Supply Chain Challenges In The Heavy Manufacturing Industry

Supply Chain Challenges In The Heavy Manufacturing Industry

The heavy manufacturing industry has its own unique challenges in managing its supply chain.

Global shifts in demand, traditionally low volumes and extensively long lead times are common factors that define the nature of this industry. Additionally, by nature of the specialized processes involved in manufacturing these products, the complexity of the supply chain alone, is further increased with the inclusion of many smaller sized suppliers and subcontractors performing these specialized operations.

For example, one leading OEM in this industry has over 4,500 connections between its factories and suppliers as compared to the average of 2,500 similar connect points in the automotive industry. All these drivers of complexity can help explain why heavy manufacturing companies have been continuously challenged to find an answer to two questions:

• How to respond to customer demand faster?
• How to reduce inventory?

In the last decade alone, the industry has experienced significant ups and downs in the economy that have caused severe headaches to supply chain managers all over in managing inventories.

Consider this one event cycle alone - when demand is booming and production volumes are at a high, there is a lot of product being built, moved and stored. When the economy slows and the orders suddenly get turned off, the reaction time of this complex supply chain with long lead times etc. has a very damaging effect due to all the source points and manufacturing points spread out across the globe.

Material is already under process at factories, it is in transit on ships and trucks, it is in storage in warehouses and distribution centers everywhere else in the pipeline. So when the economy slows, the impact on supply chains in the heavy manufacturing industry is huge in terms of the amount of inventory that gluts the pipeline. That is usually when managers start worrying about what to do with all this inventory. A day late and a lot of dollars short.

Ironically, the answer in addressing the inventory management problem is not in attacking the inventory itself. That will provide only a short term reprieve. The answer lies in addressing the root causes for the inventory such as:

• Demand variability
• Extended response times
• Lack of visibility in the supply chain
• Lack of collaboration between partners
• Quality levels and reliability of service from suppliers

All of these root causes drive variability into the system. It is this variability that managers are planning against by carrying more than necessary inventory in the pipeline. Leading organizations have managed to establish means of reducing this variability across the supply chain through several strategies such as:

• Demand Shaping: Taking a page out of the automotive industry, the heavy industry manufacturers are now educating and dictating terms with their customers about when they can expect orders. Orders for standard equipment can be satisfied very quickly but customer orders will require additional time. This allows a level of demand control where you can now plan for parts and products throughout the supply chain with a higher degree of accuracy.
• Supplier Collaboration and Development: Leading companies are investing more time and money in developing their partners with best practices in design processes, manufacturing processes, quality processes and also business management process. This creates a stronger sense of trust between parties and yields lower overhead costs and variable costs in the long term for everyone. 
• Education and Training: One of the key contributors for continued challenges in the supply chain is the level of understanding that planners, buyers and managers have about the cause and effect nature of decisions across the supply chain. Companies are investing heavily in building a workforce that is more aware of the end to end supply chain problem and the role each party plays in it.

Companies are also working hard to redefine the terms and conditions of the partnership in terms of managing key activities like transportation, transfer of inventory ownership, payment terms and service levels. It is not done with the intent of penalizing one party over the other. Instead it is done with the interest of being fair but yet creating an environment where everyone has “skin in the game” and vested interest in success of the extended value chain.

Note that all the above strategies are focused on longer term changes, requiring significant investment in time and resources and involve working across multiple organizations simultaneously. The overall stability this delivers and the resulting dividends in terms of variable and fixed costs are huge.

It is time for heavy manufacturers try something different than reacting solely to symptoms with a short-term strategy and without understanding thoroughly their own constraints. Creating a sustainably structured supply chain requires more planning and most probably more resources at the beginning but is the only way to get out the vicious cycle.

- By Aref Khwaja, Partner