Going regional to “stop the madness”

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Let's use the current crisis to signal an end to 20 years of madness in sourcing strategies. Single sourcing is dangerous. That much is obvious. And 100 sources all competing for the next contract based on piece price is also dangerous, in a different way. When that single source is continents away from production facilities, the danger is magnified. Thus a new sourcing model is needed.” –John Shook, chairman and CEO, Lean Enterprise Institute, Inc.

I came across an interesting “e-letter” this weekend penned by John Shook, chairman and CEO of the business-focused think-tank Lean Enterprise Institute (LEI), and while it’s not about trucks per se, it suggests a radical overhaul in the way companies craft their supply chains – and such an overhaul, if undertaken, would result in a lot more work for U.S. truckers.

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“A trend that started in the auto industry in the 1990s and became a tsunami that has now hit the whole industrial world: a radical supply model that outsourced, ‘off-shored’, and ‘single sourced’ from a single suppler often at a single plant thought to be the cheapest location in the world,” Shook explained.

“Before long, even internal operations were held to the same pricing standards,” Shook (seen at right) pointed out. “’Outsourcing’ grew along with ‘off-shoring,’ under the edict, ‘Match the price I can get in China or your contract goes up for bid.’ And up for bid they did go, and out of business they went. First, smaller suppliers closed their doors, at huge cost to OEMs to replace the lost supply of parts and materials. Then they were followed by larger ones.”

As a result, Shook said, supply chain logistics became increasingly complex, with other trends contributing the “madness” as he likes to describe it: more sophisticated software and transportation systems, leading to the rise of third-party logistics or “3PL” specialists.

“Then logistics and even supply chain strategy became outsourced, with outsourcing begetting outsourcing,” he emphasized. “Not unlike the specter of machines designing machines – as in The Terminator – a monster was created. In the end, yet another key competence of manufacturers was lost to specialists whose interests were their own, not the OEM's, [and] certainly not the customer's.”

While Shook is quick to point out that there is nothing inherently wrong with sourcing globally, a single-minded focus on lowest piece-price with no regard to broader regional strategies leads to unneeded complexities.

“And, as we see from the catastrophe in northeast Japan in March [caused by an earthquake and devastating Tsunami], it also leads to unneeded risk,” he said. “Who knew – I didn't – that 40% of the automotive industry's microchips were being produced in one relatively small region, most of them in one factory.”

Shook said this is part of a deeper problem in that most companies didn't know the full extent of their exposure to risk. “Buyers know their suppliers, but usually not their suppliers' suppliers, or the suppliers of those suppliers,” he explained.

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Shook believes the solution to this problem lies, however, not in moving away from “just-in-time” manufacturing or even global sourcing, but in totally rethinking supply chain strategies.

“In general, it makes most sense to produce close to where you sell. And in general it makes most sense to engineer close to where you produce. And it certainly makes most sense to procure as close as possible to where you produce for your customers,” he said.

For most large firms, that means pursuing regional supply strategies. “Let's use the current crisis to signal an end to 20 years of madness in sourcing strategies,” Shook stressed. “Single sourcing is dangerous. That much is obvious. And 100 sources all competing for the next contract based on piece price is also dangerous, in a different way. When that single source is continents away from production facilities, the danger is magnified.”

In his view, moving to regional supply chains then, with raw materials, factories and finish goods not only close to one another but close to the final customer, too, can actually save as much as far-flung global supply chains.

This also becomes a “sweet spot” of sorts for trucking, as it trucks can certainly help tie together regional supply chains in an extremely efficient manner.

“Shorter lead times are better than long,” Shook noted. “Closer proximity between suppliers and customers is better – shipping regionally better than shipping across oceans. Less inventory with more frequent delivery is better than large inventories that move infrequently,” he pointed out. “Single sourcing, especially single-location sourcing, is generally bad – it's risky and doesn't leverage natural, healthy competition tension. Maintaining hundreds of suppliers for the same part is also bad – it generates complexity, confusion, and costs of redundancy.”

Interestingly, Shook believes the U.S. is an ideal location for regional supply chain strategies and is being undervalued by many companies.

“Anyone anywhere who wants to make his or her country a competitive manufacturing location needs to practice lean math. That's total cost – including the potential cost of disruption on long-distance supply chains – rather than the piece price plus slow freight cost calculation done by most manufacturing firms today,” he explained. “The U.S., specifically, is already a much more ‘competitive’ manufacturing location than most senior managers seem to think.”

To repeat for emphasis, Shook stressed that his point is NOT that sourcing in China or Brazil is a bad idea.

“The emergence of China and Brazil as viable sources for the global production community is a positive phenomenon of historical importance,” he noted. “But each sourcing decision needs to be made on its own merits, [not] the lunacy of a narrow focus on lowest global piece price. Now is the time to rethink and reconfigure supply chains so they are rational, regional, practical, low in total cost and risk and high in fostering quality.”

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