Economic challenges increase the significance of smaller manufacturers for the OEMs who rely on their product

Story by Sean Fitzgerald, New North B2B publisher

It wasn’t all that long ago that a number of product and equipment manufacturers made most of the parts that went into the final assembly of their products sold to the end-market user.

John Deere Co., the agricultural and heavy equipment manufacturer with substantial operations in Wisconsin, is an often-shared example of a firm that made every component part of its tractors right down to the bolts that had “JD” stamped on the head.

In the last four decades or so in the United States, manufacturers have discovered sourcing various components not only helped make the supply chain from raw materials to finished products more manageable, but it often carved out a host of inefficiencies, lower-than-expected quality on parts, and wasted costs. Just because an operation is among the best in the world at making and selling agricultural equipment doesn’t mean that it can efficiently and effectively forge the bolts that hold it together.

Now that horizontal integration dominates much of the manufacturing environment in the U.S., it’s accepted that anywhere from 50 to 90 percent of the total cost of goods sold on a product from an OEM comes from their external supply chain. In fact, it’s rare that an OEM is below 50 percent in regard to the value its supply chain contributes toward the end product, said Buckley Brinkman, executive director of Wisconsin Manufacturing Extension Partnership, which has emerged as the nation’s leading MEP in supplier development.

“It’s a trend that you outsource and take a purchasing approach to your supply chain,” Brinkman said.

Of course, there’s lots of hidden costs in the supply chain, and a variety of advantages to minimizing the stations in the supply chain where waste and mistakes can rear their heads.

Borrowing many of the best practices in product sourcing that helped lead to Toyota’s rise as a heavy machinery manufacturer a half century ago, the science and philosophy of supply chain management has been ever evolving during recent decades as original equipment manufacturers – or OEMs, for short – strive to compete in what seems to be a shrinking global marketplace.

Various processes – often in combination with one another – have been adopted by northeast Wisconsin manufacturers to remain ahead of the curve on competitors, adding jobs and generating revenue here in the region.

Journey to improve

WMEP itself works with OEMs and many of the smaller manufacturers in their vendor supply chain to teach and implement systems to provide consistent quality and remove inefficiencies from the manufacturing process that otherwise increase the amount of time and the total cost to create product.

For manufacturers who haven’t endured any kind of supply chain improvement system previously, WMEP offers its Accelerate program as an introduction to the lean journey, teaching the very basic principles of process improvement. Not surprisingly, those newly indoctrinated manufacturers generally find the greatest return on investment at the outset of the process.

“For manufacturers who have not worked in a lean environment, it’s not uncommon to take 50 to 70 percent of waste out of the process,” said Brinkman.

WMEP is in the process of rolling out its proprietary MPX software, which – with just a few hours of entering data from the shop floor and from the front office – can help manufacturers identify bottlenecks in their production process to help improve throughput time.  The software nearly replicates a value stream mapping process that a manufacturer might endure, but it can identify problem areas and help determine solutions to trim waste in a matter of hours as compared to a few weeks.

“It’s a fairly structured process that can be done quickly to analyze bottlenecks in production,” Brinkman said.

During its pilot testing of the software, Brinkman reported the manufacturer test-driving MPX was able to improve its throughput by a surprising 38 percent. Brinkman said WMEP hopes to roll its MPX software out to a broader audience of manufacturers later this year.

Bottom line success

For Ashwaubenon-based Wisconsin Plastics Inc., the process of removing waste from the supply chain is a continual effort that doesn’t simply stop after the completion of each goal.

“Our customer is always asking us every year, ‘What can you do to reduce our costs,’” said Bruce Wendt, vice president of operations for WPI.

Wendt said the manufacturer of injection-molded plastic parts and some fully-assembled products that contain complex plastic components is in the process of implementing a vendor rating system in an attempt to streamline its suppliers to only the best and most responsive who can effectively meet their needs. Rather than dealing with hundreds of vendors at a time, Wendt said it’s important to consolidate the supply chain and be among one of the most important customers to that vendor.

Wendt also said that WPI’s customers continue to shrink their exposure to inventory, WPI has adjusted its financial forecasting model to buy based on demand rather than buying raw materials based upon customer orders. It may seem to be a tedious difference, but Wendt said it’s been critical toward reducing inventory and freeing up available cash.

“We used to order large quantities (of plastic resin raw material), now we just order what we need for the week. That really makes the forecasting we do even more critical,” Wendt said.

Results have already proved striking. At the beginning of 2011, WPI experienced three or four inventory turns a year on its plastic resin. Now, Wendt reports, WPI purchasing has increased its efficiency to roughly eight inventory turns annually, and he aims to gradually increase that statistic to 12 turns per year.

Wendt’s goal has been to reduce the company’s raw materials inventory in half, then to reduce it in half again, continually. He’s been working with suppliers to provide their product on consignment, so that WPI only pays for the raw materials it buys from the vendor at the time it’s used and pulled into production.

So what’s been the real value of these supply chain improvements to Wisconsin Plastics Inc.?

During the past 15 months, WPI was able to reduce its inventory by 30 percent, and as a result, free up nearly $2.3 million of cash flow that was otherwise sitting somewhere out on the shop floor in inventory, Wendt said.

Trends in supply chain management

Certainly the recession and economic challenges that have impacted most areas of the U.S. economy since 2008 are playing a role in how manufacturers approach their suppliers.

In certain instances, noted Brinkman, OEMs have been taking some of the pressure off more reliable vendors to drive down costs, recognizing there’s a long-term advantage to ensuring a quality supplier remains successful and that continual efforts to force them to drive down cost will only result in driving that supplier out of business.

The economic downturn has also highlighted the fact that offshore supply chain sourcing is difficult to manage, said Glen Thielke, an economic and workforce development instructor with Fond du Lac-based Moraine Park Technical College.

“We have a couple of companies that have picked up business from offshore competitors that they previously had years ago,” Thielke said, adding that the fallen of value of the U.S. dollar also plays a role in the affordability of abandoning cheap, offshore sources of commodity parts and materials.

With a 29-year career in industry working for manufacturers to improve quality, supply chain management and international sourcing, Thielke has worked for Moraine Park the past seven years helping local manufacturers implement lean and process optimization strategies into their operations. He’s a Six Sigma master blackbelt and has used his expertise to provide Six Sigma training for a number of local manufacturers, particularly those that supply Caterpillar Inc., which requires Six Sigma methodology in its supplier network, Thielke said.

During his past seven years at MPTC, Thielke said he’s seen changing trends in the kinds of training services manufacturers are requesting, but most are seeking some kind of consulting that in some way impacts the supply chain. In recent years, he said there’s been more of a push toward suppliers having corrective action requirements in place, and Thielke and his colleagues have provided training to help manufacturing clients implement such corrective measures into their processes.

From his perspective, the efforts made by these manufacturers to adopt change and improve operations has meant opportunities to survive and to grow. He said a number of his clients continued to remain successful throughout the recession.

“And at this time I think every single one of my clients are looking for people (to hire),” he said.