPA and management consulting firm, notes, “Those who are willing to locate a new facility to become a regional supplier are winning the game.” However, he also notes that smaller companies, such as Tier 2 and Tier 3 suppliers, tend to be more reluctant to extend their reach to accommodate customers in other regions globally or of North America.
“There’s a lot of resistance to that strategy as we go down the tiers and these companies tend to be a bit myopic,” Longo says. “They do business on personal relationships, so there’s not the need to consider what others outside their region want, such as customers that need suppliers to serve them in another region, or their competitors that want to take business away from them.”
Industry Hubs Attract Specialty Suppliers
Certain regions of the United States have become home to specific kinds of industries, which in turn have attracted specialty suppliers that can serve a variety of companies in these industry segments. For example, the central coast of California has long been known as Silicon Valley for its manufacturing of computers, computer components, and other electronic equipment. Salt Lake City has been a hub of activity in the medical device industry for more than 40 years, and continues to attract medical device manufacturers and those companies that supply that market segment.
The automotive industry has shifted somewhat over the past couple of decades, from the Detroit area where the U.S. Big 3 have traditionally operated, to the Southeast, where foreign multinational vehicle-makers have established a huge presence, bringing with them not only suppliers from their home countries of Japan, Korea, and Germany, but also attracting U.S. suppliers that want to extend their reach from GM, Ford, and Chrysler to supply Nissan, Toyota, BMW, Volkswagen, Mercedes, Honda, and others.
States including Kentucky, Mississippi, Alabama, the Carolinas, as well as Ohio and Indiana have reaped the rewards of being known as an “automotive region.” Indiana’s manufacturing sector expects a boost from the automotive industry. With vehicle sales up 14.5 percent for the first nine months of 2012 over the same period in 2011, Indiana is hopeful that production output will rise. Honda Manufacturing of Indiana is spending $40 million at its Greensburg plant in preparation for a 25 percent increase in production of its Civic vehicles.
Henniges Automotive, headquartered in Auburn Hills, Mich., recently announced a $2.2 million capital investment and the addition of 64 new manufacturing jobs at its plant in Reidsville, N.C. The global company makes vehicle sealing and anti-vibration devices and supplies the automotive industry through a number of regional facilities throughout the world. In 2011 Henniges added a mold shop for building the company’s plastic injection molds in-house at the Reidsville facility. Other North American facilities are located in Iowa, Oklahoma, and Tennessee.
Auburn, Ala., has landed a new manufacturing plant for German auto supplier Rausch & Pausch, which is expected to create 105 jobs within five years. The company, which is based in North Bavaria and produces solenoid valves, control blocks, and other auto parts, plans to have both its U.S. headquarters and a production facility in Auburn. And Florence, Ala., will be home to a new plant for Tasus Corp, a producer of plastic automotive parts, whose clients include most major North American vehicle manufacturers. Tasus is investing $19.1 million in the project.
Another German automotive supplier, iwis, has announced it will invest $12.5 million to site its first U.S. manufacturing plant in Murray, Ky., to supply a number of automotive OEMs in the region. In addition to being home to Toyota’s North American headquarters, Kentucky is also home to GM and Ford manufacturing plants that currently employ more than 70,000 people.
Locations With International Perspective
Plante & Moran’s Longo notes that business and economic development groups need to keep an international perspective of their specific location: “They need to focus on offering good logistics such as international airports, skilled labor and talent in their given area, and an international connectedness to that region,” Longo explains. “They need an emphasis beyond just the regional location from the U.S. perspective, but rather how do they get to the world.”
Kentucky has just such an international focus when it comes to attracting European suppliers to serve the Southeast region’s automotive industry. Erik Dunnigan, Commissioner of the Department for Business Development, Kentucky Cabinet for Economic Development, says, “These suppliers are not just supplying one OEM, but as many as possible. They want to work with all the OEMs in the auto industry throughout this region.” And with the increasing demand for developing regional supply chains, he anticipates more companies coming to the area to supply OEMs in many industries. This is how regional suppliers are finding success.
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