Wisconsin Manufacturing Extension Partnership

New survey of senior manufacturing executives reveals shifts in supply chain strategy.

Global economic pressure increases focus on cost savings through innovation and partnership.

Traditionally, global OEMs based sourcing decisions on cost – who could make the best component for the lowest price.  But as manufacturing has become increasingly more complex and geographically dispersed, supply chain management has become a strategic consideration that involves far more than just the cost of parts.

A new KPMG study of senior executives from $1 billion multi-national manufacturing businesses reveals a dramatic shift in strategy for supply chain management.  Component cost is still paramount, but this factor is considered in the context of transportation costs, ability of suppliers to innovate and respond to OEM needs, proximity to developing markets, and a host of tax, regulatory and political factors.

Key findings included:

  • Increasingly, strategic suppliers are viewed as partners; OEMs are reducing the number of suppliers while developing selected long-term supplier relationships. Suppliers are called on for product innovation, product development, R&D, cost reduction and supply chain agility.
  • Management of supplier risk has become more hands-on; many OEMs include financial reporting requirements in purchase orders and actively monitor and audit the financial health of key suppliers.
  • The geography of sourcing is in flux – OEMs are evaluating the appropriate link between customer and supply chain locations around the globe.

Strategic Supplier Development

The trend among large OEMs is to develop long-term relationships with selected strategic suppliers.

  • More than half of the respondents that rank their companies “above average” in supply chain efficiency and reliability plan to sign more long-term contracts in the next two years.
  • 39% of all respondents expect to use fewer suppliers than in the past.

What type of manufacturers are selected as “strategic suppliers”?  Those that are able to innovate, develop new products, perform R&D, and reduce costs (quality and on-time delivery are assumed).

The study shows that:

  • More than half of respondents expect to collaborate more closely with suppliers on (or give responsibility to them for) product innovation, product development and R&D. 
  • More than 60 percent plan to give suppliers responsibility for cost reduction and supply chain agility. 
  • One-third of respondents report that their companies are increasingly becoming assemblers of parts from top-tier suppliers – the suppliers have taken over what was once the lead manufacturer’s supply chain.
  • Companies with above-average supply chains are even more focused on collaboration – 39% plan to integrate their supply chain IT with their suppliers.

Why are OEMs focusing on collaboration?  44% say they believe it will reduce overall cost, and there are other benefits as well. Extended contracts with strategic suppliers ensure certainly of supply, improve demand planning and streamlines the process for getting the product to the customer.

A case study cited in the report illustrates the benefits of collaboration.  A large bed-frame maker teamed up with a strategic supplier of casters to eliminate anything that did not add value from the part.  Together, they developed a patented product that reduced caster weight, increased strength, requires less material, costs less to produce and is completely recyclable.  In two years they reclaimed 85% of the American market that had been lost to Chinese manufacturers.

OEM Risk Reduction

The focus of the OEM supplier risk-reduction effort has primarily been to monitor supplier financial risk. 

  • 80% of respondents include financial reporting requirements in purchase orders,
  • 66% review supplier risk annually or more frequently, and
  • 51% actively monitor and audit the financial health of key suppliers.

A common practice in the past two years has been “line stoppage agreements” where suppliers pay for line stoppage costs resulting from problems with their part.

Supply Chain Geography

According to the survey, China is the most common primary sourcing location of any country (35%), and in the next two years, respondents expect to increase sourcing in China by 39%; respondents expect to cut sourcing in the US by 18%.

The primary reason for moving supplier sourcing is cost savings; the second is proximity to markets.  The developing markets of the Asia-Pacific are growing much faster than the US or Europe and it makes sense for OEMs to manufacture goods near where they’re sold. 

  • 30% of respondents in the study foresee greater global dispersion in order to service new markets,
  • 30% see greater consolidation within regions.

What this means for Wisconsin Suppliers

Although the survey didn’t provide any real surprises – multi-national companies have been expanding into developing countries for decades – it did underscore a trend that is very important to Wisconsin manufacturers.  Opportunity for growth exists for suppliers through the development of collaborative partnerships with OEMs.  

WMEP has been helping suppliers collaborate with OEMs since 2005 through its Accelerate program.  398 suppliers in twenty states have participated in the program, and have reduced Manufacturing Critical-path Time (MCT) by an average of 45%. (MCT is defined as the typical amount of calendar time from when a customer creates an order, through the critical-path, until the first piece of that order is received by the customer).

To find out how your company can benefit from Accelerate, contact us, or call Andy Hayner, Operations Manager, MEP Supply Chain Advantage at 877.856.8588.

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