Blame Supply Chain For Downturn

March 25, 2005
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GRAND RAPIDS — Nationwide, the perception of the manufacturing industry is one of bare and vacant factories, displaced workers on the breadline and a combined realization that its time has passed.

John Layden, president and CEO of Time Compression Strategies Inc., doesn’t see it that way.

A keynote speaker of the Second Annual Midwest Supply Chain Conference at SteelcaseUniversity, the laser pointer-wielding Layden ticked off the headlines: 200,000 manufacturing jobs lost in Michigan and millions more lost nationwide; steady manufacturing relocation to a fill-in-the-blank list of Third World countries; replacement of “good” jobs by low-paying service sector jobs.

He cited an editorial a year ago in the Indianapolis Star claiming that the root of his home state’s problems was a reliance on manufacturing. It was the industry hit first and hardest, and the only solution was to recruit high-tech, next-generation companies.

“They got a number of things wrong,” Layden said. “First off, the hardest hit was high tech. The first thing to fall was semiconductors, and that industry still hasn’t pulled out.”

Traditional manufacturing is 80 percent of the Indiana economy, he noted, parallel to the Michigan economy.

“It’ll take a long time to replace 80 percent,” Layden said. “And by way, 50 years from now, high tech will be traditional manufacturing. If traditional manufacturing doesn’t succeed, our states don’t succeed. End of discussion.”

The strongest argument against the future of manufacturing has been the recent job loss, he said, but U.S. manufacturing employment actually peaked in 1979. Productivity gains have been driving employment down for 25 years.

As a percentage of Gross Domestic Product, both manufacturing and durable-goods manufacturing has held steady since World War II.

“We just came out of a recession — at least we’re informed we did,” he said. “The fact is that this was a recession caused by supply chain behavior, and there are some new rules in today’s economy.”

He suggested first changing the metrics by which the economy is measured.

Rather than adding up all parts of the supply chain together, the only meaningful macroeconomic metric is at the very end. Since 1992, sales within the combined retail and food service sectors grew from $170 billion to $300 billion a month in 2005.

Layden traced the graph with his red dot. While far from a straight line, there weren’t any noticeable dips.

“Show me where the recession is. There isn’t any,” he said, “except for the little blip right there where 9-11 had a profound effect on retail, but it was offset by a surge in October. It completely corrected itself.”

It wasn’t such a rosy picture further back on the supply chain, however.

Through most of the ’90s, the retail economy grew at a 5 percent rate. But in the 18 months leading into 2000, that pace grew to 9 percent.

“A completely unsustainable growth rate in retail sales,” Layden said. “Recall in 1999 how manufacturers were scrambling to keep up. We couldn’t keep parts and couldn’t hire people.”

Three months into the new millennium, retail sales slowed to a 4 percent growth rate, where it stayed until 2003.

Apparently, manufacturers didn’t hear about the slowdown for another 14 months. The value of shipments kept rising for over a year. Capacity continued to grow for a solid year. The inventory-to-sales ratio was out of control for two years.

Layden compared this to a graph of the 50-year U.S. economy.

“There was little instability until 1981, 1982,” he noted, pointing at a series of spikes and dips that continue to this day. “That’s when we started to implement concepts of ‘pull systems’ we were learning from Japan. By using inventory as a signal, we’ve destabilized the economy.”

When measuring inventory, a retailer’s 10 percent sales spike can translate to a 35 percent increase in the size of the OEM’s order from the distributor. The OEM responds with a 51 percent increase to suppliers.

Y2K was the biggest sell-off of inventory in history, Layden said, and the direct cause of the recession.

“Systems that use inventory as a signal will always behave like this,” he said.

While lean manufacturing is valuable as a means of streamlining assets and improving efficiency, Layden said, it is rarely effective as an information source. Most of the problems facing the manufacturing sector today are a direct result of decisions made using lean metrics.

One problem, he said, is that delayed shipping provides no savings to the supply chain; it just pushes the costs of inventory further up the chain.

Instead, manufacturers should concentrate on the supply chain as a single entity, concentrating on visibility, velocity and synchronization. Rather than ship often and on a regular schedule, shipments should be varied and responsive to the end-user.

Also, job losses in manufacturing are not historically significant. While Michigan was losing 13 percent of its manufacturing base, China lost 15 percent. Since 1992, 344 million jobs have been created nationally, while only 320 million were lost.

“Outsourcing is natural and there are plenty of other jobs around,” Layden said. “Outsourcing works, off-shoring usually doesn’t. Manufacturing is very competitive and Michigan manufacturing is not at risk, but no company is secure unless it plays by the new rules.”

Some industries, like tooling, will continue to be hurt by offshore competition.

“For suppliers that don’t add cost in the supply chain, the industry will always seek the low-cost solution.”       

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