Small Companies Take on the World

Small- and mid-sized companies competing in the global marketplace have three strikes against them: they lose on price to companies with greater purchasing power, have fewer resources for staffing and IT needs, and aren’t able to fall back on the reputation of a huge brand name. But forward-thinking small companies are not giving up the global dream. Instead, they optimize their global strategies with smart supply chain initiatives—and hit the ball out of the park.

One such company is Woodward Governor Co., a mid-tier independent designer, manufacturer, and service provider of energy control solutions for aircraft engines, industrial engines and turbines, power generation, and process automation equipment. The Rockford, Ill.-based company provides integrated systems that deliver fuel, ignite it, and control the combustion process.

In November 2004, Woodward was selected by GE Transportation-Aircraft Engines as the fuel system integrator for the Boeing 7E7 787 Dreamliner aircraft’s new GEnx turbofan engine. When it starts service in 2008, the 7E7 will seat 200 to 300 passengers and fly routes between 3,500 and 8,500 nautical miles.

As a systems integrator, Woodward is responsible for the specifications, development, certification, production, and support of the fuel system, which includes fuel pumping, fuel metering and control, engine actuation and control, heat management, and fuel filtration. Industry analysts expect the value of the total fuel system program to exceed $400 million over the next 25 years.

Woodward won the GE business largely because of its supply chain, “using an innovative logistics strategy and a great deal of support from our supply partners,” says Mark Lauterbach, Woodward’s director of global purchasing.

“We sell to some of the biggest original equipment manufacturers (OEMs) globally, and many competitors are divisions of multi-billion-dollar companies,” Lauterbach says. “On some contracts, we are the smallest provider of this technology; we are David to their Goliath.”

Small to mid-sized companies operate in a global market that doesn’t discriminate—it doesn’t give companies a break simply because they are smaller.

“The demands on mid-tier manufacturers are no different from those on the largest companies,” Lauterbach says. “Customers want better value from products, increased reliability, global presence for sales and service, continuous improvement in quality, and year-to-year cost reductions—regardless of the manufacturer’s size.

“Our competitors have incredible resources to meet these demands—staff, travel budgets, financial resources,” he continues. “How do we compete with that? We find the right supply chain partners and leverage their skills, capabilities, and resources.”

Two years ago, Woodward created one global supply chain organization within the company. Lauterbach is part of this global support services group, which also includes finance, IT, human resources, and supply chain. Lauterbach reports directly to Woodward’s president and COO.

After creating the new support organization, the company re-thought its supply chain activities. “We selected a single partner for logistics services—a third-party logistics provider (3PL) we use to manage our inbound and outbound transportation globally,” Lauterbach says.

The company wanted to leverage its supply chain, bring more value to the operation through its business partners, and find a domain expert in logistics. “It’s one thing to manage logistics transactions—we wanted global visibility of both inbound and outbound products,” Lauterbach says.

Answering the Questions

“We also wanted a partner that could make recommendations for improving our supply chain,” he says. “What are cutting-edge companies doing today? How do we increase inventory turns and fill rates? How can our partners help us add value to sales and marketing and manage our logistics to support various channels? We wanted someone to answer those questions so we could focus on our core competencies.”

Instead of staffing its logistics organization with 10 to 15 full-time employees, the company selected a 3PL to manage its logistics activities, and retained a small logistics department in-house. “The 3PL is better at managing inventory, logistics, and distribution. That is not one of our strengths,” explains Lauterbach.

On the purchasing side, Woodward looks to its suppliers to provide design support, and innovative solutions such as supplying sub-assemblies rather than individual parts.

“Instead of buying a number of different components from various companies that will sit in our warehouse waiting to be used, we have a single supplier buy the components, combine them into a sub-assembly, and deliver just-in-time (JIT) to our production line,” Lauterbach explains. “This reduces our supplier count and our inventory.”

Lauterbach compares the concept to automakers that buy drop-in seating and dashboard panels delivered JIT to their production lines. “We take best practices from other industries and ask our alliance partners to support us with solutions,” he says.

Overall, differentiation is the key to Woodward’s success going forward, Lauterbach believes. “A big company will always be able to beat us on economies of scale,” he explains. “Our largest competitor buys 100 times the amount of steel we do, so it gets better pricing. We compete on differentiation of products and services. We are more nimble, and we can leverage the resources of our supply chain partners. At the end of the day, that’s the only way we can compete.”

It’s no secret that the center of gravity for manufacturing is quickly shifting to the Far East and South Asia. U.S. companies have gained significant manufacturing cost reductions by tapping into resources available in countries such as China, Taiwan, Malaysia, Singapore, Thailand, and India.

Managing a supplier from a distance, however, brings new challenges. And managing a supply chain spread throughout the world has gotten more complex. Unlike Woodward, the majority of small and mid-sized companies struggle to get a grip on their global supply chains.

Several key factors contribute to the increased supply chain complexity that comes with globalization, according to a 2003 Deloitte & Touche survey:

• Pressure to reduce costs. Sixty-one percent of manufacturers surveyed have moved production to low-cost regions.
• Pursuit of new markets. The majority of these manufacturers have supply chain and other operations spread worldwide, which, in some cases, leaves them with more assets in foreign lands than in their own countries. This further stretches the supply chain.
• Product innovation. Manufacturers are counting on increased revenue streams driven by new products.

The report also uncovered five emerging paradoxes resulting from supply chain complexity:

1. Despite globalization, most supply chain optimization is local, focusing on individual functions, facilities—such as plants and warehouses—services, and countries. In fact, only 50 percent of companies surveyed have a senior or board-level executive in charge of global, end-to-end supply chain processes.
2. Supply chains are not fully prepared to support the escalating pace of new product introductions, despite accelerating innovation.
3. Shorter product cycles, increased customer demands, the pursuit of new markets, and focus on unit cost reductions have made achieving supply chain flexibility more difficult.
4. While managing risk is a concern to most survey participants, many companies significantly increase potential risks by fragmenting their supply chains.
5. Though customer service is a top supply chain priority, less than 8 percent of companies surveyed report high levels of collaboration with customers on key initiatives.

Competing for Mindshare

Competing for “mind share” against larger competitors is the biggest challenge small companies face when manufacturing and sourcing overseas, according to Bijan Dastmalchi, president, Symphony Consulting Inc.

“Brand names, such as Hewlett-Packard or IBM, carry a lot of weight, so these companies get away with certain inefficiencies or breakdowns,” says Dastmalchi. “Small and mid-sized companies don’t have that advantage.”

When going global, smaller companies must invest more up front—they need to understand what they can gain from the global market and execute a thorough cost evaluation. A transportation and logistics strategy that maximizes transporting relatively small volumes of product out of the Far East or South Asia is also imperative. This is particularly true in light of the current capacity crunch facing shippers.

“It’s important to have resources you trust in the areas where you intend to do business,” advises Dastmalchi. “A $100-million to $200-million U.S. company with a volatile demand curve trying to source from China through e-mails and conference calls is doomed to fail.”

One U.S. electronics OEM that selected a mid-sized Chinese company to build its product is a perfect example, says Dastmalchi. When products began arriving late or were not shipped, the Chinese company blamed delays on component shortages. After several months of investigation, the OEM discovered one of its competitors had selected the same Chinese manufacturer to build its product and was sucking up all its capacity.

“If the U.S. company had someone in China, it would have discovered the problem sooner and taken steps to mitigate the supply risks,” says Dastmalchi.

Smaller companies frequently make the mistake of simply following their large competitors to overseas manufacturing, which can cause problems.

“A small company outsources production to China, for example, and plans to begin receiving its products for the holiday season,” says Dastmalchi. “Just as the pre-holiday shipping season gets underway, however, it runs into capacity issues with the carriers and 3PLs. An unknown name with small cargo volume trying to negotiate ocean capacity in October is just not possible.”

Too many small companies believe outsourcing production to China or other low labor-cost countries is the solution for any type of product. Not true.

“Products that are high mix and low volume, have multiple SKUs, complex technology, or are unstable from an engineering standpoint are not suitable candidates for China,” Dastmalchi says. “In these situations, the savings in acquisition price alone could be offset by the hidden costs of offshore sourcing, leading to an increase in total landed cost.”

Many small businesses also fail to calculate total landed costs when considering outsourcing production overseas. Complex products require a lot of travel, a lot of engineering time on the phone, and, in some cases, the need for engineering resources at the manufacturing site, Dastmalchi says.

“Companies also need to factor in the cost of in-transit inventory sitting on the water for four to six weeks, or the cost of shipping by air,” he says. “A company may ship only 10 percent of its quarterly volumes via air, but the airfreight cost could be enough to completely wipe out any price savings made by manufacturing their products in China.”

Some companies are surprised at the difficulty of managing critical global supply chain activities, particularly transportation. “When freight forwarders quote transit times and pricing, your cargo isn’t necessarily guaranteed to move at that time,” says David Vernon, vice president, supply chain solutions, APL Logistics, an Oakland, Calif.-based 3PL. “It’s not uncommon for a smaller company to book a particular sailing only to find out there isn’t any room left for its goods.”

Smaller companies often put together supply chain plans that look smart on paper, but don’t have real-world effectiveness, says Vernon. When issues do occur—such as congested ports and rail yard back-ups—their cargo gets sidelined in favor of freight from more lucrative customers.

“Smaller companies choosing service providers only on price get into trouble in these cases,” says Vernon. “The perception is that transportation is a commodity, and any freight forwarder can move goods reliably.” This is not the case.

Companies need to look at transportation as a value-added part of their inbound solution, and trade off between cost and reliability depending on the freight, advises Vernon. To avoid carrying inventory over time for high-value products, sending smaller shipments or using a more expensive routing method makes sense.

For low-value products, where carrying inventory isn’t an issue, companies can afford to stock more and ship in larger quantities. “Companies that understand this tend to do a better job managing their supply chains,” says Vernon.

Rather than jumping to outsource production in China or elsewhere, Dastmalchi recommends companies first examine their existing situation for potential improvements. Renegotiating supplier contracts to reduce pricing, working with suppliers to increase inventory turns, reducing inventory burden by improving efficiency, and making IT improvements that reduce administrative overhead are all ways to improve the supply chain without turning to global sourcing.

“Do an ‘apples-to-apples’ comparison,” Vernon suggests. “Renegotiating deals with your existing suppliers and changing your traditional business processes for working with suppliers may close the gap between your existing business model and an offshore sourcing model.

“If after due diligence, the total cost gap is still wide—more than 10 percent—then you may have a compelling business case for outsourcing your manufacturing to China.”

Delivering What Customers Want

Star Furniture is the largest furniture retailer in Texas and one of the top 100 furniture retailers in the United States. With 11 stores, Houston-based Star is a mid-sized company, but it is a subsidiary of a much larger firm—Berkshire Hathaway.

While Star sources furniture from traditional domestic producers in North Carolina, Virginia, and California, it has significantly increased its imports—from Asia primarily but also from Canada and Mexico. Star moves 60 percent of its Asian imports via the all-water route into Houston, and 40 percent via ocean into California for piggyback service to the company’s distribution center in Houston.

Cost management is high on Star’s list of supply chain management priorities, according to Bruce Cutler, vice president of logistics.

“We’re concerned with keeping freight costs as competitive as possible and managing our inbound flows to be reliable,” Cutler notes. “I try to control as much of the inbound freight as I can, but I let our vendors control it when they clearly have a major cost advantage.” Star uses a freight forwarder to manage its ocean transportation.

Star also partners with its three other Berkshire Hathaway sister furniture companies to negotiate more attractive freight rates and service.

“Larger companies have an automatic advantage because they can negotiate lower rates through greater volume,” Cutler says. “We realized we could leverage our total corporate freight volume to our advantage.

“By combining the volumes of our four companies,” he continues, “we attracted bids from big supply chain and freight companies. We got attractive rates, saving about $500 or more per container load, adding up to $1 million per year in cost savings across Berkshire’s furniture chains.”

Inbound freight visibility is another key issue for Star. “Our freight forwarder, Expeditors International, helps us compete with the bigger players,” Cutler says. “Expeditors offers web-based visibility in a format that is easy to use. This visibility lets us make delivery commitments to our customers because we know where our freight is in the inbound pipeline.

“This technology is a great equalizer,” he continues. “We now have the same visibility as Wal-Mart or any of the other large retailers.” Expeditors also helped Star reduce its freight costs by proposing the company use all-water transportation from Asia to Houston.

“We tried it and it worked fine for our needs, so we switched 60 percent of our volume to that service,” says Cutler. “We saved money, and, because of the slowdown from congested West Coast ports, our all-water transit times are about equal with our West Coast shipments.”

Sourcing furniture from Asia has several benefits for Star. First, it reduces product purchase cost. Second, it helps Star deliver the quality and type of furniture its customers want. Key to making this combination work is effective inbound transportation management.

By tapping the strengths and expertise of a global freight forwarder, negotiating with carriers to secure volume rate discounts, and taking advantage of its forwarder’s visibility tools, Star ensures that its global sourcing strategy reduces its overall costs. It also helps Star offer the level of service its customers expect.

“Being flexible and giving your customers extra service while keeping prices competitive is how you stay in business,” says Cutler.