Seamless supply chains

Whenever anyone in manufacturing wants to argue against industry sector clustering, they invariably roll out the well-rehearsed history lesson of the demise of the Lancashire textile industry. Similarly, ask financiers for a list of industries in which they see investment potential and you will be hard put to find the rag trade among them. It's an industry that invariably conjures up images of manufacturing's past rather than its future. But that's not the way Hizmy Hassen looks at things. He is global supply chain director at Coats plc, the manufacturer that turns over £1 billion a year from the stuff that sews together sports shoes from the likes of Adidas, garment brands from Gap to Tommy Hilfiger and all the threads that keep the clothes on the backs of Marks & Spencer's Twiggy, Myleene Klass, Lizzie Jagger et al. The global leader in sewing thread and needle craft products, Coats operates in 71 countries, has 40 manufacturing plants across the world and more than 90 distribution centres. But it's a business that has needed to meet some very demanding challenges that were facing it four years ago. "It's a dynamic market, and that is one of the big challenges we face," Hassen says. "In the fashion sector, order sizes are diminishing – we ship very small order quantities – the cycles are becoming shorter and the customers are demanding a lot more colours." In fact, Coats produces 1,000 new colours a month. It claims to have taken the colours 'space' and broken it down to 18,000 of them, each subtly different to the next and very difficult for the human eye to detect. "Give me a shirt and we can have a matching colour thread in front of you in three days," challenges Hassen. "That's the kind of speed we were forced to achieve, especially in the European industrial market where we were going out of business." That variety, together with different lengths of thread and different materials – cotton, polyester, nylon, cotton filament – adds up to close on one million SKUs (stock keeping units). Coats' dilemma and Hassen's job has been to resolve the conundrum of creating a lean supply chain in a high SKU environment. The company, which can trace its heritage back to 16th century Scotland, has multiplied through acquisition and organic growth across many parts of the world with local management and decision-making structures creating much complexity. "Our vision is to create a seamless global supply chain," explains Hassen, "We have largely achieved this in regional clusters and are now joining the regions together into a global integrated supply chain." An increasingly competitive marketplace has dictated moving to a low cost supply chain. Hassen continues: "We had to bring down our cost of manufacturing quite significantly over the last three or four years and had to reduce stocks. With all those variants, in the blink of an eye you could be sitting on millions of dollars in stock, with a lot of it being obsolete as well. We needed a supply chain that would deliver the target lead time but with less stock." Coats' one million-plus SKUs are being added to at the rate of more than 1,500 every month. Small order sizes with shorter lead times mean that over 30 million order lines are shipped globally and customers want five-to-seven-day delivery – sometimes even faster if they're doing sample production runs – and they want it in any part of the world. "Our offer to Adidas – which sources from Asia, Europe and Latin America – is to get the same product to them anywhere and [have it] delivered in five to seven days." As if this weren't difficult enough, demand also shifts as a result of being driven by exchange rate fluctuation. "Big brand owners use contractors so today, if the Hungarian florin is very cheap, they will go to contractors in Hungary and if tomorrow it's the Polish zloty [they will] ditch one [contractor] and go to the other so we have to be ready to deliver to any part of the world. We really have to be fast and from a supply chain point of view, that's leanness – all about speed and delivering consistent quality." Coats is achieving this through a common system platform. It has developed a global SAP template that is now being rolled out with its advanced planning module APO2, which has significantly improved demand planning. "In the supply chain that template is untouchable – I'm the only one who can approve changes to it," Hassen says. Manufacturing lead times had to come down and they did; from 20 days to two days. Most of these improvement programmes were begun five years ago and were completed in 2007/8, so Coats has been somewhat insulated from the current economic downturn. "In Europe, volumes dropped between 25% and 30% but the margins held up pretty well because our supply chain was agile and we could cope with it," Hassen says. A Coats product is called the same thing wherever in the world it is made; it has the same serial number, so if there's some constraint on capacity, production can be switched anywhere because there are common global data and organisational structures. Last autumn, after a typhoon in Manila, the Coats factory and all its production machinery was left six foot under water. An alternative supply chain into the Philippines market was set up within three days. "We could only do that because we had common products and common master data," says Hassen. "By looking at the Philippines system we could see what products they sold and what levels of stock they had to carry." Looking back to Europe in 2004, he recalls that Coats still had large manufacturing capacities, although customers were leaving western Europe "for obvious reasons", going to eastern Europe and to Asia. "We had non-harmonised product ranges; every country had its own range through acquisition and for historical reasons. We had non-harmonised product coding structures; localised supply chains with local decision making; and very high stock levels – 150 days of dormant, unproductive stock. There were significant trading losses and, unsurprisingly, service was not up to best-in-class levels." The strategy was to come up with a two-tier supply chain. "With a million SKUs, you couldn't have everything in stock, neither could you produce everything made to order – you'd need huge amounts of capacity, particularly when customers want such short lead times," Hassen explains. So the supply chain was segmented into two parts. One part was called customer service units (CSUs) which would produce unpredictable demand on a made-to-order basis; the customer places the order, a Coats facility produces it. If the customer didn't place the order, the factory could idle. To pay for that service, the second part was based around the construction of bulk production units in low-cost centres, the objective being to achieve highly economic production. The trick then became how to exit western Europe-based production and distribution facilities while still servicing what remained a lucrative market. Coats came to the conclusion that it was necessary to create a single CSU in western Europe to produce unpredictable items – 20% of the demand. To service that market it set up a CSU complete with distribution centre in southern Germany – logistically the most appropriate location – with robotic manufacturing, very short lead times and a lot of spare capacity to cope with a make-to-order environment. That single distribution centre and CSU in southern Germany carries Coats' full profile of stocks, so if any of the company's sales organisations in western Europe has a make-to-order sales order, it will be automatically scheduled in that factory. Here, the target is to take a sales order through to delivery in eight hours, although it's currently being done in four because there is spare capacity. The CSU's primary purpose is service. It carries 30% spare capacity to cope with daily demand fluctuation and work in progress is kept to a minimum. For the remaining 80% of demand, highly efficient bulk production units (BPUs) were set up in Romania and in Turkey. Their primary focus is cost. Production is run at 95%-plus utilisation levels and adequate work in progress is required to optimise capacity. These facilities supply the predictable items into Europe and as they supply the large majority of the overall demand, their operations more than offset the cost of the German CSU. "We have invested a lot in technology," says Hassen. "It's pretty much a 'lights out' operation so when the sales order comes into the supply chain system, it's prioritised accordingly and the [thread] colour [required] is automatically sequenced – you don't want to try dying a light yellow after a black, however, if the machine has to be washed down for a customer order, then it is." At the BPUs, there is a highly optimised, constraint-based plan where production sequencing will go from light yellow all the way to black no matter how long it takes, and that has driven the cost savings. Coats has employed the same concept in strategic markets like north Africa and is replicating it globally. In some plants, as in China, for example, there is a factory within a factory where part is focused on service, and the other part on cost. Such programmes have removed a lot of headcount. "We had to do that to turn the business around," Hassen insists. In western Europe that came about through the closure of eight manufacturing units and nine distribution centres in two and a half years. But numbers came down in eastern Europe, too – this time, down to increased production lot size being achieved by better medium-term production planning and demand aggregation.. "The harmonisation process has enabled us to take out huge amounts of stock over the last five or six years, but at the same time we've been able to increase the customer order fill rate and availability of stocks so that despite the lengthening supply chain, meeting customer promises went up quite significantly." The proof the strategy's success has come during the recent 12 months of downturn, particularly in western Europe. The German operation didn't have to be compromised, says Hassen, margins held up and the necessary slow down was achieved by the removal of just one shift in Romania. A multi-site supply chain will only deliver the kind of performance Coats needs if every part of it operates to common best practice levels, Hassen concludes. The keys to this are, he says, common processes, trained staff and one single global template with zero customisation. The Coats supply chain case study was presented at Works Management's annual Lean Conference, sponsored by DAK Consulting and Productivity Europe. This is the last in a series of articles on Britain's leanest manufacturers: see WM November 2009 and January 2010