Horse trading – is it out of its time?

Horse trading – is it out of its time?

The issue: How can manufacturers across the region maximise potentials of the supply chain to ensure sustainable growth, and what can be done further to support the industry?

BQ Deloitte Taking PartKate Powell opened, explaining that Deloitte is a member of the All-party Parliamentary Manufacturing Group. A recent term paper quoted supply chains as misunderstood, neglected but brimming with potential. “It’s that potential we’re keen to understand,” she said, “and to understand what can be done to maximise it.”

Alan Lloyd’s company Heerema Hartlepool, building offshore modules and constructions for above and below surface, relies strongly on a North East supply chain. “A problem with our type of industry is that we believe we can do everything ourselves. In the old days that might have been true. There’s a large movement by the Government to try to bring content back from the Middle East and Asia - a determination to invest in the UK market. The ageing workforce is something we must consider. We’ve gone to slightly smaller suppliers – they may be large manufacturers in their own right – to support our chain. Hopefully we have something like 30 or 40 major suppliers. We need to cascade our needs out to the supply chain and get those in the market to understand. In our industry things manufactured or designed can’t necessarily be right first time, and chain managements can sometimes be very concerned about cost. It’s important across all spectrums to make it work for everybody.

Steve Bell’s firm Union Electric Steel (formerly Davy Roll) at Gateshead exports about 85% of product. Big issues now are exchange rates – some good, some bad. “Our supply chain tends to be international. We try to buy in cheap and have tried China. It works quite well, good in quality. You just never knew which year it was going to arrive. So we came back ‘local’ – which for us is Europe.”

Marc Hutchinson covers the UK, North America, West Africa, and Malaysia as head of local procurement with Duco at Wallsend (part of the French group Technip). He said: “I have noticed, for many organisations, how difficult it appears to be to find in a vertical supply chain innovation and creativity, and new ideas that we can get through the supply chain.”

As a Tier 2 supplier into the Shells and BPs of offshore, he also finds some difficulty in accessing the supply chain. “Engineers with big manufacturers tend to specify to the nth degree the requirements and cascade this down the supply chain. So there’s lots of experience and knowledge in the supply chain untapped. That’s a bugbear.”  

Simon Miller works in munitions at BAE Systems Washington (previously the Royal Ordnance factory at Birtley). He led the team that built the £75m plant and ran it for two years before entering business development. His frustration is seeking a guarantee that all bits from the supply chain will hit his production schedule. “During early negotiations it’s more about price, whereas for the guy receiving the goods quality is so important.”

Manufacturing schedules have tightened and there isn’t much local now. “We do some heat treatment ourselves but also go to the Midlands. The quantity of supply isn’t available in the North East. One local company we do use is limited in what it can offer. I’d like to see quality a focus in the supply chain. Goods delivered on time and at the right price isn’t enough if quality isn’t right. Working in top-end defence, we especially suffer from that.”

Cameron Ross came to Manufacturing Advisory Service (now part of Business Growth Service) with an engineering background, including 10 years with Nissan. The Government has asked MAS to help people get into supply chains, and also to help people with supply chain issues. Presently MAS is working on an offshore growth programme. “When the London Array offshore wind project was built, over 90% of the components weren’t British.

The Government has said that’s wrong and we must do something about it. So a lot of effort is going into trying to make people supply chain capable and aware of how to get into it.”

The nuclear sector and one or two other areas may also be looked at, subject to the outcome of the General Election in May. MAS is regularly asked for help in tracing local firms capable of supplying, and also hears from larger companies with supply chain issues.

Kevin Gaul explained how Tharsus at Blyth, an assembly and test organisation, reduces clients’ risk of designing something original that ends up impossible to manufacture. “We totally depend on our supply chain,” he says. “We also use a limited amount of labour to deter customers from taking the actual manufacturing overseas. We struggle to find suitable suppliers – certainly in advanced technology areas – other than in far flung corners of the world.”

Andrew Upton who with Seaward Group at Peterlee, manufacturer of electrical test equipment, has worked in the USA for four years, told how the supply chain goes through cycles of outsourcing then bringing back in. Seaward struggles for supply chain support during innovation. “It’s a case of trying to persuade them of benefits later. It also has difficulty in recruiting engineers.b “We do our own R&D and develop engineers from scratch. Maybe we could take advantage of good skillsets abroad.”

Stephen Learney says Haskell at Washington, maker of pneumatically driven, high-pressure liquid pumps, gas boosters, air pressure amplifiers, and high pressure systems, reckons there will always be gaps in his firm’s needs from the supply chain.

“The North East is no different to anywhere else.” Tracing specialised steels and other basics is difficult. He’d like to see less antagonism in negotiation. “Many people vital to the supply chain aren’t very professional, particularly in purchasing. I think I’d really struggle to get the right quality of purchasing people.” One person his firm trained up over two years left for another company but that didn’t reduce the company’s belief in the importance of training in purchasing.

Linda Billings at A-Belco, the Ashington manufacture of explosion proof equipment for the oil, gas, pharmaceutical and petrochemical industries globally, describes that firm as at both ends of the supply chain, with diverse difficulties. In construction, she said, it seems to be a drive to almost avoid paying for anything done up the chain. “Some customers do supply finance – a great help and we look to see more of that.”

The company also supplies engineering co-ordination skills so the supply chain includes recruitment agencies. “Again, we suffer from being unable to recruit engineers. We can get them out of London but they want London rates. That becomes uneconomical.” The company finds providers of apprentices often can’t give the training needed. “We’ve had to send our apprentices to some of our suppliers for help with training. That shouldn’t be happening.” There should be adequate training courses for everything around the North East.”

Transport links across the UK can also be difficult. “We try to buy local. But it’s not always possible, and getting things in and out of the North East can be difficult.”

Tom Vallance discussed the business environment for the region’s manufacturers, noting that an important part of this remains the tax landscape against which these businesses operate.  Generous and valuable tax reliefs are available for innovative businesses, and a significant amount of Deloitte’s work with manufacturers in the North East involves supporting investment through successfully accessing such reliefs – from delivering tax efficient capital investment, to maximising innovation tax reliefs such as R&D tax credits and access to the Patent Box regime.  While uptake among manufacturing businesses is generally good, many businesses were still either missing out completely, or failing to realise the full benefit of the help available to them in this area.

Graeme Parkins bought Dyer Engineering of Annfield Plain in partnership in 2013 – a company now making a range of product from small “widgets” to 20 ton structures for oil rigs. Besides its serial and batch production and one-off orders, it’s a Tier 1 supplier to Cummins diesel engines.

With the lower oil and gas prices, whereas a customer might previously have design managed a job then sub-contracted it to Dyer, that sort of customer is looking to cut costs by partnering in a joint venture – benefiting Dyer. “It’s a good example of how manufacturers can work with the supply chain,” he observes. However, the skills shortage threatens there too.

“As a boy I went to an NEI apprentice school,” he recalled. “Large organisations ran big apprentice schools. Apprentices not needed were fed into smaller businesses. Those big businesses don’t exist now. We’ve 15 apprentices. But it’s very expensive to have a machine just for training. It’s great the Government makes a noise about 200,000 apprentices. But we need some commitment to investment for training facilities. Colleges are great. But their technologies are those of up to 20 years ago, not what we use today.”

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Joanne Pratt explained how a big part of fund manager FW Capital portfolio in the North East is for manufacturers. She recounted how a talent hunt initiated by Tees Valley’s LEP countered banks’ demands for security when offering funding for big jobs. “Often companies in the supply chain don’t have the cash to supply that. We can provide that finance and encourage the larger businesses to use the smaller businesses within their supply chain. It would be good to raise awareness of schemes like that.”

Roger O’Brien said the Institute for Automotive and Manufacturing Advanced Practice, part of University of Sunderland, offers manufacturing support around R&D, also skills development. “We have to ensure graduates and post-graduates can enter industry ready and able to interface with the necessary skills.” The university is about to make a new commitment to advanced manufacturing, he disclosed. The North East Manufacturing Forum is also trying to bring together manufacturers.

Keith Miller told how Miller Group at Cramlington makes advanced attachments for groundbreaking vehicles, serving the like of JCB, Volvo and Komatsu, with operations in Australia, India, and a joint venture in China. It too is at both ends of the supply chain. “When you want to develop a product no-one is interested unless you will place an order with them,” he agreed.

“Or they want to steal the intellectual property.” When the group designed a revolutionary bucket, the British foundry’s casting was “awful.” A Chinese supplier had a product made at a third of the price, the quality four or five times better. Now China, with exchange rates and living costs changing, is becoming less competitive. We’re reviewing our position.”

His firm has developed an electronic device in the cab to operate vehicles more efficiently. The product is popular but supply is a nightmare and prices have doubled. It is currently being sold at a loss.

South Tyneside’s Ford Group making aerospace and other parts, is quite far up the supply chain and, says managing director Chris Ford: “Some customers just go for the price and hammer you down. Some want to work together. I think that’s where the supply chain should go.”

A-Belco at Ashington invests heavily in R&D, Linda Billings says, and uses the R&D credit scheme. But creating jobs in manufacturing seems undervalued politically, she feels. “They want high tech jobs paying perhaps £30,000 a year. They don’t want to assist over manufacturing jobs at minimum wage. Unskilled people need the jobs that we could give.”

Simon Miller questioned that. “We’re measured by jobs created and jobs safeguarded,” he said. “They’re not saying, what’s the salary? They’re wanting full time jobs.”

Linda Billings: “But if you’re trying to access the Let’s Grow Fund you’re up against quality of job. We’ve been told a few times, ‘you can’t access that money.’”

Simon Miller: “My opinion is that’s the way plant managers are managing the plant. Measurement is not the quality of a job but provision of a full time job.”

Is there a tax allowance for businesses wishing to spend £15,000 to £20,000 a year to train an apprentice, it was asked? Tom Vallance replied: “Not from a corporate perspective. Money’s there but on a grant basis.”

One participant complained about “a very complex system” surrounding grants.

Joanne Pratt replied: “I think the key is to target one individual who understands. If they can’t help they might know someone who can. We get enquiries. While we may not always
be able to help directly we may be able to refer them on.”

Deloitte Image02Roger O’Brien: “We’re not very good as a region at signposting help.” Another participant said grants were there. “You have to push. Don’t wait for it to come to you. People do want to help.”

Alan Lloyd affirmed: “It does pay dividends to keep at it. Keep chasing till a door opens.”

Cameron Ross suggested it pays senior executives to network. “The LEPs are doing something and there are moves afoot.”

Alan Lloyd said colleges know who can help about taking on young people. Graeme Parkins pointed out that when the Government talks about 200,000 apprentices, that’s funding going into the education system not to the businesses.

Roger O’Brien, confirming the skills shortage and problem of an ageing workforce, said his university is helping businesses to form introductions. Linda Billings’ company has formed links with Lancaster University to get young engineers. “We’d love to employ more in this area,” she added.

Roger O’Brien said that, even if the university couldn’t meet a particular skill demand,
schemes and transfer partnerships exist with attractive grant funding.

A participant whose company had benefited from a grant said it had definitely helped.

Keith Miller offered to share emails about some problems if that would help.

Marc Hutchinson mentioned how anything up to 80% of revenue will be on material costs which an individual or team is being charged with managing. So their skills, knowledge and behaviour are important to the success of the supply chain and one’s margins. Often the individuals have ended up moved into purchasing from roles in administration, engineering or project management. “How many would know whether the purchasing, procurement or supply chain person is a professionally qualified individual in their organisation?” he asked.
There was no single answer. But Chris Ford had intentionally brought in a qualified person to go through things line by line with suppliers.

Andrew Lloyd supported that policy but suggested: “No matter how good or well qualified a person, if he’s not an expert in the field you’ll never get what you want initially. You have to take time to invest to get the honeymoon right, then build on that relationship. We’ve seen one or two people come through the door and go because the experience has been difficult to take on board.”

Marc Hutchinson: “There’s a cost factor in hiring or developing someone with the right skills. But if they’re responsible for a significant part of your spend saving in your supply chain – in price, schedule or quality – or even just keep hold on inflation that’s going to straighten the bottom line.”

Stephen Learney, who agreed, would happily circulate information about collaborative rather than antagonistic negotiation. During eight years in the USA Andrew Upton found dealing with buyers refreshing. “It’s very much open. You feel part of their company. All the way through it’s very harmonious. There are fresh ways in which we can work and be successful.”

Kevin Gaul, on skills gaps, said his company with many apprentices has transfer partnerships. “Ability to influence the customer makes the whole supply chain management easier. That’s one of our goals.”

His company works with customers on their IP but they keep it. Further down the supply chain the customer owns the IP. “If we sold their IP to a competitor our relationship would not last.”

Roger O’Brien cited Toyota’s policy of putting their IP into the public domain, and a lot of their patents around fuel cells to accelerate the market to mutual benefit. “It’s a brave step.” Stephen Learney believed that had worked well. Graeme Parkins praised the value of trade organisations, such as NOF Energy, for signposting and advice but hadn’t been able to access the rail or nuclear industries.

Marc Hutchinson felt NDI worth exploring. Originally in defence, they are also in surveillance.

Chris Ford said ADS, serving the UK aerospace, defence, security and space industries, doesn’t often get into the North East. So tightly knit is aerospace, it’s hard to get in. “To get an Airbus approval would take years.”

Simon Miller stressed the importance of explaining consequences – for example, how failure of a part might take an oil rig out. “We have supplier days where visitors see products in action they’ve contributed to.  We use the fact we’re supplying British servicemen who have to defend themselves in hostile environments others probably wouldn’t want to step foot into.”

Steve Bell: “We have purchasing people trying to tell us what we want to buy because it suits their make.”

Marc Hutchinson – who is “quite heavily involved with the Chartered Institute of Procurement and Supply” -  advocates procurement and purchasing people appreciative of the business strategy and the market dynamics: expert at gathering intelligence and marketing data, drafting contracts, understanding law, and being professional negotiators – “not just people who want to reduce the price.” He suggests teams where the procurement person can rely on engineering and project colleagues.

Joanne Pratt spoke of catalyst funding. Tees Valley LEP had asked businesses what prevented them from growing? Many SMEs were struggling for funding over new contracts because customers wanted a performance bond or advanced guarantee that they hadn’t the cash for: money needed up front to buy materials was being sucked up by the banks. The LEP secured a pot of cash to help. “We now provide the businesses’ cash for the bank essentially. Once the performance bond has matured or the warranty period has finished, the bank will return the cash to us.” The finance cost makes little difference to gross margins, she added. The scheme now runs in other parts of the North East and Yorkshire.

Andrew Lloyd: “We don’t impose on anybody down the chain but it’s creeping into conversations. A lot of companies we deal with probably would struggle if we imposed performance bonds.” Would his firm be more likely to work with businesses offering a bond? “I don’t think it would swing it. Trust remains a big factor.”

Linda Billings finds it common in construction because of concerns about consequences if something along the way disrupted their project.

Kate Powell: “Its great that we’re been talking about the potential and opportunity to change things and to reshape these traditional supply chain relationships.”

Keith Miller said people in procurement needed to be trained and allowed to make mistakes.

A whole line of people was unnecessary if the purchasing person could talk to someone with the necessary expertise.  

Linda Billings said that where her firm has a supplier providing more than 20% of its purchasing, an acquisition is considered, to add to group profit. Kate Powell told of clients supporting each other in bonding needs. “People are beginning to be more innovative.”

Graeme Parkins spoke of his firm’s “excellent” relations with Cummins, an American corporation that has invested massively in his organisation. “If they’re launching a new product, almost at sketch stage they invite our expertise. Other customers have you very much in the horse trading situation.” His company is setting up a graduate exchange whereby trainees can experience three months in each other’s business.

Chris Ford’s company has set up an academy for traineeships, pre-apprenticeships, in conjunction with South Tyneside College, about 16 students at a time. There are local businesses prepared to take these students on placements period too.

Graeme Parkins: “Something like that at Derwentside would be fantastic.”

Cameron Ross suggested approaching South Tyneside College since colleges don’t just work locally now.

Keith Miller felt such facilities help young people to realise engineering’s full picture.

Andrew Lloyd: “We’ve a road show trying to make it sexy in schools and colleges.”

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Optimism within North East manufacturing

Despite operating in unpredictable and unforgiving times, members of the North East’s manufacturing community are committed to seeking new ways of working with a global supply chain to deliver greater benefits and to minimise risk.

Sat around the table at the recent BQ Live debate with businesses focused on different parts of the supply chain, and many finding themselves at both ends, I was delighted to see the positive attitudes which were, without exception, focused on open and collaborative working in order to reshape traditional supply chain relationships.

Gone are the days of arm’s-length relationships based solely on price and delivery dates. What I found was a desire to focus on ways of working that would ensure quality and enough flexibility to allow for greater innovation.

The talk, more often than not, was focused around the needs of the end customer, working towards a common goal and trusting your suppliers.

The issues that were discussed were very much aligned with those that we experience in conversations with clients and based around the pressures of being part of a large national and international supply chain, namely: cost, deadlines, availability, skills, innovation, and access to finance.

However, despite greater exposure to pressures on cost and quality, it was felt that the best ways to mitigate and minimise risk were to establish closer, more cooperative relationships rather than punitive measures, such as performance bonds or advanced guarantees.

What’s most important in the North East is that these manufacturers are supported in their ambition to build a better, more valuable supply chain. That means creating the right economic and regulatory environment to do so by encouraging future governments to take the necessary steps.

Which is why Deloitte is a member of the All-party Parliamentary Manufacturing Group, who work cross-party bringing together Parliamentarians and manufacturing industry organisations to ensure a broad and deep understanding of the issues and progressing the development of new industrial policy ideas. Supply chains are a key area of focus specifically how we can unlock their potential in areas such as innovation, skills, finance and taxation and trade and investment and we see them as being fundamental to the future sustainable growth of the manufacturing sector.

Kate Powell, North East Manufacturing Lead, Deloitte.
Tel: 0191 202 5591. Email: Katpowell@deloitte.co.uk