Collaborate to accumulate

A study by Benchmark Research last year highlighted an important common feature between companies with the highest growth in turnover: they derive a significant proportion of their business from export markets. The advantages are clear: aside from higher revenues, it lessens exposure to fluctuations in the UK economy. But the disadvantages are equally apparent. It's hard enough to build a UK supply chain that can flex rapidly to local customer demand. The problems are a thousand times greater sourcing overseas while also trying to serve an OEM or retailer thousands of miles away. The realities are beginning to bite many UK-based companies. Take the case of Manchester-based Harland Machine Systems, which designs and manufacturers pressure-sensitive (PS) label handling and application systems for global players like L'Oreal, Unilever and Glaxosmithkline. As its customer base begins to spread further afield, so do its own supply chain pressures. There are few quick and easy answers for companies like Harland. Its machines are complex and highly sophisticated: only 20% could be called 'standard'; 60% demand varying degrees of modification and 20% virtually start from a blank piece of paper. So a cheap fix through offshore subcontract manufacturing simply doesn't apply. Nor would it want that: with its experience and knowledge firmly residing in the UK, its manufacturing will always be based here. But it intends to take full advantage of global resources where it makes economic sense. Its reputation, however, depends upon a combination of design excellence and quick response to customer demand. Neither could be achieved by freighting all products from China back to the UK. In many ways, Harland is a textbook example of what companies need to do before even thinking of a wider export focus. Oliver Wight's UK supply chain expert Lloyd Snowden says companies not in control of internal costs and processes and without partnership with suppliers can expect only one result in trying to trade further afield - complete disaster. If you can't manage on-time deliveries locally, how on earth can you meet demand from the other side of the world? Harland recognised that five years ago. Since then, working with MAS North West at the Manufacturing Institute, it has steadily made business improvements across the board. It has streamlined processes and cut waste throughout its own operation and learned to operate completely differently with its suppliers. MAS visited the key ones to analyse where cost and time could be taken out while guaranteeing quality and delivery. As a result, Harland mounted an active, co-operative programme to modify its own designs to save money on suppliers' machining. "It's an open, honest relationship," declares operations director John Collins. "We have asked them not to put their prices up for four years. So the only way they can protect their own margin is by saving some money as well, by taking some of the complexity out of the materials and designs." At the same time, Harland is looking hard at its own design content and its effect on margins, simplifying where possible without compromising the end product. Through value engineering and supplier partnership, Harland has managed to take up to 30-40% of cost out of its products. It all stacks up to an efficient and competitive enterprise. Nonetheless, like many others, it is facing pressures to manufacture near its customer base. It had already met some of the issues: effectively, it reduces both shipping and import costs on some of its products by 'flat-packing' machines in the UK for sub-assembly and customisation by its US subsidiary. It cannot, however, escape the 'China question' entirely. "Like it or not, a number of our customers are moving their manufacturing there and are asking us to give them a local service," says Collins. "And some of our machines cost us £10k-£12k to freight to China. Add import duty and packing costs and it can go up to £15k-£20k. When we are under pressure to reduce our margins, it is something we cannot ignore." As a result, Harland is now manufacturing part of its product range in China and America. Its intention is to source on a global basis where it is practical, manufacturing locally to each continent for cost control and market flexibility. Follow suit Similarly placed companies would do well to follow its example in sorting out the internal and current supply chain processes first. The techniques and controls honed in the home market will serve them well over a wider horizon. But what next? Richard Wilding, professor of supply chain risk management at Cranfield, says it is possible to be a good supplier at a geographical distance, but only if the relationship is managed properly through some form of close proximity. In an ideal world, that means locating someone near customers to manage everything on a day-to-day basis. The lesser alternative is 'virtual teaming' between key players for each link in the chain. Having analysed the performance of such teams, the ones who first could build personal relationships through face-to-face meetings did better. "They could then manage the relationship at a long distance, using videoconferencing, email and phone because they actually knew each other. Technology can support you to do this but you can't just leap into it without a semi-social foundation and some appreciation of the cultural aspects." This is another critical point. Anyone who thinks that trading into a foreign market is easy should go to the China-British Business Council's website for a masterly rundown of the cultural differences of doing business there. In particular, CBBC highlights the concept of guanxi, a complex interrelationship of obligations and trust formed on the back of a personal relationship. Misunderstand it at your peril: it can oil the wheels of trade or plunge you into a deep and inescapable trap. Wilding says it's not just in the Far East that cultural differences produce real business difficulties. He actually maintains that China is easy compared to Brazil because of the legal and taxation systems it built to protect itself from the inflationary pressures of the recent past. He recalls recent advice: "If a Brazilian company wants to come to the UK, we tell them the first thing they need is a customer and a market. If a UK company wants to operate in Brazil, the first person they should talk to is a lawyer." Add issues like these to the acknowledged reluctance of many Brits to work in any other language and the involvement of a third party begins to look highly desirable. There are very good reasons for once more taking China as an example. According to Vince Cunningham, China business adviser with CBBC, UK companies are signally failing to capitalise on huge opportunities to sell into China, a reluctance not shared by fellow manufacturers in USA or mainland Europe. There is a strong appetite for goods combining an imported kernel - which many Chinese believe confers higher quality - with some degree of local configuration. Few companies, however, are able or willing to handle this initially themselves so some degree of local collaboration is inevitable. Caution, however, is necessary, especially in the matter of intellectual property (IP). "We know China is changing; it's signed up to WTO and there are prosecutions for copyright infringement. We also know it happens." His advice is not to release anything that has a high IP value. "Ship it over and integrate it with what's in China." Also, although it is possible to find any amount of agents or intermediaries remotely, it will never work unless the UK company actually sends its own people to do the groundwork. Organisations like CBBC act as facilitators in developing the Chinese market. With research teams in nine offices, it can assess the market, set up introductory packages to potential partners, find offices and facilities, and give legal guidance. It even offers a service, called Launchpad, which provides a dedicated CBBC member of staff to dip a toe in the water before establishing a full-blown business. "There are risks - why reinvent the wheel to deal with them?" asks Cunningham. Any company looking to collaborate globally would do well to kick off by using the equivalent of CBBC in any new country. But what happens when you have established your place in a global supply chain and need to maintain it? Wilding points out that even when the relationship with the ultimate customer is right, it still has to withstand handovers which, in global sourcing, can be as many as seven. "So it's not just between you and the customer, but between you and customs, shippers, and so on. It's the 'product surround' that actually differentiates companies and these can be heavily influenced by people outside the relationship." Demanding view Ron Ireland, managing principal of Oliver Wight Americas, picks out some mandatory requirements for the extended supply chain. "You need excellent collaboration on the forecast of demand and good visibility of the entire process flow so you can manage inventory for efficient transportation. You must manage the entire pipeline knowing where the products are and how long they will take." Collaboration can involve sophisticated techniques like CPFR (collaborative planning, forecasting and replenishment), or simply by giving the entire supply chain visibility of demand. Either way, a clear forward view will work a thousand times better than reacting to changed circumstances, a process he describes as sorting out the chaos behind the curtains. Today many top-tier companies are putting much more pressure on their lower tiers to improve their technology for business-to-business communication of forecasts. At the same time, they are pressing them to adopt Class A processes for planning and control. "That's where a lot of my work is coming from these days. The focus is on the second and third tier companies because the biggest inefficiencies and constraints are at that level." He says that companies like Proctor and Gamble are re-evaluating their partnership with companies which rest totally on their low labour costs without being willing to improve processes to meet the OEM's scorecard. "If you want a place in the global supply chain, you have to show you are good enough to dance in step with your OEM."