Global factory locally

PROCUREMENT MANAGEMENT. Modern supply chains are spinning ever more tightly around our planet. But the more intertwined the net becomes, the more fragile it will also be: Natural disasters, crop failures or political upheavals threaten especially the logistics of small and mid-sized businesses – and that's why they, in turn, begin to think more locally again.

What would happen to Ekkehard Beerman's customers without him sounds a little like planned economy: Shortages threaten if their supply chain snags somewhere in China, India or Russia. Then, spare parts will suddenly be missing; raw materials and equipment will run low. If these supplies fail to come, shifts will be canceled. Short-time work is looming. Production is stuttering along. Customers are turning away. Before things get that far, Beermann will be asked to come on board. He is the head of Fastbolt Schraubengroßhandels GmbH in the Westphalian town of Gronau. Actually, he is an importer supplying the trade – but sometimes, he is also a reserve manufacturer.

With a wink, Beermann says that his company sometimes is a little like a "logistic stopgap". "Because Fastbolt", he explains, "comes into the game when the import supply chain no longer works." His mid-sized company from Münsterland obtains its threads from the Far East – without exception. Annually, the company has thousands of tons of screws shipped in huge containers to Germany and England where they will be put in intermediate storage. Fastbolt customers will thus have the benefit of being able to order and purchase not only precisely and on the dot, but they could also buy up the entire Fastbolt warehouse – should their supply chain actually break – so that their production will be able to continue. Beermann then is the one to fix what intricately scheduled supply lines into the big, wide world cannot provide.

The situation is paradoxical: The economy is buzzing. Globalization is opening up enormous growth potentials. Merchandise flows are swelling all around the globe. "Higher, faster, farther" had been the credo of past years. As much as possible was to be produced as cheaply as possible. That was usually far away – that's what globalization had brought about.

But those times are over. Supply chains have become too fragile. The more all processes become intertwined – purchasing, producing, selling – the higher the risks will be, because everything is connected with everything else. "The buffer is missing", says Ronald Bogaschewsky, professor of industrial management and business management studies at the Julius Maximilian University of Würzburg.

Some small and mid-sized businesses naively marched into their success. About one third still does not do any standardized supplier evaluations. The situation is even more dramatic for risk management. A mere 14 percent of the companies with fewer than 250 employees have risk management in purchasing. That is the result of a study by the Institut für Demoskopie (Institute for Public Opinion Polls and Research) in Allensbach and the University of St. Gallen on behalf of the management consultancy Kerkhoff Consulting GmbH with registered seat in Düsseldorf. "Frequently, large companies will operate their supplier management much more professionally than small and mid-sized businesses", says Gerd Kerkhoff, head of the consultancy. Small businesses especially were not equipped for crisis events.

"We urgently need an effective mix of company-internal and public monitoring mechanisms", accordingly demands Sven T. Marlinghaus, partner at the consultancy Brainnet Supply Management Consultants GmbH in Bonn. The purchasing department should know about the individual strengths and weaknesses of its most important partners. This would include, in particular, the systematic evaluation and control of the supplier management. However, for a majority of the companies, their buyers' primary duty still is to chase after the most advantageous purchasing price. "Over the years, the leanness fad has turned into anorexia", complains the logistics expert Bogaschewsky. "These extreme dependencies had been deliberately created." And now, precisely that will become the downfall for many companies.

If you see the world as a purchasing source and as a market, you will have to move logistics to the center of the corporate strategy and distribute the risks to various supplier backs. For some time already, it's no longer only a matter of where to produce the cheapest and where markets will grow the fastest. "Companies must also include factors such as the economic and political stability, ecological risks or the availability", says Bogaschewsky. Moreover, a conversion of supply chains should have a long-term perspective up front, not any short-term cost calculation, recommends the consultant Marlinghaus. "Savings there will always mean savings in the wrong place." In the past, only few had been concerned about it – yet, the percentage in the value-added system meanwhile applying to the vendor is higher today than ever before. Purchasing, transport, distribution, manufacturing, further processing, marketing, delivery and sales are meanwhile inseparably intertwined in many internationally active companies. The volatility in procurement markets is increasing. Additionally, there are incalculable environmental factors: In India, there are electric power failures. In Pakistan, agricultural areas are flooded. In Indonesia, a volcano erupts. Companies are also very worried about the unsolved problem of international terrorism.

And suddenly, there are disturbances in one spot, bottlenecks in another – and the supply system hits a snag. Sometimes, production cannot start up again because there is no electric power; sometimes factories are destroyed, or transport routes impassable. But when the main business artery – the supply chain – is clogged, total collapse is threatening. Especially the most recent nuclear accident in Japan shows how quickly mighty and powerful companies like Toyota can become weak patients. "The disaster in Japan is an acute threat for supply chains the world over", says the expert Kerkhoff. Air freight is working only to a limited extent. Many of the major ports are destroyed. "Those having lived from day to day will only be able to find alternative suppliers fast with a lot of time to invest which is also costly."

Car makers and electronic companies reported most of the bottlenecks due to the Japanese earthquake. That was the result of a study by the ifo-Institut in Munich within the scope of its monthly economic test in May. According to it, twelve percent of the electrical equipment manufacturers as well as ten percent each of the electronics and optical companies and car manufacturers expect production constraints in the coming three months. According to calculations by the management consultancy IHS Global Insight, worldwide up to five million cars will not come off the production lines as scheduled in 2011 due to the supply chain disruptions.

The mid-sized company Fastbolt had taken countermeasures in good time to avoid the experience of a logistic aftershock like the one now affecting many companies due to the disaster in Japan. "Alternatives must be provided in good time", says Beermann, the head of the company. Decentralization of the procurement markets would be important, he says, so as not to depend on a single procurement market. He had accordingly distributed the risks and is meanwhile ordering from various suppliers in Vietnam and Taiwan. In Shanghai, his company established a purchasing company in 2005 for fast interventions on location. "It's necessary to get closer to the sources of procurement", Beermann explains.

Breaking the spell of old magic formulas

That used to be normal. For instance, the major car manufacturers had their most important suppliers in a 30-kilometer radius around their production facilities – for maximum flexibility of supply. But wage costs were increasing and the luxury of supply became almost prohibitively expensive. The years of the just-in-time and just-in-sequence movement followed –which helped companies to realize huge productivity increases. As such, it's a good thing – because individual products, whose demand can be better calculated in the course of production, are traditionally produced at least still within a 150 to 500 kilometer radius from the production plant. Even that distance can still be covered relatively fast and thus enables smooth production. But when purchasing in low-wage countries, a 30-minute or four hour transport route will fast become four to six weeks of transport. The chain will break in case of adverse weather conditions, political coups or upheavals, economic changes or simply increasing demand in those countries where it is cheaply produced. It will then become impossible to realize any just in time delivery – i.e. precisely for a specific date; not to even mention the just in sequence system, where a specific part is required on-time in the production process at a specific hour or even minute.

The global factory has become too large. "In the future, economic centers must operate self-sufficiently again", says Professor Bogaschewsky. "Actually, everything is right outside our doorstep in Germany", he says. Instead of in China or India, why don't we produce in Poland, Rumania or in the Czech Republic? Kerkhoff also assumes that, due to the disaster in Japan, more of the lesser known suppliers in the second row will get their chance. And they will then be able to look forward to really full order books.

Three questions to Gerd Kerkhoff, managing director of the purchasing consultancy Kerkhoff Consulting GmbH


Initiativbanking: The economy is buzzing but short-time work and production failures are looming – how can that be?

Kerkhoff: The economy is in an excellent condition at the moment. However, the disaster in Japan and currently also the discussion about debt-ridden European countries show how fast such positive phases can change. Overall, the economy is far more susceptible to crises today – even those happening far away on our planet. We meanwhile have a global economic area. Even small or mid-sized businesses in the Swabian backwoods will obtain their components from Asia or South America.

Initiativbanking: Why is it that especially small and mid-sized businesses are often badly set up?

Kerkhoff: In many areas, the German small and mid-sized business sector continues to be the leader in technology and innovation. And their products might be extremely innovative in parts – but the management processes behind them are really stale. Small companies are not set up for a crisis event. Most management tools are developed in large companies because they are much more complex than small and mid-sized businesses where the owner still personally knows the majority of the personnel. When these companies grow, they will also need well-ordered processes and modern management instruments. That's frequently a difficult, protracted process. But even in only half of the major companies, plans are ready in terms of what to do in a crisis event. In my opinion, that's absolutely inadequate.

Initiativbanking: If you could provide companies with a standard operating procedure – what would it be like?

Kerkhoff: First of all, they should fast close the gap in the supply chain with alternative suppliers. And then, a long-term risk management system must be set up to be able to react faster and considerably cheaper in new crisis events. Better off are those who were able to simulate already in a scenario what will actually happen when a critical component is missing. Of course, it would be ideal if the company has built up alternative suppliers already far ahead of any negative event.