Lower stocks, faster lead times
Fluctuations and variations in demand and the need for short cycles and lead times are putting pressure on the valve and actuator industry. What should suppliers do? Increasing stocks impact the bottom line. The way out of this dilemma is to invest in supply chain management and engage both the internal and external supply bases.
Article by Lucien Joppen
First of all, the supply chain as discussed in this article is the line from raw materials to end products. It would take up far too much space to discuss every part of the chain and every kind of player (1st tier, 2nd tier etc.). As for the valve and actuator industry, this sector has become increasingly global over the years, with established manufacturers exporting and setting up production facilities abroad, while businesses in emerging economies are increasingly exporting as well as serving their domestic markets.
“This development has made our sector increasingly dynamic”, consultant Stephen Cherlet says. Cherlet, former COO at Velan and president of FarStar Consulting, starts off by giving some historical perspective of the sector, albeit from a North-American viewpoint.
Global supply chain
Cherlet: “From the 1950s to the 1970s, the North- American supply chain was almost entirely served by North American suppliers. Valve manufacturers did not see the need to shop around for other suppliers. This changed in the 1980s when international sourcing became popular and Europe and Japan became interested in serving US projects from a price-quality perspective. Standardisation and the rise of the quality movement - see ISO 9001 - in the 1990s further opened the doors for suppliers from other geographical regions. This development was fostered even more in the 2000s when end users tended to focus more on cost, resulting in low cost country sourcing: finding the best quality-price ratio.”
Since then, the end-to-end supply chain has become truly global, Cherlet says. “There is a tendency to acquire products where they will be used and installed. For manufacturers, the ability to compete on price-quality has become limited over the years, due to standardisation and sort of levelling in production costs as wages in some emerging economies have grown fast and still are rising. Therefore, the emphasis is more on other cost factors, such as energy and transportation, and - of course - lead times.”
According to Cherlet, the aforementioned mix - internationalisation/globalisation, cost and time pressures - should push the sector into the major league of supply chain management. Unfortunately, many companies still need to win several championships before joining the big league. “My job requires me to visit many companies in the Americas and overseas and - while some are quite advanced - I have the impression that the valve and actuation sector is getting the basics under control. We are the laggards compared to other sectors, such as hightech, automotive and retailing, which are frontrunners in supply chain management.
One of the reasons these industries are leading the pack is the dynamic nature of their business. Millions of consumers, an endless variety of product/service options, increasingly faster launch rates, online commerce - all these variables require advanced automation in all relevant domains of supply chain management: sourcing, production, shipping, etc. The V&A sector is far less dynamic (B2B instead of B2C, ed.) than the aforementioned sectors. However, this doesn’t mean that we can’t take some valuable lessons from the front runners in supply chain management.”
One of the main lessons is investing in digitalization and systems integration. “It starts with a plan: a strategy to plan a transition to a more advanced supply chain approach. First of all, define the playing field by considering processes, products and services and select one or more that could be improved by digitalization. Then select a specific project, for example supply chain collaboration, and the relevant technologies that are needed to improve.
My advice would be: think big, start small. This especially rings true for SME’s which in general don’t have the required budgets for major overhauls. On the other hand, there are still many companies around that still rely heavily on paper documentation which slows down response times, causes mistakes/miscommunication and makes the internal organisation more sluggish. It still baffles me how many companies, including the larger ones, still rely heavily on paperwork and side systems such as MS-Excel. Digitalization is not a luxury but a prerequisite for making your supply chain more efficient and effective.”
In Europe, AUMA has taken this lesson to heart. The German-based actuation company has invested in supply chain management capabilities with focus on the customer in mind. “We need maximum flexibility and availability of parts to be able to deliver to the customer as fast as possible and keep lead times to a minimum”, Thomas von Bobrucki, Director of Production at AUMA, says. “At the same time we don’t want to waste resources and we therefore try to keep stock to a minimum. Having large stocks is not economical and ties up a lot of capital.”
As von Bobrucki indicates, the latter is quite a challenge for AUMA since the potential product portfolio is enormous. “Most of our actuators are not produced for stock, but are tailored to customer-specific requirements. This means there are roughly 10 to the power of 10 possible combinations, depending on variables such as torque, temperature range, interface to the DCS, power supply etc.”
Timing is crucial
In the quest for adequate delivery times while minimizing stocks, timing is of the utmost importance. Von Bobrucki’s colleague Michael Merz, Director of Corporate Procurement at AUMA, says: “To deliver in time, all parts have to be available at the right time when we start final assembly for a customer order. We try to shift the customisation to a point in time as close to the delivery as possible. Despite the high number of product options we nevertheless strive to standardise and use identical parts wherever possible. This starts with individual parts such as screws and extends to complex sub-assemblies into modules, such as the electrical connection with standardised plug/ socket connectors. Supply management for parts needed to make to stock is easier as it is decoupled from customer orders.”
Shifting assembly closer towards delivery
Shifting final assembly as close as possible to delivery seems logical. However, there is also the issue of lead times for parts. For a lot of these, AUMA relies on in-house manufacturing. However, the company also relies on external suppliers. “Some parts have very long delivery times, sometimes 25 weeks or more”, says Merz. “Our lead times are considerably tighter: usually only 6 to 8 weeks. So such long lead-time items can endanger our in-time delivery to our customers. Examples for long lead-time items are electronic components such as ICs and cast iron parts for housings. At the time of ordering we don’t know yet exactly how many parts we will need in 25 weeks. We have solved this issue by no longer placing fixed orders with our suppliers, but using techniques such as forecasting, long-term planning and short-term adaptations to the forecasts.”
Pull instead of push
Von Bobrucki says this modus operandi required a thorough supply chain management approach for three ‘routes’: to the internal and external suppliers, and to the end customer. “We have established so-called electronic kanban systems which are integrated in our ERP system for several hundreds of thousands of release order parts. These parts are synchronised with our production processes.
This improves internal logistics within the ‘in-house supply chain’ for the manufacturing processes, and also improves logistics with external suppliers. All inventory is marked with barcodes, which workers scan as parts move through the manufacturing process. Twice a day, the system updates our suppliers automatically so they can ensure that parts are restocked as necessary. This pull instead of push mechanism ensures timely restocking without compromising customer satisfaction.”
Closer collaboration with suppliers
This linkage between various information systems and various actors in the supply chain implies a closer cooperation. Merz nods: “We have established very close cooperation with our suppliers. They have access to our ERP system, which they can log into via a webbased application and access our forecasts and our actual consumption of parts. E-kanban can be easily integrated into ERP systems, as AUMA and our suppliers have done.” Supplier consolidation allows AUMA to intensify its cooperation with suppliers and build reliable relationships based on mutual trust, Merz states. “We establish framework contracts that clearly define responsibilities. We measure and track the delivery reliability and adherence to quantity stipulations of our suppliers, and we communicate the results to them.”
The third ‘route’ relates to optimizing shipment processes to customers. AUMA also has set up a transportation management system (TMS) to optimise physical logistics. Von Bobrucki says: “We have a broad national and international freight forwarding network to ensure minimum delivery times, including road, railway, ships and air freight. We are in the process of consolidating our transportation network to ensure even shorter delivery times in the future.”