BE PREPARED MONITORING SUPPLY CHAINS; MAXIMISING RESILIENCE

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1 June/2012 BE PREPARED MONITORING SUPPLY CHAINS; MAXIMISING RESILIENCE

2 Contents Foreword 1 Globalised and interconnected but exposed to risk 2 Disruptions past and future. 5 Monitoring for risk 8 Mitigating risks, maintaining supply chain efficiency 11 Conclusion 15

3 1 Foreword Manufacturing is as much a complex network of inter-related producers, innovators and services as it is a sector that produces outputs and exports for the economy. The global nature of these networks and the number of agents involved in them has been growing providing a challenge for management and increasing the potential for weak links to appear. Supply chain resilience has been tested and re tested in recent years. Not just by high impact events such as recession and natural disasters, which affects thousands of customers and producers all at once. But also the higher-probability, but local disruptions from a transport or communications breakdown to the failure of a vital link in the supply chain. These can also affect production schedules, output and reputations. These actions have brought benefits in normal times and when companies have been faced with the unknown unknowns. These are not, however, actions that are executed once. The pace of globalisation and the fact that manufacturing never stands still means that systems for monitoring and measuring risks as well as processes for adapting and responding need to be under regular review. A clear message from our survey is that we are unlikely to have seen the last major disruption to activities in the UK and there are widespread views on where the next risks might emanate from. The question for all parts of manufacturing value chains is whether the risk from the weakest link in that chain has been minimised. In an increasingly competitive world, firms that compete on delivering bespoke solutions when and where they are needed requires all parts of the production process to be both flexible and resilient. This includes companies involved at all points in the supply chain. This latest research looks at how companies are building this flexibility and resilience into their operations and through their supply chains. We see action on many fronts greater effort and focus on collaboration, on-going appraisal of the geographic locations of companies own operations and their supply base and the degree to which activities can be switched between locations of suppliers in the event of a disruption.

4 Be Prepared June Globalised and interconnected but exposed to risk Manufacturing is a highly interconnected and globalised activity. Customers are increasingly located in multiple markets and firm level functions are located across continents. Supply networks have increased in complexity and their geographical spread has grown as companies have sought to drive efficiency and save costs by outsourcing non-core activity, holding limited stocks, and finding cheaper suppliers further afield. All of these variables make manufacturing different from other parts of the economy. For a sector that competes on providing bespoke solutions, quality and customer service, effective management of global value chains and dispersed customers is critical to maintaining a competitive advantage. This report focuses on the particular challenges that come with extended supply chains, which have become the norm for manufacturers, in a world of economic, geopolitical and environmental uncertainties. Supply chain structure Our survey shows that the average manufacturer has almost 190 suppliers, virtually all have some of their supply base located overseas and one in five report that at least half of their suppliers are outside the UK. The number and geographical spread of suppliers will vary by company size and position in the supply chain. But even smaller companies can be reliant on in excess of 100 suppliers of parts, components and other services. Manufacturers will inevitably have a network of local suppliers in the home market: in our 2010 report, The Shape of British Industry, we found that nearly all manufacturers had UK suppliers and nine in ten manufacturers had suppliers in Europe. However, a significant proportion of manufacturers have suppliers further afield. Over half of manufacturers source from Asia and nearly as many manufacturers source from the US. Chart 1 Companies have suppliers across the globe % of companies with suppliers in each region % Source: EEF/GfK NOP Shape of British Industry survey 2010 We have seen an increase in overseas sourcing. In the last two years, 30% of companies said that they had increased the number of overseas suppliers they used, compared with just 10% of companies who said they had reduced their use. This trend is evident across companies of all sizes, but mid-sized companies were the most likely to do so, with 37% reporting increased use of international suppliers. This shift in the use of overseas suppliers is, in part, due to cost and also the erosion, over time, of some UK supply chain capacity. It also goes hand in hand with a movement in production capacity overseas and the use of suppliers in new markets. Chart 2 Manufacturers are increasing their use of overseas suppliers Rest of World % of companies citing change in number of overseas suppliers by size of company UK Europe Significantly increased Asia % US Moderately increased 251+ Source: EEF Business Resilience survey

5 3 Complexity brings risks Research from the Business Continuity Institute 1 highlights four strategies that have added to potential supply chain weakness: outsourcing activities, just in time production, supplier consolidation and a shift to low-cost suppliers. There are significant advantages to global sourcing which can range from cost savings to exposure to new ways of working. But new ways of operating bring new kinds of vulnerability. In the first instance, this can bring internal challenges. Building close collaborative relationships with suppliers, often critical in executing growth plans, becomes more challenging; there is also the additional uncertainty over logistics costs and reliability and the additional cashflow management requirements that comes with longer supply chains. More recently, the repercussions of significant natural disasters have thrown the complexities of supply chain management into the spotlight. Last year s Great East Japan earthquake and the more recent floods in Thailand have highlighted the exposure many companies have to increasingly complex and interdependent supply chains. Previous natural disasters have also had global effects: the Taiwan Chi-Chi earthquake in 1999 interrupted the supply of semi-conductors and in so doing disrupted the global manufacture of mobile phones. Similarly, the Niigata-Chuetsu-Oki earthquake in 2007 shut down automobile production across Japan by cutting off the supply of engine piston rings 2. Globally, such events had multi-billion dollar repercussions. The increased complexity of supply chains, and the fact that a growing share of economic activity now takes place in disaster-prone places means the economic cost of natural disasters appears to be rising 3. Furthermore, climate change is expected to lead to an increased frequency in extreme weather events leading to reduced or unpredictable changes in water supplies. But it is not just acts of god that can cause supply chain disruption. Many manufacturers experienced significant disruption as a result of the last global downturn, and further disruption to the global macro economy remains a concern. In its Global Economic Risks report, the World Economic Forum states that the risks that are of greatest concern in terms of likelihood and impact are largely macroeconomic. The most notable, with reference to manufacturers, were major systemic financial failure; and extreme energy and agriculture price volatility. Similarly, the degree of specialisation in some supply chains can also have big implications for companies when something goes wrong. Earlier in the year, a fire at a German chemical plant severely weakened an important link in automotive supply chains. The fire led to shortages of an important resin used in the manufacture of braking and fuel systems, which is likely to limit global production. Regulation and assessment of component testing mean that there is no quick fix on the horizon. Similarly, while global events can be disruptive, there are many circumstances where more localised disasters such as flooding, or extreme weather events, can impact on production. One need only look to the end of 2010 to see that unexpected snowfall hit the UK economy, knocking approximately 0.5 percentage points off economic growth in the final quarter of that year 4. Supply chain disruption can also occur as a result of regulatory change. The EU s chemical regulation on the Registration, Evaluation and Authorisation of CHemicals is leading to some substances being withdrawn from the EU market with very little pre-warning. In most cases this is because the costs of complying with REACH are greater than the commercial value of certain substances. However the effects on the downstream users of those chemicals can be significant. 1 Business Continuity Institute (2011) Supply Chain Resilience World Economic Forum Global Risks The Economist Counting the cost of calamities, January Office for National Statistics Quarterly National Accounts, Q4 2010

6 Be Prepared June Manufacturers do not operate in isolation, so the occurrence of disruptions is more or less inevitable. But supply chains are only as strong as their weakest link. Manufacturers are, therefore, increasingly taking steps to manage their supply chains, in an attempt to mitigate the effects of disruptions. Over the past few years building in this resilience has perhaps taken on greater significance as the global economy and world trade has been recovering. To secure orders manufacturers have been working to much shorter lead times, supply chains have been slow to rebuild and the prices and availability of some input and raw materials has been more volatile. Supply chain structures are dynamic; the integration of low-labour cost economies into global markets opened up opportunities for offshoring resulting in increased dispersion of suppliers. The recent financial crisis and significant natural disasters could lead to a further shift in supply chain management as manufacturers adapt their strategies for just-in-time production, single sourcing or outsourcing. The next sections will look in more detail at the recent disruptions that UK manufacturers have had to respond to and the extent to which plans are being put in place to deal with potential further disruptions.

7 5 Disruptions past and future. Supply chains are vulnerable to a myriad of potential events some come with warning signals and others will be completely unforeseen. Impacts will have a direct hit on individual companies through lost output or orders or will come indirectly with a failure of a strategic supplier delaying the supply of goods or services, either way the consequences will ripple through entire supply networks. The biggest event to hit manufacturers in recent years was the global economic recession, with 82% of companies reporting that this caused some sort of disruption to their business. Nearly half described the effects on their businesses as significant, as demand around the world fell back substantially. The recession was also the event most likely to hit a company directly. However, there have been other significant disruptions, with international natural disasters such as the Japanese earthquake causing a disruption to over two-fifths of businesses, though in most cases this was reported as a minor disruption. Unlike the recession, however, for the most part companies said that international disasters affected them indirectly through their supply chain with 42% reporting an indirect impact compared with 11% reporting a direct one. The scale and prevalence of this disruption was not unique to the UK; an international survey from Business Continuity Institute 1 showed that a similar proportion of global manufacturing respondents had been similarly affected by natural disasters in the previous 12 months. And notably the effect on manufacturing was much more significant than that seen in other sectors. However, local disasters were more likely to provide a challenge to companies than international ones, with 61% of companies saying that local natural disasters such as heavy snow or flooding had disrupted their business in the last two years. In the majority of cases these were minor disruptions. Chart 3 Manufacturers hit by high impact events % of companies affected by disruption and extent of impact significance of impact international transport failure geoplotical conflict disease Source: EEF Business Resilience survey supplier failure international natural disaster IT loss local transport failure % of companies affected by disruption local disaster recession In terms of major disruptions, with the exception of the global economic recession, strategic supplier failure was one of the most frequent causes: 8% of businesses reported a major disruption of this nature in the last two years. These disruptions, such as supply chain failure, can impose substantial costs upon businesses, be it in terms of lost orders, quality failures, or damaging relationships with customers. 1 Business Continuity Institute (2011) Supply Chain Resilience 2011

8 Be Prepared June One manufacturers experience of supply chain failure The recession that followed the financial crisis meant many smaller businesses had to decrease production, reduce their workforces and scale back investment. Although many manufacturers worked to hold on to skilled employees during the recession, others were unable to do so. One manufacturer told us that when demand halved overnight and fell by around 75% over the course of the recession, his supplier stripped out capacity and laid off employees. This became a problem in 2010 when demand rebounded sharply. As demand improved, the loss of skills and lower levels of investment meant that some supply chains were unable to respond with the speed and quality that their customers would ordinarily expect. For some companies these supplier disruptions have caused major problems. In one instance, for example, a supplier s inability to scale up demand on time and to the level of quality expected led to disruptions that lasted for eighteen months causing problems with this manufacturer s own ability to meet deadlines, and damaging relationships with a key customer. Wide-ranging impacts The most likely outcome for companies from a disruption was a loss of productivity, reported by nearly three quarters of companies. Disruptions can hit productivity in a number of ways. For example, if a local natural disaster such as flooding means employees are unable to access the factory site then production may be delayed. Similarly disruptions that delay the delivery of raw materials and components may mean that production has to be slowed. This is more likely to provide a direct hit to manufacturers, in contrast to international natural disasters or transport failures where the impacts will be felt indirectly from knock-on consequences to suppliers or customers. After a loss of productivity, the most common firm-level effects of disruption was a loss of revenue. This was reported as an impact by 72% of companies, and a major one by 22% of companies. The Business Continuity Institute shows that these costs can amount to more than 1 million in the case of significant disruptions, this includes not only the cost of lost or delayed orders, but also the employment costs related to shut downs or reduced shifts. Some disruptions can lead to companies being unable to meet orders within agreed timescales. This can be damaging for manufacturers for whom the ability to deliver high quality goods on time and to specification is a key differentiator. Many manufacturers rely on good working relationships with their suppliers, and disruptions that damage these relationships can cause significant problems. Although a loss of orders as a result of disruptions was not the most frequent impact, when this is the case it is among the most detrimental to the business this will have not just short term business impacts, but can also affect company reputation in the longer term. In almost all cases, large companies were less likely to report a significant impact from disruptions than their mid-sized and smaller counterparts. Cashflow is one area in particular where large companies are more resilient. While just over a fifth of small companies and 15% of mid-sized companies said that delayed cashflow had a significant impact on their business, no large companies said that this was significant.

9 7 Chart 4 Lost revenue and orders as a result of disruption have a major impact % of companies reporting effects of disruption Significant impact Moderate impact % Loss of productivity Loss of revenue Delayed cash flow Order backlog Customer dissatisfaction Loss of orders Product release delay Damage to reputation/brand Source: EEF Business Resilience survey Similarly, large companies were considerably less likely to experience a loss of orders as the result of a disruption. While 86% of large companies said they had seen no impact on orders as a result of disruption, this compares with small and mid-sized companies where the proportion of unaffected companies was much smaller, at around two-fifths. The extent to which large companies have the capacity and resources to monitor their supply networks and have plans in place to deal with the risks is likely to translate into more limited effects of recent disruptions we will return to this in the next section. The one area, however, where large companies fared worse than small and mid-sized companies was in terms of a loss of productivity. Although no large companies said this was a significant impact on their business, 86% said that it had affected their business to a moderate degree with the remaining 15% citing no problems. In contrast, a fifth of mid-sized manufacturers said that a loss of productivity did not impact their company, and nearly a third of small manufacturers said that this was the case. Clearly, as manufacturers are striving to improve productivity and competitiveness, increase their market share overseas and remain at the cutting edge of innovation and new technologies, unforeseen disruptions can knock these ambitions off track. Companies need to consider not only the short-term effects of supply chain vulnerabilities on the bottom line, but also the potential for long-term damage to their reputation. At the same time balancing this with the cost advantages that global sourcing can offer.

10 Be Prepared June Monitoring for risk We have so far reviewed what happens when supply chains fail. In recent years UK manufacturers have had to deal with some low-probability, but high-impact, events. Companies who are changing the way they work with their supply chains are doing so in the context of their concerns about future potential risks. In this section we will review the risks that manufacturers are most concerned about. Our survey sought to identify where future supply chain disruptions are most likely to originate. With the scars of the recent financial crisis and recession still evident, the recovery of the UK economy has failed to gain momentum, manufacturing output remains adrift of its pre-recession peak, and the trauma in European markets is still very much in the headlines. All of this means that companies are very much alive to the risks of another downturn in developed economies. Chart 5 Further disruptions anticipated % of companies identifying future risks in global markets % UK Disease (e.g. swine flu) EU Geopolitical conflict North America Natural disaster Source: EEF Business Resilience survey Recession Asia Pacific Strategic supplier failure Rest of the World Transport failure Manufacturers see that the risks associated with the failure of a strategic suppliers or transport infrastructure could originate anywhere in the world. But there are greater concerns about the potential fall out from geopolitical conflicts and natural disasters in Asia and other parts of the world. This is unsurprising given recent events from the Arab Spring to the Japanese earthquake and tsunami. With manufacturers keeping one eye on where future risks may lie, the other is clearly trained on their supply chains. The first step in managing risks is developing a clear picture of the entire supplier ecosystem and putting in place processes to systematically monitor capabilities and vulnerabilities. Our survey reveals differing levels of priorities given to assessing and monitoring supply chain risks. Around a third of companies see this a business critical and worthy of board level attention. Larger companies were more likely to describe continual risk management within their supply chain as a priority, while those at the smaller end of the spectrum regard the risks as an issue that needs significant attention from the Board. In the main, though, limited resources for supply chain management are targeted towards assessment and disruption prevention focused on the most business critical functions. However, there is a significant rump of manufacturers which focus some attention on supply chain performance but are still only able to react to events as they happen. We saw evidence of these various tactics during the disruption caused by the Japanese earthquake. Supply chains The Japan experience Japan accounts for around 2% of UK goods imports. Motor vehicles and parts, telecoms equipment and electrical machinery are amongst the main UK imports. A 2009 survey of EEF members showed that Japan was the main supplier location for around 3% of companies, rising to 7% amongst companies in the transport sector. Mixed responses The automotive sector was particularly affected by the disaster. But differences were evident in the preparedness and response from different companies. Many were quickly able to implement continuity plans and switch suppliers. These actions combined with ongoing monitoring ensured the disruption time was minimised. Others were taking more of a wait and see approach and anecdotal evidence suggested this created prolonged uncertainty.

11 9 The complexity of supply chains means that few manufacturers keep an eye on all of their suppliers. The majority of companies only monitor their immediate suppliers, and rely on these suppliers to monitor their supply chains in turn. Larger companies were more likely to monitor a more significant part of their supply chain. In terms of which suppliers companies choose to monitor, the most significant proportion, 60% of companies, choose only to monitor their immediate suppliers. A further 16% choose to monitor their tier one and tier two suppliers. Only 11% of companies monitor their entire supply chains whereas 16% of companies said they did not monitor their suppliers at all. Despite the disruptions that manufacturers have faced in the last couple of years, these results are little changed from our 2009 report Manufacturing Advantage: How manufacturers are focusing strategically in an uncertain world. While the proportion of companies monitoring their entire supply chain has risen a little, from 7 to 11%, the proportion of companies who do not engage in any monitoring of suppliers has also risen. Chart 6 Narrow approach to supplier monitoring, little changed from 2009 % of companies managing tier of supply chain % We monitor the entire supply chain Tier 1 and Tier 2 Tier 1 only We do not monitor suppliers Monitoring risk is an ongoing process for some but by no means all manufacturers. In addition there has been little movement in the frequency of formal supply chain risk assessment since our 2009 survey. Just over half of companies assess supply chain risk at least once a year, with larger companies more likely to assess risk more frequently. More positively, however, 17% said they had invested in IT solutions to monitor the supply chain; a previous EEF survey 1 showed that just over two fifths of companies were using IT solutions for supply chain management, varying from a third of small companies to half of large companies. And so despite the relatively low number saying they had implemented IT solutions in the past two years, in general, use of IT for supply chain management is more pervasive than this survey suggests. The investment climate more generally over the past two years is likely to have been a bigger factor on new IT expenditure as internal finance for this and other investments has been constrained. What is interesting is that small and medium sized companies were more likely to say they had implemented this in the past two years, in some sense catching up with what larger companies already have in place. The features that businesses are most likely to monitor adherence to deadlines and adherence to quality systems are not surprising, given that if either of these things slip it is likely to have an immediate outcome on a manufacturer s business. Following closely behind is monitoring of suppliers financial status. This will involve an assessment of how diversified suppliers customer base is, the strength of their cashflow position and their level of protection against bad debts. Again, the recent financial crisis is likely to have sharpened focus on these indicators as the drop in demand combined with the withdrawal of credit insurance and limited credit availability put huge strains on some suppliers. Interestingly, the extent to which these supply chain monitoring strategies are used varies little depending on the number of companies in the supply chain. Source: EEF Global Values Chains and Business Resilience surveys 1 EEF, Manufacturing IT Boosting productivity by managing performance, November 2008

12 Be Prepared June Our survey on supplier monitoring suggests that there are many example of best practice, but the evolution of supply chain assessment and management strategies has not kept pace with the globalisation of value chains or the prevalence of economic, environmental and political disruptions. This may have to change. While many suppliers may be subject to scrutiny of their finances and adherence to delivery, their exposure to material supply risks and quality KPIs, we could also see growing expectations from customers that they demonstrate awareness of their supply chain strengths and vulnerabilities. Internal and external requirements to monitor supply chains developments are growing and we should hope to see some considerable catch up amongst those firms where supply chain monitoring is not currently embedded within the business. Nevertheless, a number of proactive and reactive steps have been taken in the past two years in an attempt to build greater resilience and as a necessary response to the disruptions that companies have experienced. Chart 7 Most likely to monitor features that have immediate impact on business % of companies monitoring features of suppliers % Adherence to deadlines/delivery times Adherence to quality systems Financial status Critical sub-suppliers Diversity of customer base (e.g. reliance on one order) Lean production Source: EEF Business Resilience survey

13 11 Mitigating risks, maintaining supply chain efficiency With the sheer number of suppliers that manufacturers have to manage, and the global nature of sourcing, manufacturers supply chains are complex and more exposed to risk. The changing dynamics of supply chain structures and the hard lessons from a range of recent disruptions means manufacturers are actively taking steps to manage and improve the performance of their supply networks. The probability and impact of supply chain disruptions can vary significantly depending on company size, sector and exposure to overseas customers and suppliers. Implementing strategies to manage risks has costs and makes demands on management, in terms of systematically understanding the structure of supply chains and where vulnerabilities lie. However, as we have shown, consequences can have greater costs from lost output and productivity or indeed a loss of stakeholder confidence. Effective supply chain management can minimise the impacts of disruptions, but it can also position companies to take advantage of potential opportunities that can be a consequence of supply chain failure. Getting the right plans in place can provide a win-win from stronger relations with suppliers and flexibility through the chain. Manufacturers take action Our survey shows that the majority of companies have taken some kind of direct action to improve supply chain performance in the last two years, with just 6% of companies reporting not taking any action. The most frequent action taken was to make changes to inventory management, while increased collaboration and forward planning with suppliers have also been common approaches. On average, companies reported taking three actions in the past two years to improve their supply chain performance and this was the same across all sizes of company. There was some variance between firms of different sizes, for example large companies were more likely to collaborate with their suppliers than smaller companies results mirroring the findings of EEF s 2010 report The Shape of British Industry. Large companies are more likely to have the resources to be able to implement such actions and sitting at the top of supply chains, they have a big influence on production schedules and driving forward new product and process developments. Chart 8 The majority of manufacturers are taking action to improve supply chain performance % of companies undertaking strategies to improve supply chain performance % Made changes to inventory management Increased forward planning with suppliers Increased collaboration with suppliers Brought some production in-house Increased the number of suppliers/multiple sourcing Increased use of local suppliers Used an outsourced supplier review & management service Source: EEF Business Resilience survey

14 Be Prepared June Collaboration with suppliers Increased collaboration with suppliers has a number of advantages for manufacturers. By increasing visibility, collaboration can mean that potential issues are identified, addressed and resolved before they become major business problems. Collaboration also aids closer working relationships between customers and suppliers which can be crucial to a quick response should a disruption to production occur. Indeed, strong supplier partnerships can ensure that critical parts of the supply chain become loyal allies in a crisis. Secomak, is based in the South East and is a company which designs and assembles air movement systems. The company has increased collaboration with suppliers because it saw this as a way to improve quality, price and timing. In particular, it asked suppliers to actively question their designs when they have suggestions about improving performance or reducing cost. Working more closely with suppliers has meant that problems are ironed out at an earlier stage, saving costs and minimising disruptions. Visits to suppliers are ongoing, but if a supplier misses targets then these visits are conducted on a more frequent basis. Secomak has also found that increased collaboration has given it better visibility, for example, it knows a supplier s capacity to increase production, which gives it an idea of how quick its turnaround can be. This ability to better predict delivery times has also improved relationships with customers. A resistor manufacturer in the East Midlands, has increased collaboration with its suppliers, meeting with them several times a year. Collaboration has helped promote trust and build long-term business relationships with suppliers. Knowing what is going on with suppliers has taken the panic out of the supply chain. It is not just collaboration with suppliers that has proved positive. They found that working more closely with customers has improved delivery times and reduced costs, as it has enabled them to get things right first time. This has proved particularly beneficial as Cressall produces bespoke items which benefit from user input. Multiple sourcing Another action that 37% of companies have taken to improve supply chain resilience is multiple sourcing, although this is not always a straightforward option for manufacturers. Not only are there increased costs associated with finding and developing relationships with new suppliers, there can also be issues with quality. The inputs provided by different suppliers may not meet exactly the same specifications or requirements due to different machine tooling or processes. Moving to multiple-sourcing therefore requires investment, time, effort and a close working relationship with suppliers but it has the potential to reduce supply chain risk, and can also reduce lead-times by increasing capacity. A company in the renewables supply chain in the North East is an example of a company that avoids single sourcing, particularly when it comes to critical components, for which they typically have two or three suppliers. Sourcing from more than one supplier helps to build in resilience. Siemens Wind Energy has not experienced disruption as a result of critical supplier failure recently, but this is due to the multiple-sourcing strategy which gives the company something to fall back on if one supplier cannot meet demand. The company also benefits from the presence of competition between suppliers which results from multiple sourcing, which can keep the cost of components down. Multiple sourcing can be more complicated than single sourcing, as all suppliers need to produce to the same standards, so Siemens Wind Energy works closely with its suppliers to ensure quality and other requirements are met. They impose strict criteria that companies must meet to supply them, and place Siemens staff members on long-term placements within key suppliers to develop an ongoing relationship.

15 13 Bringing production in-house and increasing the use of local suppliers Our survey showed that just over two-fifths of companies had brought some production back in-house whilst a quarter had increased their use of local suppliers in order to improve their supply chain performance. Two-thirds of the companies who brought production back in-house also increased their use of local suppliers. Both strategies have advantages for companies, in particular lead times are reduced and quality can be controlled more easily. Large companies are more likely to report that they have brought production back in-house, 55% of companies cite having done this compared with 39% of small companies. This is perhaps unsurprising given the resources, space and capabilities larger firms will have to be able to do things in-house. In contrast, small companies are more likely than larger ones to turn instead to local suppliers (chart 9) as part of their supply chain performance improvements. Chart 9 Large companies more likely to bring production back in house % of companies implementing supply chain improvement by company size % While bringing production back in-house can result in cost savings, this is not always the case. There are often additional costs, such as the need to take on new workers, or extend factory space. A resistor manufacturer in the East Midlands, chose to bring the manufacture of a fabricated component in-house. They chose to produce this particular part because they already had the capability to make similar parts. They went through a two-year process of planning and making improvements to the business that would enable production. The company also needed to hire some additional skilled employees and had to give them some training to build the appropriate skills. Cressall said there were four key benefits to bringing production in-house: quality improvements, reduced lead times, increased control, and cost savings. JJ Churchill, is a precision engineering firm based in the Midlands. After experiencing a series of supply disruptions, they decided to bring some production in house. The part that they have chosen to manufacture was something they could easily adapt to doing by investing in the right machine. Although the company is unlikely, strictly speaking, to see a return on investment on the machine for around ten years, it offers them protection from supply chain disruption, which is crucial. One issue with bringing production in-house is space they have had to extend the factory, which eats into low margins Brought some production in-house Source: EEF Business Resilience survey Increased use of local suppliers Many companies, who would have liked to increase their use of local suppliers, have found themselves unable to do so due to a lack of available capacity. This is a pervasive and long-term issue for the sector. Our 2010 report The Shape of British Industry showed that whilst three-quarters of manufacturers surveyed said they were satisfied with the quality of UK suppliers, the picture when asked about the quantity of UK suppliers was a lot more mixed; a quarter said they had concerns with medium sized companies the most negative overall.

16 Be Prepared June Benefits in good times and bad The results of these actions have paid dividends for companies. Rethinking how value chains and suppliers are structured, managed and monitored, therefore not only provides a good buffer when disaster strikes, it can also deliver important side effects for manufacturers in normal times. Whilst just over two-fifths of companies have seen increased customer satisfaction and decreased costs, nearly four in five have seen a more positive and collaborative relationship with their supply chain a result seen across all company sizes. And the majority of manufacturers report seeing better supply chain flexibility, efficiency and visibility as a result of the actions they implemented. Chart 10 Actions pay dividends for firms Getting organised internally Looking for ways to minimise risk in the supply chain has the potential to bring long term business benefits. But there is still the question of how agile and prepared UK manufacturers are to deal with the next big disruption. The extent to which the entire supply network is monitored has already been identified as something of a weakness in this respect. This could also be compounded by the variation in business continuity planning across the sector. Our survey found that a majority (76%) engaged in some form of formal business continuity planning. This proportion was evenly split between continuity plans which focus on the entire business and those which only cover certain strategic functions. On average these plans are subject to a review at least every two years. But this still leaves almost a quarter will no formal process or plans in place. % of companies reporting change after implementing supply change improvement actions More positive & collaborative relationship with supply chain % Improved inventory management Greater supply chain visibility Increased supply chain efficiency Increased supply chain flexibility Decreased costs Increased customer satisfaction Source: EEF Business Resilience survey

17 15 Conclusion For internationally interconnected sectors, such as manufacturing, the potential for unplanned and unforeseen events has become increasingly significant. With complex webs of customers and suppliers, manufacturers need to be more agile than ever if the UK can continue to compete by producing high value, bespoke products and services for markets that never stand still. The activities of UK manufacturers are closely connected to other parts of the world. Any weak links or sudden disruptions to long and highly developed supply chains can have real bottom line impacts from lost orders and detrimental effects on brand and reputation to negative impacts on revenue and productivity. These can be particularly acute for companies that compete on the basis of customer service, speed of delivery and quality. The lessons from recent events the global downturn and natural disasters have brought these challenges and the need to build flexibility into sharp focus. And no-one is predicting that we have seen the last of the one-off events that could be similarly damaging in future to some of those seen in recent years. Yet, despite the turbulence we have seen globally, it seems that systematic monitoring of where weak links in the supply chain might lie are still lagging. In the past three years there has been only a very modest increase in the proportion of companies monitoring suppliers beyond the first tier and a not-insignificant minority that has no assessment procedures in place at all. This could leave manufacturers exposed to future events that could be anything from technology or logistics failures to another shock to the financial system. Encouragingly, our survey shows that manufacturers of all sizes and in all sectors have been taking action to mitigate against their potential exposure to supply chain disruptions. And these actions can bring benefits to firms in stable times as well as through the challenges of a major disruption to activity. Increasing collaboration and engaging closely on forward planning with customers and suppliers has been a growing feature of our research and again stands out as an important means of building increased resilience into supply chains. A potential positive development for the UK economy is signs that companies are looking to access more local supply chain capacity or indeed return production back in-house to increase visibility and control of key functions. Making this happen, however, could inevitably be a long game as companies invest in modern machinery and the skills base to make this a reality. We know that manufacturers are flexible and agile in the face of new and unexpected challenges. Building greater resilience into manufacturing functions also requires a continual appraisal of the strengths, weaknesses and optimal locations for value chain activities.

18 Be Prepared June

19 About us EEF is dedicated to the future of manufacturing. Everything we do is designed to help manufacturing businesses evolve, innovate and compete in a fast changing world. With our unique combination of business services, government representation and industry intelligence, no other organisation is better placed to provide the skills, knowledge and networks they need to thrive. We work with the UK's manufacturers, from the largest to the smallest, to help them work better, compete harder and innovate faster. Because we understand manufacturers so well, policy makers trust our advice and welcome our involvement in their deliberations. We work with them to create policies that are in the best interests of manufacturing, that encourage a high growth industry and boost its ability to make a positive contribution to the UK s real economy. Our policy work delivers real business value for our members, giving us a unique insight into the way changing legislation will affect their business. This insight, complemented by intelligence gathered through our ongoing member research and networking programmes, informs our broad portfolio of services; services that unlock business potential by creating highly productive workplaces in which innovation, creativity and competitiveness can thrive. To find out more about this report, contact: Lee Hopley Chief Economist Felicity Burch Economist Madeleine Scott Senior Policy Researcher EEF Information Line Published by EEF, Broadway House, Tothill Street, London SW1H 9NQ Copyright EEF June 2012

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The National Business Survey National Report November 2009 Results

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