Profitable proximity

European manufacturers can no longer rely on outsourcing to drive growth, E&T explains.

Manufacturers in western Europe are facing a number of key challenges in addition to the current financial crisis. In this global manufacturing world, demand is being driven by emerging markets, and European manufacturers need to be able to target the developing middle classes in places like India, including producing goods locally. 

Another major challenge centres on the supply chain - the increasing cost and scarcity of raw materials, rising labour costs in China, and the impact of the environmental footprint.

We are also in a very 'elongated' supply chain world: any one company is part of a network of companies in a complex network. This makes it difficult to have visibility across the supply chain, and this is affecting customer service.

There's a problem of loss of knowledge, too, with the loss of baby boomers - those people who are going to retire in coming years. It's going to be harder to find talented and skilled people, not just in top management but also among the workforce. In many manufacturing businesses there's a particular problem in finding specialist shopfloor workers. And there's the growing complexity of intellectual property rights and environmental rules.

Manufacturers' medium-term strategies for the next five years should involve establishing new outsourcing strategies; keeping knowledge within the company's four walls; and taking green initiatives to the company's boardroom.

The key European manufacturing strategy of the past ten years has been a focus on production and supply chain efficiency - continuous improvement processes and production outsourcing to low-cost countries. But the downside is that we're living within multi-tiered supply chain networks that have a lack of visibility, long lead times, and can be inflexible.

The drive to reduce supply chain costs comes as European manufacturers are also seeking to be more responsive to customers and to collaborate more with suppliers. So supply chain strategies are now about balancing cost with agility. While low-cost manufacturing has been a seductive goal, a 'total supply chain cost' is a better strategy, particularly as rising oil and energy costs drive up supply chain costs.

At Manufacturing Insight, we call this approach 'profitable proximity sourcing'. This involves a sourcing strategy that looks at balancing cost with agility, quality, sustainability, financial implications and customer service.

One example of this in action is the fashion clothes manufacturing sector, using a 'dual network' sourcing approach. Under this model, established, consistent products such as men's jeans are sourced from low-cost regions. Although lead times are long, the predictable nature of the demand means low-risk supply chains.

By contrast, seasonal or fashion-risk products such as women's summer dresses are sourced locally; although costs are higher, lead times are short, allowing the supply chain to react quickly to changing demand.

Different sectors will have different goals. The electronics industry, for example, has leveraged more than most the low-cost opportunities in the Far East, because the cost of manufacture is very high. The key strategy is based on cost.

By contrast, food and drink manufacturing costs are relatively low and distribution costs are high, and so the emphasis will be on optimising lead times. The automotive market, which faces high production and distribution costs, will want to focus on being close to their markets. For the chemicals sector, which has low manufacturing and distribution costs, the goal is to maximise the return on investment.

Therefore, successful manufacturers in coming years will look at the total supply chain cost of producing goods - it's not enough just to outsource to low-cost countries - and plan the supply chain network accordingly: there will be trade-offs between cost, lead time and production proximity.

We believe that supply chains and sourcing need this broader perspective. The practise of basing the sourcing strategy on using low-cost countries will come to an end and be replaced by dynamic sourcing strategies.

Consider building greater flexibility into your sourcing strategy, either with a wider range of suppliers, using supply scheduling, or inventory postponement techniques.

But don't forget about sustainability, particularly as it relates to cost and supply network responsibility.

 

Pierfrancesco Manenti is a director at Manufacturing Insights. This article is an edited extract of his presentation to the 2008 European Manufacturing Strategies Summit [new window].

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