The Distributor's Link, Fall 1998

by Joseph Cahill, Partner, Waterstone Consulting

In an industry with intense foreign competition, domestic pricing pressures and looming government regulation, how does a company most effectively deploy its capital, people and technology resources for maximum return? More and more companies in the fastener industry are considering supply chain management (SCM) strategies as the solution. Such solutions are more effective in driving increased profits and better meeting customer needs. In this article we will explore key elements of a supply chain management strategy, important advantages that can be gained from its adoption, as well as issues to consider in the SCM process.

Industry Overview

Several industry dynamics are giving motion to this trend towards implementation of SCM solutions. One is the implementation of just-in-time manufacturing techniques by OEM's and other end customers. As a result, fastener makers have been forced to make ongoing investments in factory equipment, computer hardware and software to ensure steady JIT production.

Another pressure felt on profit margins comes from foreign competition. Domestic fastener manufacturers are now competing more regularly with companies with much lower labor costs. At the same time, customer demands for quality in the six Sigma range require that any savings from new processes also improve quality. These factors, added to the specter of increased government regulation and reporting that could result from the Fastener Quality Act, are making the industry rethink how it can meet the needs of customers and face heated competition. By employing an effective supply chain strategy, companies in the U.S. fastener industry can meet these challenges and create a new partnership environment with their suppliers and customers.

Defining A Supply Chain Strategy

A supply chain strategy is a holistic, cross-functional analysis of opportunities for better service and lowered costs in the supplier-distributor-customer supply chain. If undertaken correctly, a solid SCM strategy can help companies build closer relationships with suppliers, be more responsive to customer needs and better utilize infrastructure investment and maximize return on capital.

This is of particular importance in the U.S. where fastener demand is tied heavily to the automotive, aircraft, appliance, and heavy machinery sectors. Supply chain management provides closer ties between fastener producers and ultimate manufacturers. This becomes more critical as these industries increasingly rely on JIT production systems.

For example, a SCM strategy can help fastener manufacturers better manage the inventory across all trading partners throughout the supply chain. This allows manufacturers to reduce the inventory investment and more effectively meet required customer service levels.

What Benefits Can A Company Expect?

Strengthened Customer Relationships

A supply chain strategy forces sharing of information between suppliers and manufacturers, making them work closer together. Supply chain strategy is also a key factor in maintaining performance levels most critical to fastener customers. This includes the capability to ship the customer desired product on the day it is required, as well as controlling the length of time from order placement to shipment and delivery processing. This capability is particularly important for fastener companies with international customers with widely different product lines. Without an active supply chain management strategy, shipping times can quickly increase while customers decrease.

A detailed supply chain management strategy can also point out opportunities for better service and cost savings with a varied delivery strategy. Some national clients may run on tight JIT manufacturing schedules that mandate high-cost overnight delivery services. In contrast, local and regional customers who keep more finished product inventory may be perfectly satisfied with delivery made via truck and/or rail.

Tightened Links to Suppliers

The time critical application of a supply chain strategy can also be important in evaluating suppliers of raw materials and components for fastener companies as well. A well developed SCM strategy will include a sound procurement strategy, which addresses material cost, speed of delivery and product availability among suppliers meeting required quality benchmarks. This can be crucial in maintaining production when links to a supplier are temporarily slowed or severed.

Additional Internal Efficiencies

Adopting a supply chain strategy can be a boon to corporate planning on both a short and long-term basis. Besides managing the order process and reducing customer lead times, an effective supply chain strategy can provide key insight for those involved in product planning as well.

Once implemented, a supply chain management strategy can point the way toward improved operations and efficiencies company-wide. For example, this discipline can identify savings available if resources in purchasing, manufacturing and distribution are shared between product lines.

How Does A Company Create A Supply Chain Strategy?

Applying SCM Techniques

The creation of a supply chain strategy starts with identifying the key areas of the supply chain relationships, focusing on the opportunities of mutual benefit. This process begins with the "downstream" partners. Companies should pose these questions to their customers:

• How quickly can customer demands for the company's products change?
  
  
• How fast must a company supply product to its customers to keep them satisfied?
  
  
• What does a company have to do to achieve/maintain preferred supplier status with our preferred customer base?
  
  
• What is the maximum sustained production needed over any period of time?
  
  
• What is our cost of providing the current customer service levels? What should it be?
  
  
• What is the maximum amount of product that will have to be shipped at any particular period of time?
  
  
• How much freedom will customers give the company in substituting their orders?

The supply chain management strategy also examines internal, four-wall opportunities in which case the following "upstream" questions should be posed regarding supplier relationships:

• How often can a company sole-source components or raw materials? Can this be maintained during peak production? What is the underlying procurement strategy?
  
  
• Are transportation links reliable enough to have primary lines for both raw materials and finished product, or do additional options need to be actively maintained?
  
  
• Are communications and production resources between facilities well coordinated so that large orders can be filled from several factories?
  
  
• How fast can a company switch production from one product line to another while maintaining our required levels of quality?

Procedures for rationalizing suppliers to a manageable number are of particular importance in the SCM strategy. Most JIT environments emphasize smaller numbers of suppliers as a way of tightening quality controls and establishing stronger relationships throughout the manufacturing environment.

This "rationalization" process becomes more difficult if demand across a broad product line is hard to predict because of competitive markets or global economic factors. This makes "guaranteeing" business with one supplier hard to achieve unless that company is much smaller than the purchaser company. An effective supply chain management strategy must be cognizant of this balancing act of quality and dependable supply.

All Customers Are Not Alike

In analyzing downstream elements of the supply chain, one must take into account different customer segments, even in industrial markets. For the fastener industry, automotive lines may change every year, while other consumer products have even shorter lifecycles. Long-term investments supporting these products may be less justified than capital earmarked for supplying aircraft fasteners for planes that may stay in production for 20 years.

The supply chain management strategy can point out these situations where investments in new technology are justified, and where they are not. If used consistently, it can be an invaluable tool in the effective management of manufacturing resources.

A Hierarchical Approach

To be effective, a SCM strategy should address questions of both tactics and strategies. At the tactical level, it should look at specific practices a company needs to employ with its manufacturing and distribution systems to meet its own competitive challenges.

Manufacturing strategies to consider:

• Supplier quality requirements;
• Procurement costs/raw material storage capacity;
• Cell configuration vs. traditional assembly;
• In-house vs. outsourced sub-assembly and/or logistics;
• KanBan/JIT strategies;
• Standardized sub-assemblies vs. custom-manufactured.

Distribution strategies to consider:

• Pick/pack methods: pick to order and/or automated picking;
• Centralized vs. decentralized warehousing;
• Warehouse configuration methods;
• Delivery service level requirements;
• HayMat regulations;
• In-house vs. outsourced logistics.

Companies employing a supply chain management strategy will also enjoy tighter and more productive relationships with customers and suppliers. Service levels will be increased, and controllable costs reduced. Further, with the greater availability of useful information enabled by a Supply Chain strategy, the whole organization will benefit with a better view of its challenges and opportunities it faces in its industry. This means both higher return on investment and improved profitability for the company.

Joseph Cahill, Partner, heads up the Supply Chain solutions group at Waterstone Consulting. Mr. Cahill has extensive experience with manufacturing and wholesale distribution systems, and specializes in thedevelopment and implementation of supply chain strategy and supporting systems solutions, including custom and packaged information systems. He can be reached by phone at 847.699.9797 or e-mail at jcahill@waterstone