Why You Need to Pay Close Attention to Your Supply Chain

Having worked in the industry for over three decades, there was never a dull moment. We always had processes to monitor, parts to produce, or costs to cut. Most manufacturing companies do a pretty good job of managing their core competencies. After all, we are manufacturers.

However, many companies don’t look at their supply chain as part of their core competencies, but instead as a necessary evil. They look at themselves as a manufacturing-only company and not a transportation or warehousing company. I challenge you to focus on your supply chain as a vital part of your operation. A stable supply chain is a critical component of a successful manufacturing operation.

I think of a supply chain in manufacturing like the cardiovascular system found in our bodies. The cardiovascular system supplies our bodies with nutrition and oxygen and removes waste—it truly touches every part of our bodies.

A mentor once told me, “Your supply chain consists of everyone involved in getting your product to the end user.” 

If you look at your supply chain in that way, you will understand why I have strong feelings about paying attention and managing your supply chain, not as a necessary evil, but as a core competency to make you stand out from others. It can be a vital part of successfully operating your manufacturing business.

In the past, we have discussed the importance of managing your supplies and inventory, communicating effectively with your vendors, and dealing with weather and geopolitical impacts. We also talked about having biennial or triennial backup plans and not selecting your suppliers based solely on cost.

Here are a few additional things that may impact your supply chain:

Raw materials

No matter what industry you are in, raw material supply and cost are key parts of your profitability. Keeping a close watch is important in managing your need for on-hand supplies as well as ensuring you have a product-cost structure that can adjust to a fluctuating market without much impact to your bottom line. This is especially critical if you have raw materials that come from overseas. Many small companies I visit feel this is not impacting them. However, when I ask where their nuts and bolts come from, they look at boxes and notice they are mostly from outside the U.S. Another example is the price of steel, which increased nearly 22% in 2017. You can see how that could impact profitability. 

Freight issues

Business is picking up in manufacturing, as well as construction, mining, and biotechnology. The supplies and supply chains of these industries overlap in many areas. Just think of the available cargo space on road and rail. If everyone is busy shipping products, it may impact your shipping schedule. In addition, the trucking industry, like manufacturing, is facing a shortage of skilled labor. This labor shortage compounds the issue of available cargo space and on-time delivery. If your supplies arrive late, how can you make up the lost time? Adding overtime increases your part and operation costs, cutting directly into profits and delivery timelines. As cargo space availability becomes critical, freight costs will increase.

Machine tool orders

Machine tool orders have been growing steadily for months. This may impact your ability to add new machines or equipment capacity, which can have a long-term effect on your business. Increased lead times for machine tools can also impact your ability to outsource some operations. In the past, I have seen machining rates for outsourced work grow by as much as 30% when demand is high, affecting part costs and profitability.

What can you do to mitigate potential impacts to your supply chain?

• Make supply chain management part of your business, and don't treat it like a necessary evil. It is part of the lifeline of your business.

• Pay attention to not only your business, but also to your industry segment and the overall economy. 

• Understand and monitor the Purchasing Managers' Index (PMI). The PMI is a monthly indicator that is collected through the Institute for Supply Management (ISM) and focuses on the U.S. manufacturing industry. The number is usually released on the first day of the month, before any governmental economic indicators are released. The PMI is a great tool to see the overall state of the manufacturing sector, including inventory, order levels, and contractions and expansions of certain market segments. It provides a forecast on cargo capacity and indicates production and process changes within manufacturing.

No matter the size of your manufacturing business, it is important to understand your total supply chain and manage it as a key part of your business.