Four trends in manufacturing, and the pressure they place on procurement professionals.
Emerging manufacturing trends are placing new pressures on procurement professionals, and, according to the 2014 GEP Report, demand on procurement professionals is expected to rise. Businesses hope to add strategic value through cost savings and supplier driven innovation, and who better to enact innovation than procurement professionals. Over the past few years, leading organizations have shifted their procurement approach from a cost to a profit centered perspective. The result is a focus on value levers in both strategic and tactical procurement areas. Procurement obviously has much to offer in helping businesses achieve their objectives in an uncertain and multifaceted market but not only are procurement professionals expected to do more with less, they are also gaining responsibility for strategically guiding management decisions.
Through RESCO’s extensive work with procurement professionals, we’ve noticed four current and emerging trends that are changing the face of manufacturing and distribution. Navigating through these initiatives as they relate to individual organizations can be difficult, and we hope to offer insights and solutions that may help. This blog will review the manufacturing trends briefly and address how they impact procurement professionals. In a following blog, we will provide our own solutions for remaining resilient in the face of emerging trends.
Four Current Trends Impacting Manufacturing
1. THE LEAN MANUFACTURING REVOLUTIONThe famous Lean approach dominating global manufacturing implementation for over 20 years has eliminated expenditure on processes that do not add value while streamlining business operations. Lean is a powerful concept that has proven successful in many production environments, but doing more with less can prove challenging for purchasing professionals. Fully understanding the lean process requires holistic thinking throughout the supply chain as a system, and relegating lean to procurement or certain projects alone will not improve the whole value stream. Targeting and eliminating expenditure on anything that doesn’t create value may improve workflow and efficiency, but lean initiatives can also impose new restrictions and expectations on procurement operations.
CHALLENGES
Procurement is hardly a bystander in lean implementation. Typically, procurement professionals find themselves in the thick of the process by learning and applying new tools, implementing new procurement and inventory management programs, and having their own processes reworked as part of the lean process. Maintaining the balancing act between a smooth lean workflow and stable quality can require constant learning for procurement professionals with new tools like value stream mapping, 5S workplace organization, and six sigma. Needless to say, these programs pose a big learning curve in an environment already saturated with learning demands.
Often, high objectives from senior management for lean implementations fail to take into account structural and cultural barriers that prohibit successful implementations. Procurement professionals can be faced with translating company objectives into reality and failure to achieve goals can lead to additional company-wide pressure.
Just-in-time (JIT) inventory management systems, such as kanban systems, strive to deliver just the right amount of material to the production floor at the right time with the minimum of handling. In theory, JIT sounds great, but only if procurement professionals organize a reliable flow of material to the factory floor. That means having fewer but more reliable suppliers to support lean initiatives. An unreliable supply chain can lead to material shortages, increased line-down events, quality issues and lost productivity. In other words, the cost saving promise of lean can easily be lost. With lean organization here to stay, procurement professionals are under substantial pressure to get this one right.
2. OUTSOURCING
For decades manufacturers have been engaged in outsourcing certain production activities and this trend is only accelerating. Outsourcing promises many advantages the three biggest of which are cost reduction (it’s cheaper to have someone else build it), asset utilization (free our plant capacity for higher value activities), and flexibility (easier to change when there are fewer operations to re-configure). With more time to focus on core competencies and high value activities, companies can greatly improve their output and profitability, that is, if they have reliable outsourcing partners.
CHALLENGES
Finding a reliable outsourcing partners is a significant challenge for procurement. But before conclusions on outsourcing partners can even begin to be drawn, clear financial and performance objectives must be set. Finding reliable partners to effectively meet outsourcing needs requires a good plan and some hard work.
A poor outsourcing choice can be costly. As a result, more and more manufacturers are revisiting their supplier base in search of more dependable partners and procurement is leading the charge. Nothing less than the financial benefit of outsourcing is on the line. The pressure is on.
3. ON-SHORING
Beginning in the 1980s completion from foreign manufacturers caused many US companies to seek lower production costs overseas. The attraction of off-shoring was similar to that of outsourcing in that it was based on finding a cheaper means to manufacture. However, unstable political, economic, and legislative environments have caused manufacturers to reassess the costs and reliability of offshore production. With long lead times and convoluted supply chains of offshore production, many companies are realizing the total cost of overseas production is much higher and riskier than once assumed. A demand for quality is also emerging after years of delivery issues that have incurred higher costs and less flexibility throughout the supply chain. As a result, many manufacturers are reversing course and bringing manufacturing back home.
CHALLENGES
While good for the US economy, on-shoring is yet another challenge faced by procurement professionals. At a minimum on-shoring requires more management time from procurement while new suppliers are found and production transferred. Like outsourcing, successful on-shoring requires establishing clear financial and performance objectives, the proper selection of opportunities, the selection of new suppliers, and a carefully managed transition process. And each of these falls largely on already taxed procurement departments. As with lean and outsourcing, the benefits can be high but so can the risks.
4. RESOURCE CONSTRAINTS
A natural by-product of competition is that all involved in manufacturing are expected to get more done but with few resources. Resource constraints, defined as “increasing output while decreasing investment per unit of output”, is adding pressure at every level of the manufacturing process which certainly includes procurement. And this is occurring at the same time that the other three trends discussed above are descending on procurement professionals.
CHALLENGES
The challenge here is obvious: how do we successfully manage other initiatives and keep up with daily demands if the resources available are, relatively speaking, always shrinking? Interestingly, the answer may well lie in some of those other initiatives…especially if they include one or more of the trends discussed in this blog. If executed correctly, each of these holds the promise of lifting burden and resource requirements from procurement. The catch is successfully navigating through to the other side of each initiative. Each of these initiatives requires resources to be successful and these resources must be applied long before benefits, including the need for fewer resources, can be realized. And the stakes are high since failure in lean or outsourcing or on-shoring can have just the opposite effect, adding significant work just as resources become scarce. Finding strong supplier partners is clearly part of the answer.
Procurement is facing more complex challenges than ever before and the visibility of success… and failure… has never been higher. But many of these challenges hold great promise if managed correctly. Read our upcoming blog for our observations on those procurement organizations that have effectively managed through each.
About the Author
David Copenhaver is President of RESCO Electronics, a Baltimore based manufacturer electronic assemblies and value added reseller of auto ID equipment to original equipment manufacturers. Before joining RESCO in 2003, David was the Senior Vice President of Operations and member of the Board of Directors for US Office Products, a publicly traded distributor of office products that is now part of Staples. David has a Bachelor of Science in Electrical Engineering and a Masters in Business Administration both from the University of Virginia. He is married and lives in Arlington, Virginia with his wife and three sons.