Can manufacturers combine lean with green?

There is a school of thought that suggests manufacturers may have to face a future in which lean and just in time are no longer the primary drivers for production. Let's face it: minimal inventory can mean maximum transportation, as raw materials and half-finished goods are permanently on the move, being bustled from one factory to another, across counties, countries and even continents. But is that really the current picture? When just-in-time first came into common parlance, many observers said that this could result in hundreds and thousands of trucks on the road, each containing very few parts. It hasn't happened to that extent, but today there's undoubtedly an issue with vehicle fill rates. Transport efficiency in that sense is very poor and many organisations continue to strive to find ways to fill their vehicles to a level that represents efficiency – both operationally and environmentally. Right sequence The automotive sector, for instance, has long been a leader in coming up with ways to boost efficiency, and it's no different with transportation in the supply chain. The sector initiated sequencing centres; these buildings are operated by the likes of NYK, DHL or TNT, and the logistics company manages collections from suppliers. The goods are then sequenced at the centre for onward delivery to the (typically) OEM. There has to be some inventory within the supply chain D the bone of contention for many is where that is best located. "We're seeing companies that have much more sophisticated demands these days," says Phil Roe, divisonal MD for manufacturing at logistics giant DHL. "Just because something has to be delivered on a JIT basis doesn't mean that all the goods are transported in that same format back up the supply chain; What is important is that everything is in the right order: that may mean, for example, that the weight on a vehicle is less because of the space needed to present items in the right order. Roe says that it is this need for order that often presents manufacturers – and indeed supply chains – with the greatest challenge. "We're often called in to try to help people where goods are not arriving in the right order. Sometimes, a company has employed multiple sub-contractors for distribution purposes and this can lead to problems Whichever way you want to look at them, mergers and acquisitions (M&A) are not what they were. Like a lot of official statistics, those reporting such activity involving UK companies are always on the drag. The latest Office for National Statistics data was published in December and covered the third quarter of 2008 – an update is due next month. It shows that very few UK companies are buying other UK companies, even fewer UK companies are buying foreign companies, and fewer still foreign companies are buying UK companies. All in all over the quarter there were 191 deals worth £11 billion; which sounds a lot until you compare that with the previous quarter's 317 and £34 billion. If you're in the M&A business and take a similar view to Martin Shaw, a partner at heavyweight law firm Pinsent Masons, the Q4 figures don't bear thinking about. "In today's market, apart from disposals to create cash flow for survival, frankly there aren't any deals around. M&A has come to a shuddering halt," he says. "Successful people like [Dublin-based building materials group] CRH would be doing something like 30 or 40 acquisitions a year. That's how it was until the spring/summer of 2008. Now everything's been turned on its head and most manufacturers – particularly those that have been on the acquisition trail and have got large slugs of debt – have got real problems." Shaw has little hesitation in pointing towards the culprits. Because banks are preserving their own capital, they are reluctant to lend more and, as facilities come up for renewal, borrowers are being pressed to reduce their debt. Furthermore, existing facilities that had been syndicated are not being renewed, mainly because overseas lenders have been told by their own home state to withdraw from overseas facility commitments; higher Libor (inter bank lending) rates are putting up the cost of risk; and banks are asking for facility arrangement fees of between 5% and 10% – even for strong companies. Even worse, Shaw describes as "absolutely outrageous behaviour" examples of banks seizing upon trivial breaches of covenants on existing facilities and charging fees to waive them. One company's payment falling due between Christmas and New Year was delayed by one day, incurring a waiver charge of £250,000. Such a tight cash environment means that mergers or acquisitions that might otherwise be advantageous – in terms of the mutually beneficial consolidation of a market sector or reduction through economies of scale achieved by centralising overheads – are often not possible. However, "if a competitor was clearly going into administration, it's just possible that a knockdown price deal might be on the cards," says Shaw. Whether it's mergers, acquisitions or administrations, manufacturers need to watch the companies in their supply chains very carefully and make sure that they have alternative lines of supply in place. It's a view echoed by Brad Brennan, managing director at emergency logistics specialist Evolution Time Critical. The potential for interrupting production is so high that in the automotive industry, vehicle manufacturers are supporting troubled suppliers with faster payments or higher prices rather than risk the consequences of a rushed acquisition. If this can't sustain the supplier's business, then they will support M&A as a far superior option to administration because, if managed carefully, it will ensure continuity. But mergers and acquisitions can be very sudden, he adds, leaving an OEM in the lurch. Brennan says: "If youOre in control with suppliers, talking to them about what's happening – they might be being bought by a company with production being moved to the acquiring company's premises or maybe to a lower cost manufacturing base – at least you know what's going on. One particular OEM customer sent its regular 'milk run' trailer to collect some components from a supplier and the guy was told when he got there, "sorry, we don't make that here any more, that's made in Spain". That's the sort of thing they need to avoid at all costs." So, with the bank vaults locked, is M&A dead in the water? Not according to David Raistrick, UK manufacturing industry leader at Deloitte. "For manufacturers in a stable financial position, the current downturn presents a good opportunity to steal a march on competitors," he says."With conventional finance for M&A effectively off limits in the current lending climate, firms will need to draw on their own resources to beef up their assets.Cash-rich manufacturers with strong balance sheets are now being presented with attractive acquisition opportunities." Martyn Pilley, corporate finance partner at Grant Thornton agrees. "Where there are opportunities for synergistic, opportunistic acquisitions to consolidate your market position, people whoOve got the financial ability are buying each other up; there's an opportunity to add complementary products to the portfolio or to gain market share in their core business," he observes. But there are issues. Pilley goes on: "We're seeing a massive polarisation between the purchasers, who have got money and are under pressure from shareholders not to overpay because it's their perception that this is a buyers' market, and sellers who are still hanging on to what I would call first half of 2008-type valuations." However, the gap is starting to narrow as owner-managers nearing retirement age face the choice of adjusting their price expectations or sitting things out until the cycle turns upwards – perhaps two or three more years, believes Pilley. Both he and PinsentOs Martin Shaw believe some M&A solace could come from a source once, and maybe still, regarded with a scepticism that branded it the 'vulture capitalist' sector. VCs, more properly venture capital or private equity funds, are still said to be available. "The private equity houses are certainly looking at providing debt themselves and it may be that it would be a combined equity investment plus lending from the private equity house. We haven't seen any significant examples of that yet but weOre told that that is a [possible] scenario," says Shaw. Pilley is even more bullish about VC funds and the degree of innovation he's beginning to see in their approach to investment. "If you're a poor business and your bank's running out of patience with you, you're not going to attract an investment anyway. But if you're a good business who could use money for expansion but, again, the bank's not co-operating, that [VC investment] is an option that should not be discounted," he says. VCs are either having to sit on their funds and not invest at all, or invest for lower returns – perhaps backing an MBO purely for equity or maybe looking to joint venture with a corporate group that would like to sell a non-core division in its entirety but is prepared to instead sell a stake to the VC and back that subsidiary's management. Two of the still acquisitive manufacturers Works Management tracked down owe a good deal to private equity. Precision Technologies Group (PTG) claims to be one of the two largest remaining UK machine tool manufacturers. It was formed in September 2006 when two individuals and an investor got together to buy grinding specialist Jones & Shipman, then rotor and gear specialist Holroyd from Renold plc. The strategic intent was to form a machine tools group with what PTGOs COO Tony Bannan calls "a central niche market focus – not your standard machine tools but something a little bit special". The first motivation for the purchase was purely one of availability at a sensible price, says Bannan; it was "ideal for exploitation because they'd underperformed for a long time and the versatility and flexibility that a small group could bring to it would give them the best chance of success". All that was needed was "some capital, some focus and the creativity," adds CEO Stephen Lord. In little more than 12 months, the business had been turned around and in August last year hit the acquisition trail with the purchase of the prestigious Crawford Swift and Binns & Berry brands, and the launch of J&S Remanufacture to design and build new machines and re-engineer large existing machines at its Rosemount Works in Elland, West Yorkshire. It was a move that allowed PTG to exploit opportunities in the large capacity machine tool sector and, as Lord puts it, "has spread the risk in times like this so the business is very well positioned today". Separation Operationally, when PTG makes an acquisition, "we almost put it into an isolation ward". As it becomes strong enough to fit within the PTG ethos – the last one took six months – it is brought into the main fold of the group. That may mean taking out non-complementary products – optimising an underperforming brand effectively, not cherry picking bits of it, Lord insists – and realising the upside of implementing the group's ERP system. "We take legacy systems out immediately upon acquisition." Group turnover this year is expected to be £30 million. It's been profitable since its conception and is growing in profitability despite the way the markets are. And it's still looking for acquisitions. Current such activity is about identifying strong, underperforming complementary brands. "There are lots of opportunities now and they're growing on a daily basis." As for funding, Lord says: "The shareholders are very much forward thinking and are retaining the profits weOre making in the business for potential acquisition activity; they have also offered, if required, to provide funding to supplement the retained earnings." COO Tony Bannan says: "We've got two or three more in the pipeline; it's a big opportunity for the obvious reason that businesses are becoming available, so it's not something we're slowing down on." An example of market consolidation via acquisition on an even larger scale can be found at Braintree, Massachusetts-based Altra Industrial Motion, a multinational manufacturer of clutches, brakes, gears and couplings with 40 product lines and production facilities in eight countries, including the UK. Craig Schuele, vice president marketing and business development, is in charge of seeking out and managing the purchase of new acquisitions. Altra was initially formed by a private equity group, incorporating the power transmission division of Colfax and Kilian Manufacturing, a spin off from Timken. Now, it is a fully-fledged public company. Two years ago, it acquired five power transmission brands from UK-based Hay Hall, a purchase that gave Altra a bigger stake in Europe and the UK. "It really allowed us to globalise sales and marketing," says Schuele. More market-consolidating acquisitions, mainly in the US, followed – the small motion control group Bear Linear in 2006; TB Woods and All Power Transmission in 2007 – as sales grew from $300 million in 2004 to well over $640 million now. There's a five-part philosophy, "a very disciplined core strategy", behind the acquisitions, Schuele explains. Each of them, he insists, must strengthen Altra's product portfolio, be accretive to group earnings in a manageable time frame, be capable of leveraging fixed costs, expand the company's global footprint, and make products and serve markets that the group understands. Financing the deals can come from a number of areas, including issuing bonds or, for smaller bolt-on acquisitions, "we just use cash". Rather than getting into an auction for an acquisition target, Altra believes in developing relationships with the company, avoiding situations where the price ratchets up. "Overpaying means that the company comes under a lot of financial pressure after the purchase," Schuele says, "and you don't want to damage the company or damage established customer relations by taking out cost too aggressively." While the ultimate aim is increased sales and profitability, purchases have not included substantial plant rationalisations so far. "In the long term, we are interested in building expertise and manufacturing excellence. When we acquire a company we look for synergies – cross-selling opportunities, where products can be sold into new markets; and for new solutions, how we can leverage the existing infrastructure to increase the sales of that company. We have a global sourcing office which often brings substantial benefits in terms of purchasing raw materials and components more competitively." A key tool Altra applies to its new companies to improve productivity quickly is its own brand of lean manufacturing – the Altra Business System – which, it says, leads to improved profitability. On the subject of future acquisitions, Schuele says: "There is plenty of space within the market to expand; long term there are a wealth of power transmission companies that fit all our criteria fully for potential future acquisitions.– the danger is, of course, that the left hand doesn't know what the right hand is doing." This is a good point: without a lead logistics provider to orchestrate the network, disparate transport arrangements will inevitably struggle to hit the right note in terms of efficiency. Inventory, of course, has long been the enemy of lean. So does he believe that inventory could eventually come back into vogue? "For some manufacturers in some supply chains, yes it could," says Roe. "It all comes back to the question of value and you have to understand the alternative cost models. If you hold stock, will it cost you less than not holding it?" To calculate carbon footprint, a business needs to understand not only how it makes things, but how it moves them. Certainly road transport today is much less costly to the environment. Modern vehicle engines and a sharper focus on fuel-efficient driving can significantly reduce carbon emissions. And more notable cost and carbon savings can be achieved by combining road transport with other modes such as rail, canal or sea. Carbon contributor DSV is one such multi-modal global business offering transport and logistics services: in the UK, it operates under the brands DSV Road, DSV Air & Sea and DSV Solutions. Rene Falch Oleson, managing director of DSV Road in this country, says that fuel costs are clearly a major factor: "Fuel accounts for approximately 35% of our total transport costs and unsurprisingly it's also by far the highest contributor to our carbon footprint." DSV is investing in a driver training programme – the Department of TransportOs SAFED scheme – to improve fuel efficiency, as well as working on other ways to recycle more waste product and generally enhance its own green credentials, but Oleson reckons the key for manufacturers is co-operation and collaboration. OIf the supply chain network is poorly designed, there's only so much logistics providers will be able to do. By working together, logistics companies and their clients can plan and implement lean and green supply chain solutions to give them a competitive edge. This is a point picked up by Mike Bernon, senior lecturer in supply chain management at Cranfield School of ManagementOs logistics and supply chain centre. To successfully combine lean with green, he believes manufacturers need to stop holding their cards so close to their chest. He urges them to think far beyond the existing shared-user models: OThere needs to be more fundamental change, not a few shared sheds here and there. I'd like to see organisations saying "let's work together on distribution where we donOt compete and where logistics is a cost driver" That does happen in some sectors, the petro-chemical industry has trialled a scheme called 'tank share' for example, but it's by no means widespread and it could transform distribution networks for certain sectors. Bernon says that this requires a step change in the relationship between clients and logistics firms: until recently, contracts with 3PLs were seen as purely 'transactional', thus missing the opportunity to tap into a pool of expertise. Logistics firms have extensive experience of leveraging supply chains, but to exploit that, you first need to open your doors: "If you just want stock or parts delivered at the right time at the lowest price, thatOs fine but you will almost certainly miss out on so much more." If we share information, share plans and forecasts, we stand to gain much more than a price differentiator. But to realise opportunities, there needs to be a willingness to embrace change.