Earthquakes, job shops, and the global supply chain

With Japan in crisis, so are global supply chains. With the world’s third-largest economy basically in standby mode, manufacturers stateside--and around the world--are scrambling to adapt.

Most metal fabricators aren’t assemblers sitting at the end of a long global supply chain, but many of their customers are. Disasters like last week’s earthquake reveal the uncertainties of long supply chains, and for fabricators it also brings up the question of inventory: How much is enough? Lowering inventory frees up cash. But knowing all the uncertainties of a global economy, how “on edge” should a shop operate?



I recall visiting Power Curbers, a heavy equipment manufacturer north of Charlotte, N.C., and witnessing a pallet of materials being delivered, enough for just one machine. Soon after delivery, workers send that material into production. As Craig Neyhardt, vice president, told me, “We expense this material s we receive it rather than turn it into capitalized inventory.”

Talk about a major inventory reduction.

Another made-to-order product-line manufacturer--this one of metal labels designed to go on various machines--Decorated Products Inc. in Westfield, Mass., takes advantage of a consignment system between the company, its metal supplier, and other manufacturers, even competitors. In this vendor-managed-inventory (VMI) arrangement, every five business days a representative from the metal supplier visits the shop floor to monitor inventory levels and replenish as necessary. He notes every opened stack of 100 sheet and writes up tickets for them, which triggers the supplier to send an invoice for the opened material to Decorated Products.

In this case, Decorated Products serves as a “virtual warehouse” for the metal supplier. If demand fluctuates, the metal supplier can shift inventory from one customer to another, even to some of Decorated Products’ direct competitors. After all, customers don’t own the consigned inventory until they open the package and put the metal to use.

Both situations describe manufacturers with a family of products. They’re made-to-order operations, but still centered on defined product lines. That’s so unlike the high-mix, low-volume job shop, a place where one order may look nothing like the next. This probably explains the various opinions I hear about raw stock inventory in the job shop arena.

Job shops are in the business of quick turnaround. Many say their shops operate with lead-times between a few days and a few weeks. Still, small job shops don’t have the market muscle of large OEMs, so they find ways to ensure they have the right material on hand.

Often, they leverage their financial independence. Shops that pay for material quickly get noticed. Texas ProFab, a shop outside Dallas, has practiced this for years. The shop has the cash to pay for material well before terms. This gives the small company some leverage when negotiating price and delivery times. How? Because their metal suppliers know that an order from Texas ProFab means cash in hand within a few days.

At the other end of the spectrum is Cupples’ J&J Co., Inc. of Jackson, Tenn. Jeff Cupples, vice president of engineering and estimating, said, “We’re a job shop. I don’t believe in lean when it comes to materials.”

Cupples’ J&J Co. often turns around jobs within several days. With such quick turnaround, Cupples said, the 195-person company needs materials on hand, which is why the shop sits on several million dollars worth of raw stock.

But like Texas ProFab, Cupples’ J&J is debt-free, and in fact has had the cash to purchase more than 15 machines since 2008. With that kind of money on hand, Cupples’ J&J can afford to sit heavy on raw stock inventory.

There probably is no “right” answer when it comes to raw stock inventory levels. Job shops are fiercely independent, their mix of market niches unique. There seems to be one common thread, though: Cash is king. If a shop has enough, it opens up a lot of options--and may even prepare for unforeseen disturbances in the global supply chain.