Waste Not Want Not

by Dan Doolittle

The ongoing challenge in manufacturing is to reduce costs, innovate products and expand into new markets. Unfortunately, there are new R&D and infrastructure costs associated with innovation and expansion, so the first head of the Hydra^[1] is pretty tough to cut off without making some serious changes to increase operational and financial performance.  That’s why manufacturers, worldwide, are shifting production and spreading out supply chain and other activities to lower-cost countries. 

“By 2008, auto and industrial products companies will more than double their percentage of spending on components and materials in low-cost countries,” according to a recent Booz Allen Hamilton survey of purchasing executives. “Moreover, apparel companies, which currently spend 50 percent of their procurement dollars in low-cost countries, say that within four years, these countries will provide virtually all of their material and supply needs”^[2].

Companies are increasingly turning to China because it “has the cheapest labor, a pro-business environment, a productive work force, and strong government support for keeping domestic manufacturing operations as inexpensive as possible — a direct path to easy cost cutting” ^[3].  However, there is another side to the coin.  Sony, for example, found that doing business in China is not always as cost-effective.  It came to the conclusion that supply chain factors like product cycle time, proximity to suppliers and speed to market were more important than manufacturing costs; and moved production of high-tech camcorders and digital cameras from China back to Japan^[4].

Producing different products in different countries results in an increasingly complex and fragmented supply chain environment, and there can also be tax implications and/or regulatory restrictions which further complicate the picture.  The bottom line is, regardless of where a company locates its manufacturing operations, tight control of the supply chain is the most critical element in reducing the cost of goods sold (COGS).  “Waste in the supply chain can constitute as much as 10 percent of revenue,” ^[5] according to research from Manufacturing Insights”.

And here are a few more points of interest from Manufacturing Insights and Deloitte:

• Despite globalization, most supply chain optimization is done locally
• Supply chains are not fully equipped to support accelerating innovation
• Flexibility is becoming more difficult to achieve in the face of shorter product cycles, increased customer demands, the pursuits of lower-cost locations and the race to new markets
• While managing risk is a priority, current fragmented supply chain initiatives increase potential risks
• While customer service is a priority, fewer than eight percent of companies have a high level of collaboration with customers on key initiatives^[6]

“Consequently, during 2005, companies will look across traditional application categories to craft new supply chain solutions in areas such as SRM; supply chain event management/visibility; and global manufacturing execution,” says Manufacturing Insights.  “Demand information will emerge as a high priority.  Further, in a related trend, supply chains will become calibrated to demand information, as manufacturers shift from "plan and push" to a "sense and respond" orientation that relies on accurate demand-side data”^[7]. That’s good news for Adexa customers who already have an integrated and synchronized demand side and supply side solution-set.

Solutions that help to reduce COGS and increase Return On Assets (ROA) will ultimately impact Earnings Per Share (EPS) and will increasingly be in demand by globally fragmented manufacturers.  Software solution providers that are able to articulate product benefits in terms of financial impact will have a huge edge over their competitors.

Overall, executives are starting to realize that manufacturing costs and material costs are not the only financial levers for success and that by ignoring the others they may just be trading one set of problems for another.  An integrated, intelligent planning environment is required.

Dan Doolittle is Adexa’s Marketing Operations Manager.  He can be reached at ddoolittle@adexa.com.