Manufacturing Industry Report: Trends in Strategic Sourcing and Supply

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1 Bank of America Merrill Lynch White Paper Manufacturing Industry Report: Trends in Strategic Sourcing and Supply Executive summary The manufacturing industry is undergoing rapid transformation due to advances in computing and automation. Such technological changes have particularly impacted strategic sourcing and supply. Sustainable sourcing and reshoring have also impacted manufacturers supply chains. Contents Suppliers: Integral to manufacturing Sustainable sourcing... 2 Sustainability certification a must... 3 Smaller manufacturers impacted by automation... 3 Online reverse auction... 4 Automation and high-tech concepts... 4 Insourcing, reshoring and localization

2 MANUFACTURING INDUSTRY REPORT: TRENDS IN STRATEGIC SOURCING AND SUPPLY 2 A printer that creates a three-dimensional model from a computer drawing may sound like science fiction, but it s real and available for purchase by anyone who wants one. This is just one of many examples of how computing and cloud-based technologies have revolutionized how individuals and businesses work within the manufacturing sector. In the area of strategic sourcing and supply, the increasing use of computer technology continues to change the way companies find, get and even create the supplies they need. Global sourcing executives face more challenges than ever, writes John Brennan of Innovative Analytics & Training LLC. 1 The firms that survive the next century will do so because they make key investments in building the next generation of strategic sourcing capabilities. It is critical that manufacturing firms do all they can to stay healthy and competitive because of the important role the industry plays in the U.S. economy. Writing on GE s Ideas Lab website, Chairman and CEO Jeffrey R. Immelt notes that roughly 12 million Americans, or 9% of the work force, have jobs in manufacturing. The sector generates $1.7 trillion in value each year, and manufactured goods comprise more than half of all the nation s exports. Manufacturing companies spend $7 of every $10 in private sector research and development funding. Every $1 in manufacturing sales generates $1.34 in other sectors. 2 Suppliers: Integral to manufacturing To keep up, companies today are viewing their suppliers as an integral part of their businesses. According to Brennan, businesses are implementing sophisticated analysis and new technologies, including multi-enterprise supply chain management networks, reverse auctions and active data collection programs, to stay on top of the value and location of supplies and keep updated on risks. Automating as much of this as possible will increase the effectiveness of sourcing executives. For instance, by using web crawling and crowdsourcing to scan for information on the Internet official company websites, news outlets, Twitter and blogs a company can stay ahead of potential issues stemming from public perception of the use of certain materials in manufacturing. Brennan cites the case of a Fortune 100 company that was concerned about public perception of food additives and sweeteners; the company has set up a system to monitor websites in order to learn when consumers or officials raise concerns about ingredients they use. Sustainable sourcing Companies are likely to keep moving toward sustainable sourcing as a way to decrease their impact on the environment and to improve factories working conditions. Companies throughout the world as diverse as Patagonia, Unilever and Mattel have made commitments to use responsible sources in response to a growing call from the public for products that are environmentally friendly and produced under fair working conditions. 1 Brennan, John. Strategic Sourcing 2.0. Tech. Innovative Analytics & Training LLC, n.d. Web. < StrategicSourcing2.0.pdf>. 2 Immelt, Jeffrey R. Riding the Productivity Waves to Growth. Ideas Lab. General Electric Company, 21 Feb Web.

3 MANUFACTURING INDUSTRY REPORT: TRENDS IN STRATEGIC SOURCING AND SUPPLY 3 In fact, Patagonia has made sustainable sourcing a cornerstone of its operations and central to its value proposition to its customers. Its website illustrates in great detail its efforts to create a sustainable supply chain. Nike reacted to negative publicity from its production practices (which included subcontracting with overseas factories staffed with child labor) by making a large commitment to sustainable sourcing. It has also made a commitment to being transparent in how it sources materials, including the environmental impact of its sourcing practices. Its website invites visitors to learn how the company is focused on eliminating water use in the dying process for some of its apparel products, for example. Many of these large companies have set standards of sustainability and employment practices that they ask their suppliers to follow. Today, there are numerous software programs and cloud-based services that allow companies to find needed materials that meet certain conditions, such as a supplier s sustainability practices or the best prices. The trend toward sustainable sourcing can sometimes save money. Unilever s goal, according to a video on its website, is to double our business while reducing our environmental impact. It seems well on its way to doing so: The company states that tomato growers in the United States used 50% less nitrogen fertilizer, which reduced their cost 10%, and still produced the same quantity of crops. A drip irrigation system used 70% less water in India, while producing a yield that was 84% higher and more than tripled the gross margin. Sustainability certification a must Sustainable sourcing has become a surprisingly important topic among manufacturing sectors that are not considered green. The printing industry, for example, began an industrywide effort in the early 90s to use more recycled paper and reduce the usage of petroleum-based solvents and inks. In today s competitive and environmentally aware business landscape, virtually every corporate client requires that all of their printed promotions be produced using paper that is sourced from responsibly managed forests, notes Mark Hahn, CFO/COO, Corporate Development Officer at FLM Graphics, located in Fairfield, New Jersey. Printers are now on board with these requirements and have bought into obtaining certification from independent organizations that audit the manufacturing facility to ensure compliance with sustainable forest practices. It s no longer an option; having an appropriate sustainability certification is now one of the must have boxes on the qualification checklists. Smaller manufacturers impacted by automation Automation has affected sourcing strategies at smaller manufacturers, as well as their larger counterparts. Automation allows companies to use online systems to order raw materials once they have established strategic relationships with suppliers. Often this can result in favorable pricing, as companies can easily compare prices and negotiate favorable terms.

4 MANUFACTURING INDUSTRY REPORT: TRENDS IN STRATEGIC SOURCING AND SUPPLY 4 An example of automation in the printing industry, FLM Graphics latest digital press, igen4, was manufactured by Xerox and financed by Bank of America. This digital press orders its own replacement parts directly from Xerox when the operators note in the system console that they have performed a maintenance operation. Now that s automation in the supply chain that keeps our presses running, says Hahn. Online reverse auction One particularly effective form of so-called e-procurement is the online reverse auction, in which the role of buyer and supplier are flipped, and suppliers bid competitively, offering the lowest prices. Olivia Korostelina writes in an article in the Dartmouth Business Journal that some studies show firms that use e-procurement save up to 15% on average. Reverse auctions can also connect manufacturers with a broader spectrum of suppliers more quickly and easily. 3 More firms are going to use cloud-based solutions, because they do not require complex installation or maintenance overhead. Automation and high-tech concepts Immelt recently endorsed the use of high-tech concepts. In an article posted on LinkedIn, he states that the Industrial Internet, or applying the lessons of social media to industry, is one of four new drivers of productivity. By owning and connecting the analytical layers around industrial products and using realtime data to extract real-time knowledge we can improve asset performance and drive efficiency, he writes. New technologies and innovations can reverse a trend where companies outsourced critical capabilities in their supply chain and focused too much on cheap labor rather than speed, innovation and market access. 4 He notes that companies that control a local supply chain will have a competitive advantage and be more able to invest in their own capabilities. GE is taking advantage of new technologies to improve the products it makes. Immelt writes that GE Aviation had traditionally manufactured jet engine components the oldfashioned way, mostly by casting, stamping and cutting steel and other alloys. But now the company is using 3D printing, or additive manufacturing, to create parts layer by layer, which will reduce engine weight and cost less. Many smaller manufacturing companies are using 3D printers to create full-scale prototypes quickly in multiple materials including plastics, metals and ceramics turning out an actual object from a computer-designed creation. These are being used in the automotive, fashion and home goods sectors. In mid-2012, President Obama announced $30 million in federal funding to a public-private partnership for the National Additive Manufacturing Innovation Institute to help boost manufacturing jobs in the U.S. 5 3 Korostelina, Olivia. Online Reverse Auctions: A Cost-Saving Inspiration for Businesses, Dartmouth Business Journal RSS. Dartmouth Business Journal, 17 Mar Web. 4 Immelt, Jeff. Why We re Betting on Manufacturing. Web log post. LinkedIn. LinkedIn Corporation, 7 Feb Web. 5 United States Government. Department of Commerce. Obama Administration Announces New Public-Private Partnership to Support Manufacturing Innovation, Encourage Investment in America. Commerce.gov. United States Department of Commerce, 16 Aug Web.

5 MANUFACTURING INDUSTRY REPORT: TRENDS IN STRATEGIC SOURCING AND SUPPLY 5 Insourcing, reshoring and localization Another trend related to encouraging job growth in the manufacturing sector has emerged. Often called insourcing, reshoring or localization, this trend refers to bringing production and/or sourcing back to the U.S. The trend is influenced by political and economic factors, according to the authors of a special report on manufacturing in a January 2013 edition of The Economist. For example, the question of sending jobs overseas became a political issue in the presidential election, and promises to remain a hot-button issue for American workers fearful of losing jobs to their counterparts around the globe. Economic factors, such as rising energy costs and natural disasters, are also causing U.S. manufacturers to reconsider outsourcing. A succession of wars and natural disasters in the past decade has highlighted the risk that supply chains a long way from home may become disrupted, according to The Economist. 6 There are a number of other reasons companies are insourcing, according to Charles Fishman, author of an article in the December 2012 issue of The Atlantic magazine: Rising y oil prices have made it more expensive to ship cargo from overseas 7 yincreased natural gas supplies have lowered the cost for running factories in the U.S. ywages in China are rising, while American unions are now willing to negotiate ymanufacturers can get locally made products to market much faster Insourcing y allows companies to adapt products more quickly and get them to consumers faster In 2012, GE began opening new assembly lines to make products low-energy water heaters, high-tech French door refrigerators, stainless-steel dishwashers and front-loading washers and dryers that had previously been made in foreign countries. Within the past year, a number of other major U.S. manufacturers made a commitment to bring production back to the U.S., including Apple, General Motors, Caterpillar, Whirlpool, Otis and Wham-O. As they move production back to the U.S., manufacturers supply chains will often reshore as well. 6 Booth, Tamzin. Special Report: Outsourcing and Offshoring. The Economist. The Economist Newspaper, 17 Jan Web. 7 Fishman, Charles. The Insourcing Boom. The Atlantic. The Atlantic Monthly Group, Dec Web. This article is for informational purposes only. Please consult your tax advisor, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation B