Time was there was a wide divergence between supply chain practice in mainstream consumer manufacturing and the engineering sector. But while there is still a considerable difference between best and worst, benchmarking exercises show top engineering firms are now on an equal footing with those in high tech manufacturing – as illustrated by this year’s overall winner of The European Supply Chain Excellence Awards, where Rexam Beverage Can Europe won, not only the Engineering and General Manufacturing sector Award, but also took home the Overall Winner trophy.
Gordon Colborn, director of management consultancy PRTM which has worked with many of the world’s largest engineering firms, says: ‘Five years ago there was a massive difference but the gap is closing and the engineering sector is adopting many of the practices seen in other sectors.’ As in the consumer field, firms are competing not just in terms of product excellence but also using the supply chain to try and outdo one another.
‘Engineering is not quite there yet but we have done some work with big firms that are starting to realise that you can’t compete on engineering excellence alone. The service supply chain, in particular, is being used in this way.’
Buyers of engineering products are usually quite sophisticated and are less likely than consumers to be swayed by a low initial purchase price if on-costs will be higher. The engineering sector will have to think how to configure supply chains to deliver this. Engineering organisations are increasingly configuring supply chains to deliver the lowest supply-cycle costs. That has significant implications for how supply chains are organised.
Engineering firms are also adopting modern techniques like lean manufacturing and vendormanaged inventory. ‘Our statistics also show a strong correlation between supply chain efficiency and profitability,’ says Colborn.
In a sector that is seen, as a steady rather than spectacular performer, taking supply chain costs off the bottom line is an effective way of boosting profitability.
But the move away from a purely engineering-led approach is culturally difficult for firms. ‘Yes, it can be a wrench for organisations that have been run by engineers. In some cases, there is nobody from the supply chain at the top table.’
One difference between engineering and other industries is that in the former, products are vastly more complex, at least in terms of the numbers of components and suppliers. There is a need to make a trade-off between variability and cost management and, in some cases, to address the huge tail of rarely used or product-specific parts. ‘Typically, only 20 per cent of components will be common across 80 per cent of products. That has big implications as to how you run the supply chain and organisations are beginning to understand how this complexity adds cost. It’s something we’ve always suspected and now our research in the engineering sector confirms it,’ says Colborn.
Some engineering firms have grasped the nettle more firmly than others. In some it is still a case of a proliferation of suppliers and physical distribution points. The industry could usefully look at car production which is, after all, a branch of engineering. It could learn how techniques like common platforms for what appear to be different car models or the use of pre-built assemblies can reduce the number of components and suppliers. ‘That’s the sort of concept we’re exploring with some of our big engineering clients at PRTM,’ says Colborn. ‘For example, we are introducing the idea of configuring products further back down the supply chain.’
What the consumer wants
While engineering companies have always prided themselves on the high degree of configurability of their products, it is worth asking whether the customer actually wants this. The more complicated a product is and the greater the number of variables, the longer and more costly it will be to procure. And it is not just the initial manufacture that will be rendered more costly but also the ongoing support costs which typically run for quarter of a century, and can go on for 40 years.
Take the rail industry, for example. With trains, there are a huge number of items you theoretically have to keep in stock. So how do you structure your supply chain? Increasingly the rail industry is learning there should be two supply chains – one to produce the trains in the first place and another to keep them running for the next 50 years.
Keeping spares stocks over such a long time is doubly difficult because health and safety rules may mean specifications change – rendering existing spares obsolete – or because the original manufacture goes out of business or relocates. Often, the service supply chain is considered when it’s already too late.
With the contraction and rationalisation of the engineering base in many countries, an interesting phenomenon of recent years has been the growth in engineering firms offering to service other makers’ products, adds Colborn. This immediately throws up another problem in the sector – the near lack of product identification. ‘This makes it difficult for an engineer in the UK to know he can get the same part from, say, France for half the price.’
Software can only go so far. ‘Yes, you can use it to manage complexity but it does not in itself reduce the underlying complexity.’ Integrating engineering firms’ databases would be a mammoth task. ‘It’s difficult to know where to start,’ says Colborn. ‘And bear in mind the number of suppliers these firms have – even a company in something modest like lift manufacture could have 200,000.’
Difficult though these issues are, there are signs leading firms are beginning to address them, something that could lead to the disappearance or takeover of those less able to adapt. That, if nothing else, should reduce the number of suppliers in the industry.
How far have lean techniques permeated the engineering supply chain? It’s difficult to define what lean means, says Dave Kraemer, global VP for manufacturing and high-tech business at GXS. ‘There’s no single definition of lean, but it includes taking a process-based view of replenishment and engineering firms no longer carry inventory willy-nilly.’
‘Take the US Navy, for instance. At one point, their depots purchased all their items in the same way even if items just went into inventory and stayed there for years. But now the Department of Defense is looking at process-based purchasing, with some kind of alert mechanism,’ says Kraemer.
Some items, like sheet metal, can deteriorate over time. With complex sub-assemblies produced by another supplier ‘there’s a need to balance having it available when you need it against having it too early’. says Kraemer. Other items, particularly in industries like shipbuilding, can be costly to store.
While some supply chain questions in engineering are complex, Kraemer’s assessment is that many companies ‘are really far along’ in streamlining their supply chains. ‘Oil companies, construction companies and defence projects do a pretty good job because there’s a lot of project scrutiny and they’re looking at things with increasing granularity.’
Contrary to what some might suppose, it is often in the public sector that scrutiny – and hence supply chain efficiency – is strongest, says Kraemer. Episodes like the notorious “$500 toilet seat” resulted in a lot of publicity and, with heightened public awareness, scrutiny of costs is now intense.
But the civil engineering sector is still somewhat behind the times. Until recently, labour was the main cost focus here and a lot of fat could be hidden in a bill of materials. But even here things are changing.
Kraemer says much has been done to simplify componentry and get rid of unnecessary proliferation in both mechanical and civil engineering. ‘Its not as big a problem now as you might think. For instance, in the 1990s the US Department of Defense changed from using engineering-specific drawings to the As Good As (AGA) approach. This eliminated a lot of special part numbers.’
An ongoing process
Significantly, one UK-based engineering company that has lasted the course, Deltron-Emcon, has made great efforts to develop a lean supply chain. It’s an ongoing process, says md, Bob Davis. ‘While it’s often considered as something for the shop floor, it really should concern the whole business.’ Deltron-Emcon has positioned itself as a company that can supply complex assemblies close to the end user. Often, says Davis, the issue is ‘getting the customer to understand the true cost, not just the price-tag, and also that we can offer the flexibility of having Far Eastern and Eastern European suppliers. If you’re going to supply from further afield it means you’ve got to forecast, and that can be tricky in today’s market.’
Deltron now deals with 55 per cent of its orders electronically, mainly through EDI links, though it has also developed software that allows customers and suppliers to look at its own live data – passwordprotected, of course – and make informed decisions about what to produce by assessing likely delivery times. ‘That’s especially helpful where you’ve got awkward time differences,’ says Davis.
‘There’s a lot of interesting software about now. For instance, we use a program for automating Kanban systems.’ This is particularly useful for applications where bar coding is not practical as it allows requests to be fed electronically through an online hub, and such systems are increasingly being used by Tier II and Tier III suppliers.
In the longer term, RFID could have an impact on manufacturing as it is already doing in mainstream retailing, the main question being whether Tier II and III suppliers can afford it.
Deltron has worked closely with business performance management software specialist Geac and has used the latter’s System21 ERP solution for its core business since 1995, later using it to support its lean strategy. System21’s purchasing, manufacturing and financial modules allowed Deltron to strip transactions out of its purchasing system, reduce reports and generally improve the accuracy of the information held
In 2004, Deltron mapped all processes onto a single screen to enable easier access to systems, giving cell leaders a real-time view of a product or area at the touch of a button.
And Deltron is not the only engineering company Geac has worked with. In fact, together with the food processing industry, the sector is probably now the software specialist’s biggest. At mining and construction machinery specialist Sandvik, it has helped centralise a far-flung supply chain, reducing inventory by 40 per cent. At the same time it has helped tighten up engineering and manufacturing collaboration to cut production lead times from conception to a machine to within one year. Sandvik has given five of its suppliers web access to stock and production information held in System21 to facilitate vendor managed inventory.
Geac’s business consultancy manager Graeme Drain says the Western engineering companies that survive the onslaught of low cost country competition will have to sharpen up and instigate lean philosophy across the piece. Strategies like vendor-managed inventory, systems that show consignment stock and cutting times to market can all help, he says.
In the case of Sandvik, each of its 35 global operations has its own installation of System21 backed by a central system in its Swedish head office providing a consolidated view of inventory and production. This is vital in streamlining the supply chain process. It provides staff with a view of worldwide inventory which helps the order fulfilment process, while customers can place orders safe in the knowledge they will be supplied on time. Sandvik has extended the information it provides to customers to embrace systems used by its third party logistics companies.
Some customers have seen lead times slashed from two weeks to just a few days, while also taking dozens of people and discussions out of the information chain – a vital consideration when faced with costly downtime.
But Drain says that while there are many steps engineering companies could theoretically take to turn themselves into lean, mean machines, getting there is a painful process – too painful for some. ‘This is particularly true of medium-sized firms under pressure from suppliers and customers.’
For example, postponement sounds great in theory but products may have to be totally redesigned to take advantage of such strategies and firms that have seen their profits under pressure for years might not be able to do this. Engineering generally has suffered from a lack of investment – the take-up of even basic technology like computer aided design is still limited. In some cases, even the physical premises make it hard to adopt high tech solutions.
Jeff Baum, senior vp of international operations at Manhattan Associates explains that while engineering is not the supply chain software specialist’s biggest market, it is one of the fastest growing. ‘Manhattan has a good number of customers in the make to order segment, he says. ‘Over the years there has been a move, first from a make to stock model, then to postponement, and now to lean manufacturing on a produce to order basis.
‘Lean manufacturing is coming into all sorts of areas now, especially with the move to offshore manufacturing in places such as China. It’s fair to say that until quite recently there were companies that did some brilliant manufacturing but did not care too much about the supply chain. But now they’re doing sub-assembly abroad, they’ve got a supply chain in the middle of their operations and they’ve got to position themselves to bridge that gap.’
Shop-floor control is still the essence of engineering, with product changes often being carried out by engineers. Products are often complex and, in highly engineered sectors like military or medical equipment, ‘there may be a need for a detailed log of who’s touched a piece. Levels of information must be a lot higher.’
Naturally, this makes engineering a promising area for RFID, especially when it comes to more expensive or complex components. Indeed, aerospace companies are already using such devices to keep track of instrument panels. RFID is also useful with those tiny items that are impossible to bar code.
In the context of engineering, the ability to scan information in and out will be valuable but RFID can also carry a lot more information than a bar code, especially if read-write tags are used. In fact, much of the information currently carried in enterprises’ central systems could in future be carried on tags as companies shed their nervousness about holding information outside of a central system. ‘This could be valuable in the field where the engineer might not have access to the central database,’ says Baum. ‘The only question is how to reconcile information on tags with that in the central system.’ Communicating the information may not be a problem in these days of GPRS but different codes and naming conventions, especially in an industry with a multitude of unique parts, could be a problem.
Getting suppliers to conform to conventions and systems is notoriously difficult. It’s rarely an issue with firms making specific, customised items but it is a problem for more commoditised suppliers.
Deltron’s Davis adds that hazardous substances regulations have forced companies to take a closer look at product descriptions. One possible solution to the problem of different people wanting to call the same part different things is to use a header and then a second layer of information to give more details.
In summary, Baum believes the engineering sector is a late adopter of advanced supply chain techniques but that it is beginning to happen. In aerospace, for example, for years the focus was on getting the engineering process itself streamlined, then it moved into assembly, and now the focus is on the supply chain which is seen as the final frontier.