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There's Never Been a Better Time to Invest in Your Supply Chain

Dec. 18, 2014
These four areas can yield an increase in key metrics that measure the investment returns to the business, such as return on capital employed.

Manufacturers and multinational firms with globally scattered manufacturing facilities and operations have emerged from the economic downturn lean and mean. They are in fighting shape, having stripped non-essential costs and investments to the bone. But as they take a deep breath, business issues on the horizon demand even more stringent and strategic planning.

Most cash-depleted firms have put off technology and equipment investments and acquisitions for years. Many have not mined the massive amount of valuable data that can optimize operations and drive revenue. Many have decided they need capital to build or rebuild their manufacturing and distribution capabilities. Some are eight years into a 10-year equipment investment cycle.

And with Asia’s formerly low-cost labor rates on the rise, many seek to take advantage of proximity to U.S. consumers by repatriating some or all of their manufacturing to the U.S. or to countries like Canada, Mexico, or Central America. But it’s a complex process to leave contract Chinese manufacturing behind, select the optimal locations for a plant or factory, and set up shop closer to consumers.

The Rising Cost of Borrowing Creates Urgency

More than 60% of economists expect the Fed to begin increasing their fund rate in the first half of 2015, according to the Wall Street Journal, with market rates rising in advance and business impacts felt by the end of 2015. This will drive a potential 20% to 40% increase in the cost of short-term borrowing by the end of 2015, continuing at a healthy pace into 2016.

As manufacturers prioritize capital spending and asset improvement, the window of opportunity is quickly closing for those who want to rebuild their operational and logistical muscle mass to stay in peak operating and fulfillment condition for their suppliers, distributors and customers. There’s no time like the present to invest in their future. So where do manufacturers start?

Four Supply Chain Strategies to Consider in a Still-low-interest Lending Environment

Our global supply chain engagements have shown us that manufacturing-intensive organizations can get ahead of these converging pressures by considering four areas that can yield an increase in key metrics that measure the investment returns to the business, such as return on capital employed:

1. Invest in equipment and tools for manufacturing and assembly lines, including packaging equipment and materials. Funding equipment upgrades and investments in today’s low interest rate environment provides multiple benefits. Smarter packaging systems can drive a core spend reduction if manufacturing-intensive organizations put the most efficient packaging and tools in place. These systems can drive down material and process costs in their supply chains and enable them to reap both return on investment and assets and efficiency savings sooner.

For example, a beverage manufacturer who hires external suppliers to manufacture, stock, ship and manage the carrying costs of packaging—including several sizes of bottles, corrugated materials, pallets, shrink-wrap, etc.—and label printing could benefit from owning packaging equipment and making their own bottles. And instead of hiring outside suppliers to prepare thousands of different bottle labels, integrating a print-on-demand labeling system into the internal production process greatly increases production efficiency, enables customization and improves responsiveness. With better packaging comes better “product density,” which enables manufacturers to get more items in a case, more cases on a pallet, and more pallets on a truck, to reduce shipping and handling costs.

Packaging optimization improves productivity in other areas, too—from ensuring better inventory management and space utilization to reducing manufacturing footprint and expediting manufacturing run changes. For example, packaging-on-demand enables the manufacturer above to build the exact quantity of packaging required, rather than depending on the supplier to ship—and charge for—extra inventory.

2. Explore plant and facility relocation options to pptimize supply chain costs. Firms considering realignment and relocation that require short- or long-term capital and equipment investments in different countries, plants, or production lines are under double pressure: The low-interest-rate environment means this is the best time to implement their vision for the future. Complex supply chain reengineering projects demand due diligence and careful network modeling to successfully relocate the necessary facilities, knowledge, tooling and suppliers to the best locations. Delaying these decisions can have a costly financing outcome.

3. Take advantage of the M&A environment to execute new product and brand strategies. While interest rates remain low, companies planning to round out their portfolios to ensure competiveness—especially in consumer packaged goods and fast-moving consumer goods—have great opportunities to grow via brand extensions or move into completely different categories, as other companies divest themselves of brands.

But these acquisitions also carry integration costs that affect logistics and distribution. Acquiring firms may need to consider the timing and value of integrating a production line into existing manufacturing capabilities as well as best ways to integrate suppliers and their current transportation portfolio. It’s important to remember: The full supply chain costs of the acquisition rise with interest rates and impact the business case that you must take to the board of directors for approval.

4. Invest in IT. Technology and IT have come a long, long way over the last three years, as supply chain Big Data has proliferated. The value of the data lies in the ability to visualize and interpret it and glean meaning from it. Today’s sophisticated supply chains handle not only internal data but also support close integration with complex external data sources, like supplier and consumer point-of-sale data, for better supply and demand sensing, forecasting and reduction of both downstream and upstream manufacturing, distribution and inventory holding costs,

A well-executed IT portfolio program can achieve payback fairly quickly—sometimes within a quarter—through reduction of excess inventory costs. For example, a $1 million dollar advanced planning system implementation can save $5 million by ensuring your firm does more accurate demand and supply planning and reduces inventory turns by 10% to 20%, to save working capital.

Additionally, many firms have delayed major upgrades to their core ERP, WMS and TMS systems, given the potential cost implications. But now is the time to revisit these decision,s given the impending cost of capital increase.

With so much at stake, we think now is the perfect time for many manufacturers to revisit their capital expenditures and supply chain projects and goals. Companies that use fact-based transformation to justify the business case for major projects will enjoy the efficiencies brought on by thoughtful evaluation together with the historically low cost of making significant investments possible.

Tom Wrobleski is executive vice president of industry supply chains at Chainalytics, a supply chain consulting firm, where he is responsible for coordinating the development and growth of the consumer packaged goods and retail industry sectors.

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