Small or Large, Manufacturers Benefit from Supply Chain Improvements

By Anthony Cerilli

June 4, 2014

Today, I am currently among leaders from 13 companies, most manufacturers, who have chosen to attend the Supply Chain Optimization Overview in Manchester, New Hampshire. To set the stage, I’d like to begin with a summary of New Hampshire’s manufacturing sector.  Ninety-three percent  employ less than 100 people, with 23 percent employing less than 20.  This is indicative of many states and should raise our collective consciousness of the importance of keeping small- to medium- manufacturers responsive and agile in the global economy.  There is no argument that NH equals small manufacturers.

Additionally:

• Manufacturers in New Hampshire account for 11.5 percent of the total output in the state, employing 10.5 percent of the workforce.
• 21 percent of the manufacturers are metal fabricators.
• 11 percent are in machinery manufacturing
• Another 8 percent are in computer and electronic manufacturing

It’s a seemingly odd place for companies to gather to learn about optimizing their supply chains.  Or is it?

Hoping to Gain

The attendees represent many of the statistics mentioned above.

When asked what they hope to gain at today’s Supply Chain Optimization Overview, they say things like:
“We are trying to reduce our operating costs by improving our relationships with our suppliers.”
“I just joined the company and there is no supply chain system.”
“We order and ship by the truckload and we want to order and ship in smaller amounts.”

Smart people.  These folks know that if they want to remain competitive, they do not want to compete on price.  They’ve watched too many companies fall out of the race because they cost-competed themselves out of relevancy.   They know that somewhere around 60% of their operational costs lie in the supply chain and they want to manage it instead of the other way around.

Managing vs. Being Managed

I am a MEP consultant, but I am not an orator – not like the New Hampshire icon, Daniel Webster anyway.  So, instead of lecturing from PowerPoint slides, our team used a system dynamics simulation: the MIT Beer Game. This simulation (unfortunately no beer is consumed during this exercise) provides a hands-on, interactive way to illustrate the principle of demand amplification and its two business-killer tag-alongs: dependency and variation.

Michael O’Laughlin, VP of Operations for Lydall Filtration/Separation, Inc., logs the orders at the retailer level in the simulation exercise.

• Dependency is the existence/reality of unavoidable events that occur among interacting companies in a supply chain
• Variation is statistical deviations, inaccurate forecasting and the dreaded bullwhip effect

Understanding what these inter-dependencies are and where/when they occur is important if you want to manage (not be managed by) the supply chain.  Failing to

recognize and address dependency and variation is a recipe for costly surprises and sub-optimized business performance.

The simulation was developed at MIT in 1960s (apparently they liked beer at MIT in the 60’s), and is still part of MIT’s business school curriculum.  It’s time tested and still relevant. The game itself challenged the folks in the room to balance product supply and demand among four elements in the supply chain; a retailer, a wholesaler, a distributor and a

brewery/factory.  The participants try to fine-tune their forecasting, ordering processes and replenishment processes in order to best manage their inventory and ultimately drive costs down.  The game is simple.  The realities are complex, especially for small and medium-sized manufacturers.  But, smart manufacturers, like the ones I was privileged enough to interact with in New Hampshire, know that they need to:

• Develop partnerships and alliances with members of the supply chain, based on a supply chain strategy that is aligned with corporate goals and vision
• Communicate demand based on consumption, minimizing the effects of dependency and variation, limiting the chaos that is demand amplification
• Use network analysis, total cost of ownership, and risk management to increase throughput, lower investment, and lower operating expenses throughout the supply chain

An optimized supply chain is not just the domain of large companies. It’s the domain of successful companies, regardless of size.
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