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September 14, 2014

Next generation supply chain - Perspective from innovators (Part-I)

Global automotive and industrial manufacturers are reviving investment cycles towards growth plans for 2020 and beyond. As supply chain enthusiasts, we wanted to understand what that means for automotive and industrial supply chains of the next decade. While there are definite hues of transformation, I noted a clear theme on their outlook towards supply chain capability development initiatives:

1. Selective investments: Unless a new capability is comprehensive and fully suited to meet emerging needs to business models, investments decisions won't come easily.

2. Back to core: They are not going down the path of big-bang, grandiose transformation programs but more to the core and on-the-ground.

Our clients are clearly referring that future supply chains of the global automotive and industrial manufacturers will have new set of capabilities to "manage complexity", "be more nimble" and "be resilient" besides driving "cost efficiency", which remained in focus during the past decade. I wanted to share some of our findings on this renewed outlook by supply chain leaders of these two sectors. In this first part of my two-part blog, I wanted to share highlights on key drivers, in an effort to answer - "why such theme". In the next blog, I would delve into those emerging supply chain capabilities and how these leaders are going about to embrace them.

Two key macro factors that are reshaping design considerations of future supply chains

1. Development of distinct and prospective markets:

The last decade has seen prominence of distinct markets of considerable size (and fast growing) in emerging countries like - Brazil, Russia, India and South Africa. From automotive or industrial manufacturers' perspective, each of these markets has their unique demand characteristics and supply chain needs. For example, hatchbacks have a significant market share in Brazil and India, which is very different from China, Russia or the developed markets. Automakers in Brazil have adapted to flex fuel (Ethanol), hybrids are growing in China, whereas deregulation of fuel prices (petrol) in India have resulted in increased sales of diesel car models. Markets like Brazil force local sourcing due to strong currency and trade barriers, whereas, high labor and material costs in Russia favor import of automotive or industrial products. China and India have emerged as local manufacturing hubs as well as low cost component manufacturing hubs for global needs. In the same way, multiple distinct micro markets exist within Europe also.


Source: https://parts.olathetoyota.com/2011-car-sales-statistics.html   | 2011 World Car Sales Statistics Infographic

The implication to manufacturers has been - "one supply chain architecture will not fit all". The local supply chain architecture that would cater a distinct market must be built as per local needs but should remain integrated with global supply chain, so that economies-of-scale benefits are not compromised. Now that's one great challenge for automotive and industrial manufacturers to overcome!

2. Global economic volatility: 

Volatile macro-economic conditions have been the order since 2007. While there are signals of growth with varied magnitudes, uncertainty is the norm across economies. That makes volatility as the new normal. Supply chain executives of automotive and industrial firms have indicated "demand volatility" and "poor forecast accuracy" as their key operational challenge of recent times.

                

Source: Federal Reserve Economic data [Link: http://research.stlouisfed.org/fred2]

Estimating "demand" has become complicated with product preferences and product proliferations within each market. With widely spread supply chains, volatility makes capacity management at nodes perplexing, resulting in either higher costs (component inventories) or lost revenues (component shortage). None of these scenarios are desirable. The takeaway for automotive and industrial manufacturers is to renew and develop capabilities for "agility" and "flexibility" within their supply chain networks. To put in simpler terms, these firms needs new capabilities to adjust capacities at nodes in sync with the volume and cadence of market demand changes. You would agree that is easier said than achieving!

Three grand industry challenges are driving investments for next generation supply chains

1. Expanding global supply chain network: 

Global market outreach, low-cost country sourcing and localization strategies have compelled global automotive and industrial companies to expand their supply network. While operating a global supply chain has advantages, expanded supply networks have increased management costs and reduced visibility.

Lack of visibility within n-tier supply network has direct impact while they aim to serve diverse customer segments with varied needs. These multi-national manufacturers need new set of supply chain capabilities to orchestrate and integrate local, regional and global supply chain networks that can deliver cost-to-serve requirements of distinct market models.

2. Growing supply chain costs and cost of quality: 

Volatility in commodity prices and currency fluctuations have impacted sourcing and supply chain costs. Steep rise in wages in China is another factor. There are costs that can be attributed to quality issues and returns, when suppliers are located far away. The need to set-up new supply chains at lower costs while maintaining a fast pace is growing. The new product introduction timelines are shrinking and more new products are launched every year.

Demand for sustainable products, needs of distinct markets has put-up stress on new platforms, new components. Management of material costs, quality costs factors and efficient new product (component) sourcing needs mandate advanced capabilities in direct material sourcing and supplier quality.

3. Increasing exposure to supply chain risks: 

A Zurich Financial Services sponsored supply chain resilience study conducted by the Business Continuity Institute showed 75% of companies reported at least one supply chain disruption in 2013 and this is consistent with their findings in each of past four years. Sole sourcing, just-in-time, lean - few prominent supply chain strategies of the last decade have increased risks within supply chains.

Like all, automotive and industrial companies have no other option but to develop abilities to sense supply disruption indicators (components, suppliers, places) and have in place robust business continuity capabilities that can reduce or avoid the impact.

In Summary

While they may not be as disruptive as today's digital technologies, supply chains of automotive and industrial companies are indeed up for change! I see this as natural  evolution. While earlier initiatives (e.g. procurement outsourcing, best country sourcing, planning automation, etc.) will prevail, new focus and investments will flow towards building fresh set of supply chain capabilities - but "selective ones". That's the key takeaway for me. I would delve into those in my next blog.


Have you noticed shades of such outlook from firms within these two sectors? How do you see the factors that contributed? I look forward to your opinions. Please share your experiences.


September 13, 2014

Manufacturing Value with Big Data

Manufacturing and Big Data

Manufacturing has been slow to adopt new technologies and methodologies for dealing with large volumes of data but that is starting to change. Harley-Davidson's plant in Pennsylvania has an operations center that keeps track of all aspects of production including the temperature, humidity or number of rotations of the blades within the fan in the painting booth. If any deviation from norm is detected then the equipment gets automatic instructions on how to recover.[iv] When the data told Harley's managers that assembly of the rear fender was preventing a motorcycle from getting through the production lines on time they changed how the motorcycle was put together.[v] Rio Tinto RIO which is a mining company in Australia has been able to generate about $90M in savings by continuously monitoring and analyzing processing data from companies 5 geographically distributed sites.[vi] GE has certainly made a large push into the world of big data and is promoting its vision of Industrial Internet where machines, from manufacturing plants to plane engines, are connected and pumping out large amounts of information about their operations. This allows to increase their operating effectiveness and even foretell a potential failure.[vii] GE predicts that improving our data analysis abilities could lead to 1.5% increase in productivity translating into billions in benefits to US economy.[viii]

Going Beyond Lean Management

Collecting and analyzing data does indeed allow manufacturers to optimize operations, anticipate events, or to improve quality. But, these companies can go beyond cost cutting and create value for their customers as well. They can share their data with the customers giving them an ability to use their products better and extend product lifetime. Data-enabled trucks could provide transportation companies with data on its fuel usage and mileage allowing them to optimize their operations. And, connected power and water meters can supply information to power companies and municipalities on resource consumption allowing for better planning. Such value-added services provided by manufacturers could serve as a huge differentiator and provide important benefits to their customers.

Conclusion

For decades now, manufacturers across a wide spectrum of industries have been turning to lean management or outsourcing, or both, to cut costs and remain competitive among their peers. Unfortunately, the result was that these companies have been increasingly looking more and more similar across the board to their customers which invited substitution. However, rather than having to compete on price, Big Data can give manufacturing companies a shot at differentiating themselves from the competition and offering value to their customers beyond commoditized products.

Getting a handle on fast flowing vast amounts of information is not an easy task for any company. Just being able to store, organize and leverage data can be a huge technical challenge for our clients. Performing analytics and getting right insights pushes that problem to a next level of complexity. Fortunately, the rewards of 'getting' Big Data right can be enormous.

[i] Nicole Bogart. Research in big data analytics working to save lives of premature babies. http://globalnews.ca/news/696445/research-in-big-data-analytics-working-to-save-lives-of-premature-babies/
[ii] Nikki Comeau. The promise and risks of big data. http://phys.org/news/2014-05-big.html
[iii] ABI Research. Big Data Spending to Reach $114 Billion in 2018. https://www.abiresearch.com/press/big-data-spending-to-reach-114-billion-in-2018-loo
[iv] James R. Hagerty. How Many Turns in a Screw? Big Data Knows. http://online.wsj.com/news/articles/SB10001424127887324059704578472671425572966
[v] Ibid.
[vi] Engineers Australia. Big data results in big savings at Rio Tinto. http://www.engineersaustralia.org.au/news/big-data-results-big-savings-rio-tinto
[vii] Fast Company. The World's Top 10 Most Innovative Companies in Big Data. http://www.fastcompany.com/most-innovative-companies/2014/industry/big-data
[viii] Fast Company. Most Innovative Companies 2014. http://www.fastcompany.com/most-innovative-companies/2014/ge