Manufacturing in America – A Simple Supply Chain Model

14/10/2011

Supply chain is an exhaustive topic. Volumes have been written about supply chain design, structure, strategies, management, competitiveness and more. I have no intentions of reproducing or summarizing this vast literature here. However, what we do need is a common vocabulary and framework for the discussing manufacturing in America going forward. So I will limit my discussion to an extremely simple supply chain model.

Manufacturing Supply Chain

Traditional view of supply chain consists of three flows from suppliers to customer and back. These are

  • information flow,
  • material flow,
  • and financial flows.

The goal of any well designed supply chain system is to be cost effective, responsive (time) and efficient (service). There are other supply chain design and management parameters but for our discussion these should suffice. I will introduce them as and when the discussion demands. The picture below shows a simplified flow of raw material and components from suppliers to a manufacturing plant and the finished products to the consumers.

a-simple-supply-chain-model1

This is truly a simple material flow diagram. Complexity quickly creeps in this simple material flow model moment we add even one more variable. For example, consider what happens when you return a sweater back to the retailer or the situation where you have multiple suppliers as it usually is. I have also not shown the warehouses and other storage facilities. They are all rolled under in- and out-bound logistics. For now lets keep this simple model in mind.

Does supply chain matter?

Yes! It not only matters but it is the single most important consideration in locating a manufacturing facility. Lets consider few situations…

  • It’s the total cost of supply chain and not just the cost of manufacturing that counts. One can produce goods cheaper in a low wage country but if the cost of moving the finished product is high then its not worth it.
  • Whether or not customers buy your products depends upon if its available. It has to be on store shelves – virtual or at your neighborhood stores. The key point here is the fluctuating demand. Farther away from customer your manufacturing operations are higher the cost and effort of meeting that demand in an efficient manner. A silly example would be a restaurant where kitchen was located a mile away.
  • Logistics cost could overwhelm a supply chain. Consider a steel mill that acquires key raw materials (iron ore and coal) from two different countries, makes steel in a third country and sells in the fourth country. I can assure you that cost of moving all the low value bulky material all over the place will be more than any saving in the manufacturing cost due to lower wages or environmental regulations. Now contrast this with a high value low density item like your iPhone. A very different picture.
  • Product shelf life could significantly increase the cost of in- and out-bound logistics. Cost gets even higher if one needs a specialized shipping equipment like freezers. Can you think of a manufacturing operation where a manufacturer moves the live stock from one country to another just to process it and then move the fresh meat (or fish or poultry) to a different country to sell. The logistics cost will be enormous not to mention the cost of product (meat) going bad. All it takes one freezer to not work for a day.

I could go on and on and give you a thousand example where supply chain cost, efficiency, risk etc play the central role in deciding where a manufacturing company would locate its plants and warehouses. Savings offered by any regulations, incentives (like taxes), low wages etc have to be so great that they fundamentally shift the supply chain structure.

Efficient supply chain as the core of solution

A picture starts to emerge – may be just may be we are loosing manufacturing in America because a supply chain with US as its manufacturing hub is not as competitive for many of the products. A smart man once told me that recognizing the problem is a good first step to finding the solution. I can assure you that an efficient supply chain with US as manufacturing base is not only possible but preferred for may products and industries.

Let’s start exploring what industries and products naturally fit into the model of a good supply chain structure with America as its manufacturing base. These industries could start building the manufacturing base if it doesn’t already exist. Or if we already have those industries we can start strengthening that manufacturing base. Or if we had them and lost they can be brought back. The established manufacturers and new entrants alike given the right environment would jump on the opportunity.

There are 2 comments in this article:

  1. 9/12/2014Manufacturing in America – Competitive Advantages: Raw Material - Mani Agrawal says:

    […] the last post I discussed the impact supply chain has on locating a manufacturing facility. Taking this discussion further, there are many situation where locating the manufacturing facility […]

  2. 9/12/2014Manufacturing in America – Competitive Advantages: Skills - Mani Agrawal says:

    […] the previous post I listed some of our obvious supply chain advantages. The post detailed the advantage of abundant raw material  that our country enjoys. One of the […]

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