Transforming supply chains: the links effect

The term ‘supply chain’ is somewhat overused these days by everyone from serious business people to journalists and even politicians. At one level, that gives some cause for optimism – as Oscar Wilde said: ‘There is only one thing in life worse that being talked about, and that is not being talked about’ – but there is some concern that the phrase is not as well understood as it should be, and is too often interchanged with the term ‘supply base’.

You may think it is just semantics but the difference matters. The distinction is that the supply base encompasses all of the suppliers in a particular sector, geographic area, or even those supplying a large company.

It is still important to recognise that ‘supply base’ is a relevant term when we think about improving supplier capabilities, and there are many initiatives aimed at that very objective. However, the strength of the term ‘supply chain’ lies in its implied connectivity, the fact that the chain contains links which secure the end-to-end process. If we think that way, it helps us to realise that most large customers and original equipment manufacturers (OEMs), actually have one supply base, but several supply chains, which cascade down from the very highest level of product integration.

To illustrate the point, it is unlikely that an aircraft assembler will have the same companies supplying its engine and its cockpit seat. So, unless the customer has a standard or regulatory requirement that all suppliers must meet or abide by, why not focus supplier development and improvement down a chain, rather than take a blunderbuss approach and hope that the whole chain gets stronger as a result?

We’ve heard a lot in recent years about the ‘hollowing-out’ of the supply base, a result of global economic conditions, and the drive to purchase from low-cost economies. With recognition from many sectors that local supply has significant advantages – logistics, communications and quality to name but three – there is a challenge to meet both capacity and capability requirements if UK suppliers are to grab the ‘prize’.

Productivity, product and process innovation remain significant drivers for all businesses in the supply base, but one of the greatest chances of success lies in working along supply chains in an integrated manner. One of the ‘elephants in the room’, however, is that customers and OEMs might actually have to change some of their processes and behaviours if they are truly committed to greater levels of local content. Suppliers, particularly small- and medium-sized enterprises (SMEs), will need confidence of longer-term relationships if they are to invest in technology and people.

So where should this investment be? On the one hand, we know that deployment of robotics and automation in the UK manufacturing base is significantly lower than in many of our competitor nations; that specialist areas like metrology have been neglected for too long; and that without investment in skills in all of these and other areas, growth simply will not be sustainable. In addition to this, we have ‘Industry 4.0’ or ‘industrial’ Internet of Things (IoT), which is still not well understood by the very companies who are being told it is where the future lies. It is important, therefore, that we try and de-mystify some of the hype here.

The IoT aims to connect machines, either to one another, or to the cloud, with seamless interoperability that collects vast amounts of data for monitoring, guided local decision making and management analysis. The potential economic impact of IoT adoption in industrial sectors is staggeringly high – by 2025 it is estimated that the total value arising from IoT in factory settings will be around £1-3tn. Within this, the largest beneficiaries from IoT adoption are expected to be in the supply chain, with research from global management consulting firm McKinsey & Company predicting that forecasting could become up to 85 per cent more accurate, alongside a reduction in inventory holding of 20-50 per cent.

This is a very attractive proposition not only for a single factory, but indeed for the entire supply chain and the market as a whole. The effect of bad predictions can be felt globally, and often so quickly that it is simply too late to act once predictions are found to be lacking; such a situation emerged recently with the overproduction of crude steel coils in China, the excess capacity of which was economically devastating to industries outside of the country.

With the adoption of an IoT approach this would be a thing of the past, and could potentially lead to zero waste across the whole supply chain. However, despite the clear benefits, a recent survey commissioned by the Institution of Mechanical Engineers revealed that up to 44 per cent of industrial businesses are not investing in the internet of things (or Industry 4.0) due to lack of understanding. How can this be addressed, and what is the outlook for people and businesses?

In the future, IoT adoption within manufacturing could shift the role of supply chain managers to one in which they work together with suppliers to ensure the on-time delivery of products. Within Industry 4.0, supply chain managers would need to be lean engineers who understand ‘takt’ time – time that is synchronous to the heartbeat of a lean production system, where all processes have the same processing time. They would have a collaborative approach with suppliers on how to continuously improve processes across the supply chain. They would also need to work closely with design engineers, and together apply significantly improved design-for-manufacturing principles, reducing tolerance stack-up errors, working to improve error-proofing  and equipment change-over times.

The role of the supply chain manager in this scenario would become extremely important; future candidates would require a breadth of knowledge and experience across many disciplines. They would assume the role of conduit and integrator and would have a greater profit-and-loss responsibility. Such roles are already beginning to emerge, with multinational technology conglomerate Cisco recently creating new leadership roles that manage both supply chain operations and the IT group.

The adoption of IoT technology could see suppliers that are slow to adapt being side-​lined quite quickly, leading to more intense collaboration between suppliers and supply chain managers as supply base options are reduced. This could arise at the expense of security of supply, as the risk would become higher when relying upon a sole or a few suppliers. Hitting the right balance would be of key importance. It would remain to be seen how regulators would react towards a more closely-knit supply chain of this sort.

We are beginning to see the uptake of IoT facilities within supply chains across industries. The use of sensors in the oil and gas and process industry is already common and remote connectivity technology for predictive maintenance is becoming increasingly popular. The next step is to have these systems properly integrated, analysed and with executable actions. The time is now, but the majority of SMEs are still waiting for the signals from OEMs. The tipping point could come when several end-customers take the decision that they want to implement IoT across their supply chains.

IoT technology suppliers are currently racing to deliver the highest possible interoperability and secure solutions. While this is progressing, some in-house work can be done now. The effectiveness of the IoT can only be achieved when lean concepts are well embedded in factories and transactional business processes. Activities must be focused on getting the value stream right, with savings generated from lean initiatives invested back in the form of process monitoring with digital outputs for continuous improvements.

Focusing supply chain attentions in this way will ensure that operations are lean and continue to generate savings with a better rate of return on investment. In time, when the major customers have decided how they want to see the IoT rolled out, then businesses across the sector will be in the position to react accordingly.