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The Paradigm Shift Towards U.S. Manufacturing- More Evidence, Momentum and Commitment

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In mid-May, Supply Chain Matters called reader attention to a study issued by Alix Partners that cited a narrowing gap in the sourcing of production in China vs. the United States. Last month the Boston Consulting Group reiterated its prior message that the increased competitiveness in United States based manufacturing will capture $70 billion to $115 billion in annual exports from other nations by the end of the decade. In an August 20th published BCG Perspectives report (no-cost sign-up required), BCG declares that the current momentum in U.S. manufacturing is just the beginning, and that by 2020, higher U.S. exports combined with production work that will likely be “re-shored”, could create 2.5 to 5 million additional factory and service jobs. The strategy firm declares that its analysis suggests that the U.S. is steadily becoming one of the lowest-cost countries for manufacturing in the developed world, as much as 8 to 18 percent lower than countries such as France, Germany, Italy, Japan and the United Kingdom. The full impact of the shifting cost advantage is expected to take several years to be felt and BCG advises that manufacturers and retailers should recognize that structural cost changes underway represent a potential paradigm shift in global manufacturing sourcing. At the same time, BCG advises supply chain teams to maintain diversified manufacturing operations around the globe.

Some well-known retailers and manufacturers are now demonstrating more noticeable awareness to these trends, for obvious business reasons.

On August 22nd, global retailer Wal-Mart sponsored a U.S. Manufacturing Summit.  At the event, Bill Simon, President and CEO of this retailer’s U.S. based operations delivered what seems to be a passionate address to the attendees where the transcript was captured on the Wal-Mart web site.  Simon declared his belief that this is a transformative period in history, that opportunity in America and growth of the middle class was predicated on a job at the local factory. His argument is that the current U.S. “hourglass” economy has caused a rift, with groups calling for reform of either too much wealth or too little unskilled wages.  He argues that filling in the middle through a revitalization of U.S. manufacturing could help boast the U.S. economy. He reiterated a takeaway from this Wal-Mart sponsored summit that: “the next generation of production will need to be built closer to the points of consumption.”

Of course, Wal-Mart has skin-in-the-game on these arguments since its core customers represent a good portion of middle class consumers, and they have been showing a tendency of late to shop at other lower-cost outlets. None-the-less, Wal-Mart continues in its effort to commit $50 billion, no small sum, toward increased sourcing of products among goods manufactured in the U.S. The retailer has appointed a senior team to lead this effort and has stated its willingness to sign long-term supplier agreements when it makes sense to provide manufacturers more certainty in sourcing. Simon implored other retailers to do more in their sourcing commitments. Some other passionate statements were: “I tell my team all the time that that our $50 billion commitment is our starting point. If we put our minds to it, there’s no question to me that we can achieve and exceed it.  I want us to think bigger.

Supply Chain Matters readers will recall that our numerous ongoing commentaries regarding Apple and its supply chain, cite CEO’s Tim Cook’s commitment to bring forward a U.S. based manufacturing presence it its assembly of end-products, albeit an initial small presence.  That announcement was been communicated in the declared commitment to produce a new line of Mac computers in 2013 at a U.S. based facility. In late May, Cook declared to a U.S. Senate Subcommittee that the new Mac assembly facility would be in Texas.  According to his testimony” “The product will be assembled in Texas, and include components made in Illinois and Florida, and rely on equipment produced in Kentucky and Michigan.” While we and other sites speculated that the new U.S. presence would be overseen by contract manufacturer Foxconn, a mid-June posting on Mac quotes a Taiwanese equity analyst as indicating that Apple will actually be partnering with contract manufacturer Flextronics for the new upcoming Mac Pro. The 450,000 square foot Flextronics facility near Fort Worth is also reported to be the manufacturing site for Motorola’s new Moto X smartphone. Astute readers may also pick up on the fact that Texas is a no-income tax state, which provides an added incentive and economic justification to make it the home of Mac Pro production.

Yesterday, Parade Magazine featured an article, Made in the U.S.A., which cited other manufacturers upping their commitment to increased U.S. manufacturing including General Electric and a host of non-U.S. automotive brands. One interesting statistic: “according to Libby Newman, a vice-president at the American International Auto Dealers Association, about 55 percent of all light vehicles sold in the U.S. through July were foreign brands- but more than half were built in America.

While readers might argue that some of the cited companies we note in this commentary have obvious motives behind their renewed interest in U.S. based manufacturing sourcing, the economics and the noticeable shifts in momentum towards a re-discovery of U.S. based manufacturing attractiveness is underway. Supply Chain Matters has further cited structural shifts in global transportation that reinforce a paradigm shift in supply chain related economics.

Each supply chain organization will have to analyze their own business factors but take heed to these messages since more noticeable momentum and commitment towards favoring U.S. manufacturing is underway.

Has your senior management teams been advised of these trends?

Bob Ferrari


A Supply Chain Matters Commentary Regarding Inventory Performance Trending

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Since our founding, we have always looked forward to the annual REL Working Capital Scorecard, and specifically its reporting of inventory performance.  We have provided Supply Chain Matters readers our observations and insights that were related to reported performance in individual industry sectors.

The data was collected by REL, which is now a division of The Hackett Group, and published each year in CFO Magazine. These indices, particularly the calculation of the metric Days Inventory Outstanding (DIO), are rather important because they reflect a generally accepted method for how CFO’s measured their supply chain inventory performance. While many in the supply chain community have adopted and are very comfortable with inventory turns calculation methods, DIO is, in our view and others, a broader financial indicator of inventory performance contrasted to annual sales trends. DIO reflects if inventory management is tracking to revenue performance, and that interests the C-Suite, stockholders and the Wall Street community.

Since CFO Magazine discontinued its sponsorship of the REL Scorecard, Supply Chain Digest took the initiative this year to actually perform the DIO calculations based on raw data supplied by REL.  A few weeks ago, Dan Gilmore issued a two-part commentary providing his analysis of 2012 inventory performance which our readers can review. Supply Chain Matters provides a shout-out to Dan and his editorial team for undertaking this calculation task and allowing our community to once again review performance. 

Gilmore discovered that the previous industry grouping categories were somewhat misaligned.  We also have been observing that since we began reviewing the annual reporting.  Gilmore further points out that mergers, acquisitions and private equity deals make the continuity of the industry groupings difficult to pin down. We speculate that the previous CFO Magazine industry groupings were formed to insure that readers in those industries would not rebel when reviewing specific industry results.  Supply Chain Digest was able to provide a DIO inventory performance view that spanned the years 2006, 2011 and 2012.  We reviewed our files and were able to review published data from 2008, 2009 and 2010.  Although we noted that there are problems in the continuity of the trend reporting, the numbers do provide important trend indicators.

An observation and insight we do want to share reflects on the marginally performing industry sectors, those whose performance reflects an increase in inventory when compared to revenue trends. A snapshot of the 6 year DIO inventory performance as reported by Supply Chain Digest reflects:

Construction Equipment                                                 58.4 percent increase

Chemicals and Gases                                                        27.2 percent

Metals Manufacturing and Distribution                      19.5 percent

Retail- Electronics and Home Improvement              12.5 and 11.6 percent respectively

Auto Parts and Components                                           12.7 percent

Toy Manufacturing                                                           10.2 percent

Apparel and Shoe Manufacturing                                  7.2 percent

Auto-Truck Related OEM’s                                             4.2 percent

Computers and Peripheral Manufacturing                  3.2 percent


Can you spot a common denominator?

Most of these industries plunged big-time into global sourcing and distribution of products and were subject to global economic developments, supply chain disruptions and slower transport times.  In 2011, the automotive and high tech sectors were significantly impacted by supply chain disruption. Apparel and toys have been forced to deal with exploding direct labor costs in China, and have since altered some sourcing of production. On a positive note, Consumer Packaged Goods, which also plunged into global markets, demonstrated a 7.3 percent decrease over six years.

We share one other comment regarding Aerospace and Defense Components, which according to the analysis had a 30.1 percent increase in DIO over 6 years. This should really not be all that surprising, given the multi-year delays encountered in the major new aircraft programs from both Airbus and Boeing that overlapped this period.  If there were a need for definitive evidence on the impact of these delays, particularly on aerospace component suppliers, it would be reflected in this DIO trending.

Despite all the technological and process advances in supply chain planning and inventory management, business factors often complicate overall supply chain inventory management.  It is not so much a reflection on the technology, but rather the implications of globalization and increased supply chain complexity and disruption.

What is your view?

Reviewing this six year trending data on inventory performance, along with your experience in having to manage inventory in these specific industries, do you believe that external business forces have been the real challenge?

Bob Ferrari


Two Contrasting Examples of How Supply Chain Process Capabilities Matter

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The mission for the Supply Chain Matters blog is to be constantly alerting our readers to industry examples of where supply chain internal and external business process and information technology capabilities due matter in business outcomes.

In today’s published edition of the Wall Street Journal, (paid subscription or free metered view) the Marketplace section features two side-by-side articles they depict the crucial importance of supply chain capabilities.

One of these articles, Honeywell Takes Lesson From Japan, depicts how that company’s System Sensor business unit which designs and produces smoke and carbon-monoxide detectors for commercial buildings. The article’s focus is on the transformed results from its 1000 worker St. Charles Illinois factory, a facility inherited with many operational challenges. The subject plant was part of Honeywell’s 2000 acquisition of Pittway Corp. which WSJ describes as a well-regarded product line but high industry costs.

This facility was one of the first to participate in Honeywell’s Operations Systems (HOS) improvement framework, modeled from tenets incorporated in the well-known Toyota Production System. The plant previously struggled to align production output with product demand and was described as stacked with inventory. Honeywell Chairmen and CEO David Cote is quoted as indicating that in the first two years of the transformation he wondered aloud about the challenge undertaken. Honeywell maintained its investment in U.S. manufacturing because of the power of ideas generated by the workforce.  Assembly lines were replaced by empowered production cells. Production workers were cross-trained on producing multiple products along with the elements embedded in the HOS.

The result is described as a plant that can produce four million units a year with a defect rate that has fallen 80 percent. Production can be flipped readily to accommodate changing product demand and common parts make-up the bulk of various products. The required to develop and produce new products has been reduced from three years to 18 months. Profit margins for the System Sensor business unit are reported to have risen from 17.7 to 19.4 percent since 2009.

A contrast to that article is Chrysler Says Initial Supplies of New Jeep Cherokee Are Limited, which describes how U.S. automotive OEM Chrysler continues to deal with market introduction setbacks for its new smaller Jeep Cherokee model. This model was originally scheduled to arrive at dealers earlier this year to coincide with the market introduction of the completely re-designed Jeep Grand Cherokee, but production start-up setbacks at its prime manufacturing facility have delayed volume shipments until August. The slower than anticipated product launch leaves Chrysler temporarily without a contender in the mid-sized U.S. SUV sector dominated by the Honda CR-V, Toyota RAV-4 and Ford Escape.

This new Cherokee was designed to share the same product platform as the Dodge Dart but utilizes other newer components including its transmission. Production was originally scheduled in May, then pushed to June, and apparently now likely to be August, because of various start-up challenges, with the implication that pipeline inventory ramp-up will not be ready for dealers until the fourth quarter.  In its article, the WSJ points out that the delayed launch already has hurt Chrysler’s first quarter earnings with not much of an offset impact expected until the third quarter.  A senior Chrysler sales executive is quoted as being optimistic that sales and profit targets for the fiscal year will be met despite this model setback.

How would you like to sit-in on Chrysler’s S&OP planning team process in the next few months?  We speculate that the conversations are rather dynamic among sales, marketing and supply chain operations teams.

In one WSJ page there are two contrasting examples of how supply chain business process capabilities have the potential to impact business outcomes.

Bob Ferrari

Continued Stark Reminders of the Existence of Supply Chain Risk

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Late last night, while monitoring Twitter, we picked-up on breaking news “tweets” reporting that a major 6.1 magnitude earthquake had occurred in the vicinity of central Taiwan.  While earthquakes often occur in this region, a strong tremor that occurs at a shallow depth can be a cause for considerable concern. Knowing that this area in the epicenter for high tech and consumer electronics supply chains, we immediately re-tweeted this news with hopes that our readers would be on-alert to both the event and the potential for disruption.

Fortunately, for those residing in the impacted area, damage was reported as minimal.  Tragically, one fatality occurred along with some injuries. As we pen this commentary, there is a report that a number of large production facilities had to be quickly evacuated.  They include two separate facilities operated by the world’s largest semiconductor fab producer, Taiwan Semiconductor Manufacturing Company (TSMC), but according to the company, no interruption in production schedules is expected.  Three other companies with operations in Taiwan–chipmaker United Microelectronics, flat-panel maker Innolux, and liquid crystal display manufacturer AU Optronics each indicated in public statements to Bloomberg that they expected no impact from the quake.

These names, along with others, should be very familiar to our readers since they are each key strategic partners to large and smaller global high tech OEM’s. Any disruption involving any of these suppliers would probably have a significant supply chain impact without a supply chain risk mitigation plan.

Earlier this month, we were alerted to a startling report from Japanese media. A Japanese government panel predicts that if a magnitude 9.1 earthquake, similar to the size of the quake that struck the northern coastal region in 2011, were to hit off the southern coast of Japan, it could cause upwards of $2.3 trillion in economic damages, ten times the economic impact of the 2011 Great East Japan Earthquake.  That would equate to 40 percent of Japan’s current GDP. This estimate regarding a worst-case scenario is sensitive because of a long-expected quake potentially occurring along the Nanki Trough, a roughly 4 kilometer deep depression on the seabed that extends from Suruga Bay to areas off eastern Kyushu.

Think for a moment about what occurred in 2011, and the impacts incurred on aerospace, automotive, high tech, industrial and other supply chains. The impact to supply and brands was enormous and far-reaching.

These are all timely reminders of the realities of supply chain related risk, and the critical importance for having active supply chain risk mitigation and business continuity processes.

What’s the status in your organization?

Bob Ferrari

Added Note: This author will be speaking on this timely topic at an upcoming monthly meeting of the Central Pennsylvania APICS organization in Harrisburg Pennsylvania on Wednesday, April 17. The meeting will be held at the Holiday Inn Harrisburg East beginning at 5:30pm.  For further information and registration, please email registration <at> apics-cp <dot> org.

Demonstrations of Successful Supplier Business Strategies

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From time to time, Supply Chain Matters will call attention to reports or articles which we feel should definitely be included in your reading list, especially when it concerns small to mid-sized supplier businesses.  This commentary references an article worthy of both a good read and reflection on how component suppliers can demonstrate industry diversification in supply chain support strategies.

Today’s edition of The Wall Street Journal features the article: Meet the Smartphone Arms Dealers. (paid subscription or free metered view) This article describes the efforts of two Japan based suppliers, Murata and TDK, both of which have managed to successfully leverage continuous product innovation and industry targeted support toward business excellence. While Japan’s major electronics OEM’s have fallen on difficult business times, these two suppliers are performing very well. In terms of overall business and financial performance, the WSJ reports that both of these suppliers posted profits for the first nine months of their fiscal year’s, fueled by healthy demand for products.

Murata is one of the largest providers of ceramic capacitors and wireless communications modules. TDK is a leading global supplier of electronic inductors.  The WSJ points out that both suppliers have been able to maintain dominance in the electronic circuits’ area by keeping R&D and leading-edge production in-house. Each further designs and builds the manufacturing equipment used at their factories, maintaining a manufacturing process edge. A Murata senior executive is quoted as indicating that one always needs to be one or two steps ahead of the competition.

In the 80’s and 90’s when Japanese electronics OEM’s dominated the global market, the customers of Murata and TDK were domestic. According to the WSJ, today Japanese customers amount to little more than 20 percent. Both suppliers have reached out to supply components to major smartphone and electronic tablet OEM’s including the lucrative supply chains of both Apple and Samsung. Both suppliers are working on longer-term efforts towards expanding their diversified industry presence. TDK is focusing on components utilized in electric and hybrid automobiles along with energy distribution systems for buildings. With a trend for more and more electronic circuits used within cars and trucks, Murata is building a presence in that industry.

Upon reading this article, we thought of the past history of U.S. automotive supply chains in terms of Tier 1 and other component suppliers.  At one time, the big three OEM’s owned their own Tier 1 component suppliers, and later under severe financial stress, were forced to spin them off as independent companies owned by various outside investors. During the severe recession of 2008-2009, when the market tanked, the ripple effect impacted U.S. automotive suppliers quite heavily.  Some diversified in supplying adjacent industries or non U.S. OEM brands such as Toyota or Honda. Others were unfortunately forced to be acquired, some by non-U.S. interests also seeking product innovation or market diversification.  That was the initial entry of China based suppliers into U.S. automotive supply chains. Some smaller suppliers unfortunately perished, running out of options.

In 2008-2009 we were publishing commentaries highlighting successful product innovation and diversification strategies as a means to share learning. We therefore remain much attuned toward highlighting successful efforts of component suppliers in practicing sound business and diversification in supply chain support strategies.

Understand and learn from others.

Bob Ferrari


3MSupply Chain “Hairballs” Headline Move Toward Simplification

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Supply Chain Matters has often pointed out increasing occurrences where the impacts of supply chain strategy and initiatives contribute to either positive or not-so-positive financial media news stories influencing a company’s value to shareholders. The significance of efforts to simplify a supply chain supporting unusually large assortment of products with a corresponding complex global supply chain is indeed newsworthy.

Last Thursday, The Wall Street Journal headlined a rather positive story related to industrial manufacturer 3M Company, and its efforts to untangle “hairballs” across its global product supply chains (paid subscription or free metered view).  The 3M supply chain has responsibility to plan, produce and distribute over 65,000 products ranging from tape, solar energy panels, dental braces and dog chews.  The company has 214 plants located in 41 countries with nearly two-thirds of current sales originating outside of the U.S… With a continued challenged global economic climate and overall sales growth at just over 2.4 percent, 3M had no choice but to focus on cost control and efficiency as a continued source of profitability.

In the article the 3M corporate culture is described as risk-averse, leading to a philosophy of “make a little, sell a little”, meaning do not make hard commitments to capital and capacity until a product has proved itself to be a market winner. That philosophy drove product developers to seek out any available supplier expertise and capacity, regardless of ultimate product distribution strategy, even if certain sub-component suppliers were hundreds of miles distant from other upstream value-chain suppliers.  The result was what 3M ex-CEO described as “hairballs”, value-chains that extended across multiple suppliers in multiple geographic areas, all adding to transportation and logistics costs.

Sound familiar?

3M has now embarked on a three-pronged supply chain strategy addressing simplification.  The first is to have production located closer to customers.  With two-thirds of revenue outside of the U.S. the implication is for a more international based production capability.

Second is the need for fewer, larger, more efficient “super-hubs”, plants capable of making large numbers of products. These hubs can also customize products to the needs of local markets. Ten of these hubs have been implemented with six additional planned.  Ten of the total sixteen “super hubs’ will be outside of the U.S.

The third area of focus is overall efficiency which includes reduction in cycle times from order of raw materials to delivery of finished goods.  As an example, the production of 3M brand Command Hooks was reported to be reduced from 100 days to 35, which is a considerable impact. Similarly, the cycle time for 3M’s Littmann stethoscopes will be reduced to 50 days from 165.

Between the lines, readers can discern that 3M shifted its supply chain strategy from one of total focus on efficiency and cost to that of time-to-market balanced with an overall supply chain flexibility and efficiency.

In the Gartner 2011 last listing of Top Twenty Five supply chains, 3M was listed at number 24.  Perhaps at this week’s unveiling of the 2012 listing, 3M will advance.  In any case, 3M provides another example of supply chain strategy and response that has a positive impact on business outcomes and performance.  Perhaps the next emphasis will be on a reduction of overall product portfolio.

Bob Ferrari