Feeding the Line
When you make materials or components for other companies, their production rhythms become just as important as your own.
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A late shipment of bath towels will cause a snag in a retailer's efficient operations. But a delayed shipment of auto doors or plastic pellets might shut down a manufacturer's entire assembly line. And you definitely don't want to be the supplier who causes that disaster.
"For an original equipment manufacturer (OEM), line stoppage is the cardinal sin," says Rob Zachrich, president of Fabri-Form, a New Concord, Ohio-based manufacturer of thermoformed plastic components and packaging units used in the automotive industry.
Making and shipping products to meet customers' production schedules is just one logistics challenge suppliers to other manufacturers face. When you engage in the business-to-business (B2B) manufacturing supply chain, you also must respond nimbly to changing product specifications, and gauge the needs of your customers' customers, among many other requirements. Issues may vary with the industry, but in each case you're trying to deliver exactly what customers need while managing your own production and logistics costs.
What does it take to get this right?
As a third-party logistics (3PL) provider serving many automotive industry suppliers, England Logistics, Salt Lake City, well understands the challenges posed by just-in-time manufacturing.
When a supplier ships to an automotive OEM or tier-one supplier, the customer usually arranges and controls the transportation. "The supplier has the 3PL put the freight on a truck, or get it to a distribution center where they can take control of it, then bring it into the production line in 10-minute windows all day long," says Jim Monkmeyer, England's vice president of supply chain.
But that doesn't free suppliers from worries about timing.
"They still want freight moving at certain times, during certain hours, with their carriers," Monkmeyer says. "They'll report us if we don't have on that truck exactly what we said we would supply, or what their purchase order release says we were supposed to have on that truck on that particular day."
Along with timing, automotive OEMs care a lot about packaging. Suppliers ship components in crates designed to fit a precise number of parts, using a specific configuration, all dictated by the OEM.
Better by Design
Automakers are also holding suppliers more responsible for designing and building sub-assemblies such as seating.
"Even though the suppliers don't do all the designing and building themselves, they bring the parts in, assemble the seating, and take the chair to the automotive company," Monkmeyer says.
The supplier designs the sub-assembly based on the OEM's specs, and often the OEM dictates which suppliers to use for components, such as upholstery leather.
Those instructions sometimes spell trouble for a supplier—for example, if the OEM suddenly decides to use a different kind of leather. "It's a big problem if containerloads of hides are on their way from overseas via ocean freight," says Monkmeyer, noting that much of the leather used in cars comes from South America. Not only is the supplier stuck with material the OEM no longer wants, but it has to obtain new material fast.
"We occasionally end up air freighting the equivalent of a full ocean container from South America, just to keep up with production," he says.
To meet customers' complex requirements, many automotive industry suppliers locate their manufacturing plants as close as possible to the OEMs they serve. For example, several of England's customers have moved facilities from the United States to a "supplier park" adjacent to the Ford assembly plant in Hermosillo, Mexico.
Supplier parks aren't new, but some suppliers abandoned the concept in recent years, preferring to make parts in Asia. "Hermosillo is once again becoming a model after a five-year distraction of trying to produce parts in Asia, then ship the parts back," Monkmeyer says.
The Need to See Downstream
When a company makes product for another manufacturer, the supplier always stands at least two steps removed from the end customer who uses the product. That poses a significant challenge, says Fred Hartung, vice president, supply chain solutions and logistics at Jabil Circuit, a St. Petersburg, Fla.-based contract manufacturer with facilities and customers around the world.
OEMs engage Jabil to manufacture both complete finished products and sub-assemblies that carry the OEMs' brand names. Jabil serves companies in healthcare, telecommunications, aerospace, defense, energy, and other manufacturing sectors.
To cost-effectively provide each customer the required service level, Jabil must understand the true level of end-user demand.
"Jabil must also be able to quickly identify statistically significant deviations from past demand, and understand whether a change in demand is a one-time occurrence or a continuing trend," Hartung says. Do medical labs need more analytical equipment? Are pay TV systems distributing more set-top boxes? The farther upstream in the supply chain you operate, the harder it is to gauge those requirements.
A huge jump in orders might look like an increase in customer demand, when it's really only occurring to build up depleted safety stock in another supply chain node. If a supplier such as Jabil misinterprets that signal, and buys materials, schedules production, and otherwise ramps up its supply chain, it might get in trouble once the OEM fills its own warehouse. Orders could fall abruptly to zero."
That creates a huge burden of trapped working capital that you can't do anything with," Hartung says.
Or, if the OEM fails to tell the supplier that it's filling a surge in orders with safety stock, the OEM and its supplier could be caught short once the safety stock is gone.
The answer to this challenge is to gain visibility into the true demand of the customer's customers. Jabil has designed software that compares and contrasts current demand, demand forecasts, and historical demand at both the SKU and product-family level.
"The information we gain allows us to have a detailed, fact-based, intelligent conversation with customers, to ensure that we can meet their needs with an efficient use of capital," Hartung says.
Just as customers' needs can fluctuate, so can many other conditions in a dynamic global economy. The strength of markets in different countries, labor rates, foreign exchange rates, and other factors all combine to determine where a company should manufacture, and how it should get product to market. Jabil has designed analytical processes and created accompanying tool sets to help customers keep their supply chains competitive now and in future years.
"The next decade will bring a lot of volatility in terms of the right places to manufacture to service new markets and ensure competitiveness," Hartung says. For some products, it will make sense to move production to other countries; other products will stay where they are.
To make the right decisions, Jabil and its customers must consider more than the potential impact of individual changes in the global marketplace. They must be able to quantify the cumulative effect of all those developments.
Supply Chain Services International (SCSI), a 3PL based in Peoria, Ill., serves overseas companies that supply components to manufacturers including Navistar, John Deere, Caterpillar, Cummins, and Yamaha Motor Craft. Along with traditional logistics services such as transportation and warehousing, SCSI helps some customers with containment services.
If the OEM receives a shipment, and finds some components are defective, SCSI steps in on the supplier's behalf.
"We'll take the product out, sort it based on sets of criteria, rework it if we can, and return only good product to the OEM," says Edward Ubelhor, senior project manager at SCSI. "Or, if necessary, we'll let the supplier know that none of the product is good."
The items that these manufacturers produce tend to vary more in quality than finished goods usually do. "Some items are just metal castings that haven't been finished yet; they have to go through the machining process," Ubelhor says.
"Shippers of these lower-level components don't always exert the same controls in transit as shippers of finished goods," he adds.
For example, inadequate packaging may cause problems. "Some suppliers from China overload their containers with product, just to squeeze in as much as possible," Ubelhor says. "The crate, or whatever packaging they're using, isn't capable of handling the weight. Loads shift as they ship, and products get damaged."
To avert such problems, SCSI recommends improvements such as better methods for loading parts into crates.
Although SCSI's customers might not be bound by the imperatives of just-in-time assembly, they do need to time their shipments to customers' manufacturing schedules. SCSI helps them by pulling data from the OEMs' systems and then, based on the lead times for different components, letting suppliers know when it's time to ship.
"We reach out to suppliers and provide due dates to keep them on track," Ubelhor says. "And we let them know how much stock we have on hand, and what they need to replenish." The 3PL typically sends those alerts three or four months ahead of when the OEM needs the parts.
Like many of England's automotive suppliers, SCSI's customers retain ownership of their inventory until the OEM needs the parts for production. That means they live with the continual risk of getting stuck with obsolete parts.
"We might be carrying weeks of inventory when the OEM decides to revise a part," Ubelhor says. "Now we have all this inventory that has to be consumed."
If it's possible to modify the parts to meet the new spec, the supplier incurs only a rework cost. But if the OEM makes the change because of a safety issue, the supplier often must scrap the material entirely.
Safety and Integrity
Companies that sell food grade products to manufacturers share one important mandate: To keep product pure and clean throughout the supply chain. Ingredion, Westchester, Ill., faces this challenge every day.
Ingredion makes starches, sweeteners, and other ingredients used in food, beverages, and pharmaceuticals, as well as in everything from baby powder and cosmetics to textiles and corrugated boxes. The company maintains manufacturing and sales operations in 40 countries. Within North America, most of its product moves in liquid or dry bulk form, by either truck or railcar. Some of it travels in bags packed in dry van trailers; all of it must be handled with care.
"We follow stringent sanitation procedures," says Mike Moran, director of logistics for Ingredion's North American operations. Those procedures include establishing and enforcing correct wash cycles for bulk trailers and containers, and making sure those assets are properly sealed. Ingredion maintains certification with the International Organization for Standardization (ISO) to demonstrate that it follows all the necessary procedures.
Seventy-five percent of Ingredion's facilities worldwide are certified by the Global Food Safety Initiative (GFSI), and the company is working toward 100-percent certification.
To further ensure product safety, Ingredion maintains close relationships with a small number of carriers that often dedicate specific units to specific facilities.
"For the most part, those assets cannot be used to transfer other products, so they guarantee the trailer's integrity," Moran says. "The trailers are specially designed to efficiently move the products that we're delivering to our customers."
Along with maintaining quality, Ingredion—like so many other suppliers—must carefully coordinate its deliveries to match customers' production schedules. The company delivers large volumes, but customers use that product quickly.
"Customers may only keep a half-day or one day's worth of inventory on their site," says Moran. "So we're potentially making multiple deliveries to one site on any given day." Ingredion carefully monitors carriers' performance to make sure each trailer arrives within one hour of its delivery appointment.
To synchronize with customers' demands, Ingredion closely follows their manufacturing processes. "In many facilities we serve, we actually can monitor the inventory in the tanks," says Dave Gardner, vice president, North American supply chain, Ingredion. "We can see how the customer is using the product, then tailor the delivery rate to maintain the inventory in the plant."
Coordinating with Ingredion's own suppliers is a bit simpler. The company's raw materials include tapioca, wheat, and potatoes, but mainly corn. Like its customers, Ingredion doesn't carry a large inventory in its plant.
"We need a responsive and robust network that allows us to continuously get the corn into the plant, and adjust the rate at which the corn comes in to support the facility's production requirements," Gardner says.
But demand for these products stays relatively stable. "There are not huge swings in production," he adds.
For companies that supply basic materials for industrial processes, the rise and fall of commodity prices can create tremendous pressures. Take, for example, the recent drop in the price of natural gas, and the way that has affected companies that process and deliver sand for use in natural gas production.
Most of the best sand used in the drilling process known as hydraulic fracturing, or fracking, comes from Wisconsin, says Taylor Robinson, president of PLG Consulting in Oak Park, Ill. Once the supplier mines, grades, and cleans the sand, it ships the commodity to a transload facility near gas fields in Texas, Pennsylvania, Ohio, or other states with shale gas activity.
Providing frac sand used to be a very profitable business. But as gas prices have fallen in the past year, frac sand suppliers have faced a much tougher market.
And that has meant making logistics as efficient as possible. "Currently, the cost of frac sand delivery is roughly 70 percent transportation," Robinson says. Sand usually moves to the transload facilities via rail, so shippers try to keep their rail costs low.
One strategy is to build a unit train—an entire train loaded with one commodity, all moving from one origin to one destination.
Shipping by unit train is 25 to 30 percent cheaper than shipping by manifest train—sending smaller groups of cars to different locations. Manifest shipping is also much slower. "The cars can sit in a yard for days or weeks at a time, and it takes one month to get to Texas," says Robinson. A unit train can get from Wisconsin to Texas in five to seven days, he notes.
Unfortunately, it takes tremendous volume to build a unit train. That's bad news for smaller suppliers. "The industry will experience a shakeout," Robinson says. "The smaller sand players will not be competitive if they can't ship in unit trains."
Efficiency Isn't Easy
Like sand producers, companies that make plastic resins for use in manufacturing must design their supply chain networks for maximum efficiency. But in today's market, that's not always easy.
Many resin producers manufacture on the Gulf Coast because of its easy access to petrochemicals. And many of their customers are in the Midwest. Plastics suppliers must establish distribution centers close to those customers, then ship the product—mostly in the form of plastic pellets—to those locations as efficiently as possible.
One irony of the current market is that shale gas states such as Ohio and Pennsylvania offer plenty of "feed stock" for plastic resin. And demand for resin in that region is high, as well. But because it takes billions of dollars to build a new resin plant, production is unlikely to start up close to the shale gas wells.
"They will have to move all that ethane—feed stock for plastic—via pipeline out of Ohio and Pennsylvania down to, say, Houston, to be processed into plastic," Robinson says. "Then they'll put the pellets on a train and send them back to Pennsylvania."
Companies in all industries that supply components and materials to other manufacturers operate in complex environments. A drop in the value of a key currency, a customer's new marketing plan, an earthquake, a prolonged drought—all sorts of factors, working together, can change the logic of a supply chain. For companies that supply other businesses, it's essential to pay attention to all those conditions at once, and keep up with continual change.