2/11/2017 KeepastrongsupplychainHSBCGlobalConnections

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01 February 2013

Keep a strong supply chain

Frederico Curado says Embraer can assemble a plane in a

few weeks but marshalling parts from 700 overseas
suppliers has a lead-time of 15 months.

F
rederico Curado says Embraer can assemble a plane in a few weeks but
marshalling parts from 700 overseas suppliers has a lead-time of 15
months. At SKW Metallurgie, Ines Kolmsee secures strategic raw materials
by vertically integrating manufacturing processes and locating plants close to
customers around the world. How do manufacturers develop the supply chains
they need to grow into international businesses?

Embraer uses technology in the form of virtual reality
modelling and a master database of suppliers to keep its
parts makers coordinated.

The saying that an army marches on its stomach, aptly describes the challenges
faced by international manufacturing businesses today.

Theres no doubt that global businesses march on global supply chains. For
Embraer to build its complex aircraft, the company must source from parts-
makers around the world. SKW relies on an international network of plants to
maintain competitive prices despite fluctuating raw materials, transport and
foreign exchange prices.

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With each of its aircraft costing millions of dollars to make, Embraer has
developed its supply chain to work to a just-in-time manufacturing standard
designed to minimise its holding of costly unsold inventories, or white tails as
Curado describes them. In contrast, SKWs need to maintain competitive prices
means Kolmsee is vertically integrating company supply by bringing the
manufacturing of raw materials in-house. Since 2007, the company has bought
a magnesium processing plant in China, a calcium carbide furnace in Sweden
and a calcium silicon plant in Bhutan demonstrating how vertical integration
has received new life in recent years, cited in the strategies of companies as
diverse as ArcelorMittal, General Motors, PepsiCo and Oracle.

But while they can resolve manufacturing challenges, supply chain models can
also create new problems. Just-in-time delivery has been noted for making
supply chains vulnerable as it strips out inventories which could offer a cushion
against disruption. Floods in Thailand, for example, caused disruption in supply
from hard drives manufacturers and component makers in 201112, while
Japans earthquake and tsunami disaster in 2011 halted car assembly by closing
crucial part-making factories.

Vertical integration, meanwhile, increases exposure to the risk of obsolescence

being out-performed by competitors that have new technology but do not face
the costs of an existing plant. This is exemplified in the struggle of national
flag carrier airlines, which own everything from caterers to ground handling
services and travel agents, against bare-bones budget airlines with internet-
driven sales models. Vertical integration can also lead to higher costs if a plant
is not put to the level of use necessary to drive economies of scale in pricing.

Embraer and SKW have taken measures to insulate their supply chains against
these side effects. Embraer uses technology in the form of virtual reality
modelling and a master database of suppliers to keep its parts makers
coordinated. It also requires all 700 of its suppliers to meet at its factory and
buys full assemblies of some systems to reduce complexity. And by opening two
new assembly sites in China and the US, it has spread its manufacturing risk
carefully.

SKW minimises the risk of cost inflation to its price sensitive products by
locating plants close to customers, which cuts logistics costs. Operating plants
in different economies gives SKW more options to manage costly foreign
exchange movements, and means for instance that it has relatively low exposure
(less than 30%) to the Eurozone and its current crisis.

Sourcing supplies not just of raw materials but of talent plays a major role in
setting up supply chains. Embraer is a lone Island of Excellence in Brazils
aerospace sector but is now trying to nurture local suppliers to balance its
dependence on imports.

Embraers choice of the US and China to site assembly plants rely on the
availability of manufacturing talent there. Its products dont need to be
manufactured close to customers because delivery isnt a major cost factor, but
talent and favourable investment conditions are. There are many pockets of
talent famous for attracting such manufacturing investment around the world:
Silicon Valley for technology companies; Italy for ceramic manufacturing; Taiwan
for semiconductors; and Houston, Texas for oil workers.

On the other hand, SKW locates its talent because of where its customers are.
New plants were added in Brazil, Mexico and Russia in recent years to serve

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nearby markets. But new executives do not sit in SKWs slimmed-down head
office of around 30; responsibility is devolved locally to teams who can react
quickly to customer demands and changing market conditions. Indeed some
98% of SKWs staff work outside Germany.

So while supply chain management is essential for growth, its just as vital to
the company brand. Businesses reputations rise and fall on their ability to
deliver products to market on time and without disruption.

If Embraer stalled in producing aircraft on time, its customers would have other
options. The steel producing industry and steel consumers would feel the
impact if SKW did not have an ironclad determination to deliver. It pays,
therefore, to plan.

US President Dwight Eisenhower might as well have been referring to companies

when he said No battle was ever won according to plan, but no battle was ever
won without one.

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