Manufacturing and Supply Chain Innovation in 2020
The global health crisis has pushed manufacturing and global supply chain management (SCM) to the forefront of issues facing companies in 2020.
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The global health crisis has pushed manufacturing and global supply chain management (SCM) to the forefront of issues facing companies in 2020. To gain an understanding of supply chain resilience, we spoke with John McEleney, a world expert on this topic.
John is an entrepreneur and industry pioneer in product development and manufacturing innovation. He co-founded of software-as-a-service (SaaS) product development platform, Onshape, which was acquired by PTC. Previously, he was CEO of SolidWorks. John is now the corporate vice president of strategy at PTC.
- Introduction
- On Historical Supply Chain Strategies
- On Supply Chain Efficiency vs. Rigidity
- On the Impact of Supply Chains on Business Models
- Advice for Business Leaders on Supply Chain Agility
This transcript was lightly edited for length and clarity.
Introduction
Michael Krigsman: Manufacturing and supply chains have become essential points of innovation during the global health crisis. John McEleney is an expert on this topic and a serial entrepreneur. John, tell us about your work at Onshape. I know you were acquired by PTC. Tell us what's going on right now with you.
John McEleney: We started Onshape back in 2012, along with many of the original team from SolidWorks. The reason we started it was, of course, how people design and build products really had been transformed over the years but the tools hadn't kept pace.
On Historical Supply Chain Strategies
Michael Krigsman: John, supply chain really has become a core issue as all of us try to manage through our daily lives. What were the supply chain strategies that have governed the distribution and manufacturing of goods to date?
John McEleney: If you talk to any company that makes things, physical goods, one of the things that people are trying to do from an operational perspective is they're trying to minimize inventory because, of course, when you have inventory, cash tied up in inventory, you can't invest in other areas of your business. If you look at the history, there were several discrete moments in time where supply chains changed.
It used to be that you built everything in-house. Then, of course, people started looking for specialization and they found suppliers that could invest both in terms of capital and experience in building specific capabilities.
In the '80s, what you saw was a big shift with purchasing czar Ignacio Lopez. At the time, he was sort of a real strategist about what to do with supply chains. His philosophy was, let's partner up with one supplier and then, of course, we'll try and get economies of scale.
What that really translated into was, basically, get the suppliers, put the arm behind their back, and wrench it up to get discounts. It drove down the cost of supply goods and, ultimately, drove the cost of goods down for manufacturing.
That, over time, translated from what was defined as partnership to actually true partnerships. Manufacturers started seeing purchasing and supply chains as strategic.
There was a big shift to just in time manufacturing. That is to say, as you're building products, to make sure that those suppliers delivered sort of subassemblies or goods for your manufacturing just in time as you need them. The idea behind that was, could you get and reduce the slack and push the inefficiencies out of the system and, therefore, free up the amount of capital that would normally be tied up in inventory and use it for other purposes in your business? It was really about optimizing the supply chain, getting waste out of the system and, quite frankly, it made many manufacturers economically more profitable and more efficient.
Michael Krigsman: This approach to supply chain was great for manufacturers and, of course, therefore, great for consumers. But then, why have we had shortages?
John McEleney: Well, it turns out that not only was the idea of just in time manufacturing one about reducing kind of waste in the inventory and supply chain, what people started looking for is additional ways to drive down costs, of course, because we want to increase the purchasing power and the competitiveness of the manufactured goods. You saw outsourcing to the Far East, to China, of course, and now to Vietnam and other countries as well. What you started seeing is just in time manufacturing and then you started seeing a push for outsourcing, both for sort of subcomponents and subassemblies, almost to the end to finished goods where many people would just assemble in the U.S.
What ended up happening is, in the drive for efficiency, we actually created more risk. People didn't realize it. Sort of the famous Warren Buffett quote that you don't realize who is not wearing a bathing suit until the tide goes out.
Well, with this health crisis, when supply chains got disrupted, what you started realizing is that many manufacturers could not get their subassemblies and the raw goods needed to actually do the manufacturing. On the drive for efficiency, the pendulum probably swung a little too far.
On Supply Chain Efficiency vs. Rigidity
Michael Krigsman: John, as we have strived to work out the economics of supply chain and reduce inventories, at the same time we have created rigidity, making it difficult to change, and so the world has changed right now and we're kind of stuck. What's the linkage between efficiency and rigidity?
John McEleney: I think you've got to kind of raise it up one level a little bit and, strategically, how do you look at supply chains and suppliers and, just fundamentally, how are we building products? I think you're going to see, a little bit, the reduction of slack in the supply chain, actually, is going to go and move from JIT (just in time) to just in case. I don't think it'll swing to where people have inventories for six months' worth of inventory, but people are going to start to look at things and segment them by what's my sole source suppliers and what are my critical elements or natural resources that I need?
Look at the balance sheets of companies moving forward. You're going to see the inventory line go up because people are going to move to a little bit of just in case.
I think the manufacturers themselves are going to look at their own product development process and probably shift from a gated process to more of an agile process. The reason is really simple. It allows you to make things quicker, but it allows you to be more adaptable to what the consumer demands are and needs, as well as what are some of the external forces that are impacting your company.
I think this idea of agile design and agile manufacturing is going to start to permeate in how we think about supply chains and the overall product development process. It's going to be a gradual shift, but I think it's an undeniable shift.
Michael Krigsman: John, you still have the problem of planning that, if your manufacturing is set up for one type of product, one type of demand and now the world changes, as it has so rapidly with our world over the last few months, how do you respond and construct your manufacturing and supply chain planning to be agile and to be able to make those shifts very quickly?
John McEleney: I think you are going to see strategic relationships continue in the supply chain. Of course, people aren't going to immediately go and have ten different suppliers. They're probably going to have one, maybe add a second. When they talk with their suppliers, they're going to talk with them about a strategic plan that allows for flexibility.
Perhaps a great example of a way to describe how technology can impact this is, I remember visiting a large automotive supplier. One of the things they had in their production floor is, they were moving the product along to do assembly and fabrication. They literally had cam and followers, meaning they had things on literally rigid pieces of metal that had been carved out with the path to move the trails along the way to move the product along the assembly process.
Now, the good news is, those things were incredibly reliable, incredibly robust. The problem is, if you went from wanting to make an SUV to making a sports car, it's next to impossible when you have physical hard tooling like that.
What you saw with microcontrollers and microprocessors invading every aspect of the world, you're seeing stepper motors. You're seeing things that allow for people to have flexibility in their manufacturing process because they're using digital technology and using software to change a configuration to allow for flexibility and for additional configurations and adaptability. I think you're going to see both a strategic process approach on how we look at our suppliers, but you're going to see a technology approach that looks at both hardware in terms of compute hardware, motors and stepper motors, microprocessors and controllers, and going to also see software come into play to be able to help with the adaptability and flexibility.
Michael Krigsman: But you still end up having to construct your manufacturing line and anticipate, make certain assumptions about the nature of the world going forward.
John McEleney: A great example of a manufactured product adapting to market needs is ZARA, the clothing manufacturer. There was a great article in the New York Times, maybe about two and a half years ago, about ZARA. ZARA makes women's fashion. If you talk to my wife or daughter, they'll sort of say, "When you go to ZARA, if you see something you like, you've got to buy it now because, in fact, it may not be here the next time you come back."
The example that was given in this New York Times article I thought was fascinating. It was around the fall timeframe. They had this women's cape kind of coat. They had made—I don't know—400 of them for their store in Manhattan, 4,000 or 40,000—I've forgotten the number—globally.
Their store managers sort of came back after hearing feedback from their customers saying, "We should have a little hook here that could take the cape to pull it through to lock it." She sketched up an idea and sent it back to the corporate headquarters at ZARA. Most of their manufacturing, quite frankly, is actually based in Spain, and they quickly iterated on that design, taking the customer feedback, rapidly manufactured it and, in less than two weeks, they had a whole new version of it and sold out in less than a week.
This idea of being able to adapt to customer input is going to be a strategic advantage for customers longer-term. People are going to look at their supply chains and they're not going to only look at cost. They're going to look at how quickly can they adapt and help me adapt my business longer-term. I think that people, they're going to put on a strategic lens when they look at these partners and they look at their suppliers.
On the Impact of Supply Chains on Business Models
Michael Krigsman: That ZARA example is quite interesting because the manufacturing business model had a direct impact on the marketing business model. They created exclusivity and their customers know that they need to buy now. If we like this item, buy it now.
John McEleney: You're exactly right. Supply chain and manufacturing, connected with product design, becomes a strategic advantage when you can respond to what the customers want and customers need. Of course, in this world of this pandemic and the health crisis we're facing, again, flexibility.
Look. We're a software company. Our tools were built to allow users and people to work remotely. I can work from my MacBook. I can use my mobile device. I don't have to be tied to a specific workstation that I have to go to a corporate office to get because it requires a lot of computing power and a lot of specialty graphics cards.
The idea of being able to remotely access things made it a natural flow for this COVID virus. I think we're already seeing customers respond in kind and saying, "Help us. How we do we deal with remote sites?"
People realize that this is not just a one-time event. I'm not forecasting another pandemic. I'm just saying that this is a notable shift in how we think, how we work, how we live. Tools that allow for adaptability, flexibility, and supply chains that can match to that will give companies strategic advantage.
Advice for Business Leaders on Supply Chain Agility
Michael Krigsman: John, as we finish up, what advice do you have for senior business leaders on the subject of agility and being able to respond to change?
John McEleney: The hardest step, of course, is the first step. Just start taking some measurable pieces. Don't try to boil the ocean. Pick one part of your supply chain. Pick one part of your product line but get started. To do that internally, find somebody that you trust, somebody that you know has the determination to actually make change and make something happen, and then you've got to support that person, she or he, to the hilt.
What'll end up happening is organizational will resist that change. But in the end, we all say we want change. As leaders, our job is to actually make change.
Find people who are good, adaptable, and that don't stop. Then pick something that's measurable and that's consumable. Don't try and boil the ocean. Realize that, of course, change is hard but, in fact, that's what we're all paid to do.
Michael Krigsman: How can business leaders balance this desire for supply chain and manufacturing efficiency with the obvious need for flexibility and to remain adaptable in their design processes, in their manufacturing, in their supply chains?
John McEleney: I think the first is that it has to be a corporate imperative. Why are you doing it and why are you making this change? If it doesn't come from senior leadership then it's just going to die in the bowels of the company to try to make some changes.
Then the question is, how do you kind of initiative the activity and get going? I think one of the ways to do that is, you may not be able to change your complete supply chain. Try and change one supplier. Try and change how you can work with one supplier and then work on the next one and then work on the next one.
This idea of, just take something that's consumable and make a difference and get some traction. Get a toehold. Once you get a toehold, you can then reach and grab another position.
George Patton, I think sort of said—I'm paraphrasing here—I'll take an 80% plan executed aggressively today than a perfect plan that executed 2 weeks from now.
In this crisis, what's very fascinating about it is, by necessity and by government edict, we actually had to find a way to make things work while we're in this shutdown. Look at the popularity of remote tools like Zoom and other tools to allow people to function and communicate and also socialize.
In fact, when you say it can't be done, the short answer is, no, it can be done. The question is, do you have the will to get it done.
Michael Krigsman: John, McEleney, thank you very much for sharing your insight and expertise with us.
John McEleney: Thanks, Michael.