Over 80% of small and medium-sized manufacturers don’t sell their product directly to consumers. Rather, they are members of supply chains whose output eventually ends up in finished products sold by large Original Equipment Manufacturers (OEMs). In machining, this phenomenon is especially pronounced. What does this mean? The bottom line is that for U.S. manufacturing to be healthy, domestic supply chains must be healthy.
In my second article I described how the emergence of China as an industrial power had huge negative impacts on small and medium-sized U.S. manufacturers and that it was primarily the result of government subsidization. China is not the only foreign country that has policies which give their own manufacturers undue advantage. The government of South Korea regularly invests billions in targeted research and infrastructure to position their industries to dominate specific markets. What happens when this occurs?
“The bottom line is that for U.S. manufacturing to be healthy, domestic supply chains must be healthy.” –
When General Motors launched their first electric vehicle more than ten years ago, Korea had the only battery technology and production facilities that could satisfy that demand. The result is that Korean industries (and their domestic supply chains) still dominate this niche and share in billions of dollars of annual sales to automotive OEMs. I should point out that the practice of government subsidization of supply chains is easier to slip under-the-radar of regulators since, for example, such assistance is easier to conceal it on simple parts and assemblies than completed products.
The Domestic Supply Chain is Left Swinging in the Wind
As this has been happening where has the U.S. government been? AWOL, at least as far as I can see. Sure, the Feds have made isolated accusations of Fair Trade practice violations in the World Court, but this hasn’t amounted to much more than a hill-of-beans, at least in the big picture. The U.S. government has also enacted trade policies such as NAFTA, which has mainly served to facilitate the relocation of large U.S. corporations to either Mexico or Canada. Some actually did move to Canada, even though there are more regulations, more unions and pretty much the same manufacturing wages as in the U.S. You don’t believe me? Check out General Electric. They closed their Waukesha (Wisconsin) Power and Water Engine manufacturing facility and moved it to Ontario, Canada in 2014 citing a more manufacturing friendly environment.
If the stock market is any indicator of business success these policies have helped U.S. OEMs succeed. Add that to all of the tax reductions given to them in the recently passed tax bill, which should further spur OEM success. You may have noticed, though, that the same bill seemed to lack tax relief for the small and medium- manufacturers that make up our country’s supply chains and form the basis for its infrastructure. Based on history, I don’t think it’s realistic to expect that government will ever to step in to help supply chain members.
Playing the Purchasing Blame Game
A lot of people — especially small and medium-sized manufacturers have blamed OEMs for this ongoing erosion of U.S. manufacturing. After all, they say, if OEMs had any bit of patriotism they’d look for reasons to buy domestically.
But that’s not fair.
OEMs succeed by playing according to the rules that have been established. And if those rules are set against U.S. supply chains, there’s not much they can do about it if they want to remain competitive themselves. OEMs have sourced overseas for one primary reason: Lower piece-prices have been available and purchasing organizations are primarily measured based on how much the cost of the purchased product goes either up or down, year-to-year. Don’t expect patriotism to edge out business realities when it comes to OEMs making sourcing decisions.
“Don’t expect patriotism to edge out business realities when it comes to OEMs making sourcing decisions.” –
So where does this leave us? I believe it is up to us in business to lift ourselves out of the situation we find ourselves in. And, to some degree, that has already happened. The small and medium-sized manufacturer has become much more competitive by responding to overseas competition. This, however, is necessary but not sufficient for the ongoing competitiveness of U.S supply chains. Innovation in the procurement function is a large part of the answer and will most likely (and effectively) come in the form of an Honest Broker interfacing between OEMs and potential sources.
Building a Better System, Starting in the Middle
In the future, I believe Honest Brokers will represent a high percentage of available suppliers in a specific commodity. For instance, MakeTime has been in business only three years and yet has a double-digit percentage of all U.S machining houses in their supply network. With this type of penetration and knowledge of supplier operational metrics, Honest Brokers like MakeTime will be better able to align OEM customers with those sources that best line up with customer needs. You may ask, “Isn’t piece-price the only OEM consideration?”
The short answer is no.
Sure, piece-price represents a portion of the customer’s cost-of-goods-sold. But more and more OEMs are realizing that supplier impact on revenue can exceed way beyond simple piece-price. For instance, when suppliers are able to deliver on short-fuse orders an OEMs is better able to satisfy incremental demand, thereby allowing them to pare back on wasteful inventory forecasting practices.
“More and more OEMs are realizing that supplier impact on revenue can exceed way beyond simple piece-price.” –
An Honest Broker with knowledge of available capacity and lead-time in their supply network will be more able to point customers towards suppliers with the needed capabilities than a single OEM searching for sources. Add that to all the other non-piece-price-related benefits I believe Honest Brokers can provide to boost their customer’s bottom lines — including production management, facilitated communication, more consistent lead times, data-based pricing, etc With these benefits in mind, it seems more and more likely that the Honest Broker model will have a significant impact on purchasing and manufacturing, starting now.
My next column will discuss reducing complexity and waste in a supply chain.
Learn more about Paul Ericksen and his long career in the manufacturing industry here.