Census Of Manufacturers: Too Many Supply Chains Are Failing To Integrate

Willie Sutton once explained that he always robbed banks "because that's where the money is." Similarly, U.S. manufacturers increasingly are importing material, components and finished goods from offshore "because that's where the cheap labor is." Or at least, that's the popular perception.

Indeed, some U.S. companies have found they can save as much as 50% on labor and associated costs, which is all the justification necessary to move production overseas. Although transportation costs immediately increase, those costs often seem acceptable compared with the labor savings, especially since oftentimes imports come into the U.S. on cargo ships, the least-expensive transportation mode.

The real cost, which is harder to measure, comes from the lengthening of the supply chain, which manifests itself in cargo ships backed up due to unrelenting congestion at major West Coast ports like Los Angeles and Long Beach. The longer goods sit at the ports, waiting to be unloaded from the ships and transferred to trucks or railcars, the less attractive becomes those apparent labor "savings" overseas.

Overseas Sales (as % of total dollar volume)
2006	12.0%
2002	7.7%
Source: 2006 IW/MPI Census of Manufacturers

And that waiting time can get even longer based on the lack of integration between most manufacturers and their key supply chain partners. According to the 2006 IW/MPI Census of Manufacturers, 34.1% of the 769 respondent companies indicate they have no integration at all with their suppliers, and 30.2% have no integration with their customers. That, of course, is the exact opposite of what supply chain integration is all about.

Imported Material/ Components (as % of total dollar volume purchased outside U.S.)
2006	13.4%
2002	7.8%
Source: 2006 IW/MPI Census of Manufacturers

IBM's Integrated Supply Chain (ISC), for instance, is the result of an end-to-end integration project that connects all of its business processes and supporting systems into a group employing 19,000 people. The ISC includes staff responsible for manufacturing, procurement, logistics, distribution, customer ordering, and planning and scheduling.

When it comes to global operations, IBM is about as international as they come, doing business in over 160 countries and shipping $70 million of goods every day. Having outsourced some manufacturing operations to China, Eastern Europe and Mexico, the company also has enabled its overseas partners to direct ship products on behalf of IBM. As Joe DiPrima, manager of supply chain planning and optimization with the ISC group, explains, "It looks like an identical order whether we ship it to the customer from our warehouse or whether the manufacturer ships it." The goal of this postponement strategy, he notes, is to postpone the manufacture of a product until an order is received from a customer.

Imported Material/ Components from China (as % of total dollar volume from China)
2006	6.4%
2002	2.3%
Source: 2006 IW/MPI Census of Manufacturers

The key, at least for IBM, has been replacing manual order entry processes with supply chain systems that schedule all orders on a first in, first out (FIFO) basis. As a result, the order entry to delivery cycle has dropped from 15 to 20 days down to 5 to 10 days.

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