Manufacturing Supply Chain Woes
Paul S. Lavoie, Dan Kogan, and Malissa Gallini
Welcome to our Manufacturing Supply Chain Woes Show. I am Sarah Scudder, CMO at SourceDay and our show host. This is a show we host the second Tuesday of every single month to talk about the absolute craziness that happens when working in manufacturing and you include supply chain, MRP, messy data, and all the things in manufacturing. I am joined today by Malissa, Dan, and Paul should be hopping on as well. The three of them have extensive manufacturing experience and I’ve asked them to share some of their nightmare stories. Today, our show sponsor for the year is Rapid Ratings. I actually personally worked with their company at another company, big fan of their platform and what they do to give you financial data on the health of your suppliers, which is something that has been particularly important this past couple of years. So Eric, would love to have you do a quick intro and then maybe tell us something fun and innovative that you guys are working on this year. Yeah, absolutely thanks, Sarah, and we’re always happy to sponsor, and we’ve been helping our manufacturing clients really detect weakness and deterioration by being that early warning signal with their critical suppliers. So I’d say this year has been really brutal for bankruptcies with year-to-date really outpacing the last several years, so you definitely don’t want to get caught off guard. I’d say Innovative well you know we’ve been just looking at our data, we actually lent some data to supply chain dive, and we were looking at the Aerospace industry due to a supplier just going bankrupt, Aerocision, and so we were looking at the combination of the short term versus the long-term Financial Health for private companies in the Aerospace and defense industry, and those have been deteriorating steadily since 2020. And the other thing that we noticed was that Yellow Corp, which is a big trucking company, 100-year-old company in the freight industry, filed for bankruptcy yesterday, which we’ve been highlighting that it’s been risky since 2019, so just some observations from recent bankruptcies. So hopefully today you guys will pick up some other good things from our panelists. Awesome thank you, Eric, it looks like maybe a little bit of sunshine behind you today a little bit in lovely Connecticut out right outside New York and you know a nice 80 degrees so hopefully not too hot in Texas where you are well thank you Eric melting away I don’t think then high is 106. so going outside is a little bit rough stay cool thank you all right thanks, Eric, alrighty so excited to have you on and I know you’ve got a really neat unique perspective coming from a different industry than we often have on the show for those of you that are joining us live drop a note in the comments and tell us where in the world you are joining us from and a train wreck or nightmare that you are experiencing this week so if there’s anything that’s top of mind that’s coming up that you want to share drop a note or put a comment for us in the chat all right so time to dive in and I’m going to ask different questions to the panelists today these will hopefully cue up some really insightful stories about nightmares that they’ve lived through and we also do want to highlight some of the positive about what the learning fit takeaways are so, Malissa, we’re going to go ahead and start with you if you could do a super quick intro tell us a little bit about yourself and background sure so I’m Malissa Bellini I’m the vice president of manufacturing I do Boy Chemicals just a little bit about Dubois Chemicals we were founded in 1920 and we’re a leading provider of specialty chemical Solutions globally. So from our manufacturing footprint we have 19 manufacturing plants, most of which through acquisition which I’m sure will ask some questions about ERP nightmares with Acquisitions and cultural changes there of those 19 manufacturing plans we have a footprint in North America 14 of those two in Europe two in Asia and one in Australia I manage eight of those in roughly 200 employees and we distribute industrial chemicals and our single point solution for plants globally so a little bit about me prior to my current role I was the chief of staff to the CEO at Dubois Chemicals prior to that we’ve touched on the Aerospace industry I worked at GE Aviation and transitioned into GE Aviation from the military so I’m a West Point grad served two tours in Afghanistan and transition to work at GE absolutely loved it moved into the private Equity sector which is a nightmare of itself both positively and negatively and much different than a publicly traded environment particularly as I come to comes to the value-added piece of manufacturing so awesome thanks, Malissa Paul you are up next it looks like you and Dan have matching blue wall backgrounds today we’re not in the same room yeah I will but yeah but well coordinated I guess we are so uh well hi Sarah and Malissa and Dan my name is Paul Lavoie I’m Connecticut’s Chief manufacturing officer if that sounds really strange to you it’s because Connecticut is the only state with the chief manufacturing officer that’s part of the executive branch of government so I work for governor Ned Lamont I was appointed by the governor to this role in February of 2022 and I’m the author of Connecticut’s manufacturing strategic plan which includes the is built on the pillars of Workforce growth development and Innovation supply chain resiliency and Industry growth within the state all on a platform of innovation so what everything that we do here in the state of Connecticut is driven from Innovation so we look at Workforce Innovation supply chain Innovation and Innovation as it relates to Industry growth prior to that in order to be the chief manufacturing officer you had to run a manufacturing business in the state of Connecticut so I was the general manager of Kerry manufacturing which is a manufacturer of catches latches and handles our tagline was latch on to us we can handle it so but great to be here and looking forward to sharing some experiences from Connecticut’s manufacturing ecosystem so I see Paul you may be someone Sports nut I see some memorabilia on your what is the Jersey behind you that is David Ortiz’s 2007 World Series jersey signed by David Ortiz so you come near it I’ll kill you.
You’ve got the flashing lights, right, the motion, yeah yeah, exactly, exactly as it is, it is well protected. But no, a rather large Boston Red Sox fan. Yes, I’m not sure I can be on the same podcast. I come from a long line of Yankees fans. I love the Yankees, love the Yankees because I love the rivalry. I absolutely, I go very exciting. I go to Yankee Stadium with my Yankee friends to watch the game. I don’t wear anything that says Red Sox, bro, I’m not that stupid.
All right, well, thanks for coming on today, Paul. Dan, tell us a little bit about your background, sure, sure. Thank you, thanks for having me on and glad to be in good company with the panelists here. If I label myself, I’d call myself a supply chain consultant and an educator. I’ve got about 20 years of experience across industry as a supply chain practitioner also Consulting with a with a software supply chain software company and then also a little bit of work in Academia as well. And most recently I’ve had the opportunity to work with one of my supply chain heroes from Desmet, and together we started the strategy-driven supply chain Institute based on the principles that are espoused in Bram’s books. Very cool, thank you.
All right, Malissa, you mentioned Acquisitions in your introduction, so I think we’ll we’ll take the conversation there to start us off. So what challenges do you have with network and Manufacturing footprint optimization given your company has grown through acquisition? What struggle have we not had is probably the better question, so you know Dubois’ growth strategy is primarily growth to acquisition which in current times is, you know, honestly phenomenal offer our growth. Our CAGR has grown, you know, 15 to 20% year over year and we generally buy, you know, small smaller family-owned companies with that come major cultural challenges just kind of you know taking a mentality that’s been you know in a positive light very entrepreneurial, maybe a little bit cowboy-esque and having them be a little bit more process-oriented, understand a little bit more that bureaucracy and processes actually help promote lean, you know, reduce waste, you know, reduce cost, improve quality, so on, so forth. So you know just from a Dubois profile perspective we have acquired 10 companies in the last two and a half years and we average somewhere between, you know, four to five annually. We and with that functionalizing those groups is interesting and complicated especially when you come from a small business and you’re a you know a tactical buyer as we would Define it purchasing but you actually wear 10 other hats you’re processing invoices you’re the customer service rep and now we’re asking you to be aligned and take on broader responsibilities in a certain Silo right. So that functionalization culturally is a challenge, taking off that kind of entrepreneurial hat and being a little bit more stove-piped to improve our processes across the board but I guess I’ll use a quick example from one of our recent acquisitions culturally just kind of the change in turnover. You know small company very integrated with their CEO who had since left and really just wanted to you know step away from the business and totality and let us absorb it we functionalize probably a year after the acquisition on the manufacturing side. We aligned the plant to myself when that happens and you can’t see finances costs ERP system is completely different than what we have internally mismanaged across the board you end up kind of pushing aside a couple of the cobwebs and slowly but surely the leadership team turns over so not but a month after we functionalized our plant manager resigned reporting to me and moved on and we took the decision to kind of promote from within someone who probably from a skill set perspective was not completely ready for the role but we thought we would you know build our Workforce capability internally promote him early and unfortunately he was politely set up for failure with the cultural chaos at that site so we quickly swept in with some of our system experts particularly the ERP because their inventory control was a total nightmare there nothing was set up properly in the ERP system purchasing you know material consumption on each of the work orders completely out of whack we couldn’t find material every day to even make a batch in our batch operations and and I would say we probably spent 50 percent of our time trying to find raw material than make it into finished goods which is a disaster waiting to happen so on the positive note we very quickly realigned kind of pull together the whole leadership team from the sales organization myself our customer service leader our R director and we all kind of swooped in and did an all hands kind of uplift the uplift the culture make sure we were one Dubois and understood that we are all a partnership and there was alignment across the leadership teams and we intentionally supplanted one of my other plant managers who was very system Savvy in our current ERP system which is d365 to really get into the guts and realign their processes to kind of right the ship on inventory control and more selfishly than not I I would like for them to get on our ERP system faster than slower so we can continue to kind of unravel those cobwebs so I guess born out of cultural chaos a lot of learning and just change management on the leadership side and then more importantly getting some strong leadership you know in the plant that can weather that cultural change and support any type of the growth leaders that we’ve put our developing leaders in those roles is extremely important and I will not harp I can’t harp enough on ERP systems driving disaster and transactions on every end room to tomb in the supply chain and how important it is for all of my plant managers to get as much system Savvy as they can to be dangerous in their roles so does that answer your question Sarah yeah so it I’m I’m smiling and my heart is breaking at the same time so I host another show called women in ERP the first Tuesday of every month so we bring women on to share their stories and experiences and what you said I feel like comes up on every single conversation that we have with people talking about the challenge with team members not having enough knowledge and information and really causing challenges with planning and forecasting when you don’t know how to use the system and you don’t have the accurate data it just can cause a disaster across the company and I mean the unfortunate truth of you know having a small small business that hasn’t invested in the technology needed to be a large business a lot of folks you know even just teaching somebody what MRP stands for and the importance of it from you know wound to tomb it’s a challenge and in and of itself let alone getting them to use it and understand what the signals are telling them to do right so we’ve been investing heavily in educating our Workforce particularly at the leadership level all the way down to the transactors what it means what it’s telling you why it’s telling you that and what we’re doing on system implementation.
So, Paul, I think you are our very first guest across the show’s almost been running three near three years now that has actually someone who works for the government and has the role that you do. So, really, really interesting. So, I’d like to ask you how state government helps companies with supply chain issues in manufacturing, and again this may be very unique to your state, but I think it’s important for us to talk about. Yeah, sure, so, my role, in my role as the chief manufacturing officer, my responsibility is to go out and understand the challenges that are faced within the manufacturing sector, and then to work with the resources that we already have within the state to be able to handle those. So, for example, every state has a MEP, which is a manufacturing extension partnership. In Connecticut, it’s called Concepts. So, CONNSTEP is my supply chain organization. So, I look through programs, and I also have access to funding. Our legislature funds every budget year the Manufacturing Innovation Fund, of which I’m the board chair, and that allows me to allocate funds to projects that will help the supply chain become more resilient.
So, when we look at things like how do we connect the supply chain together, how do we work with supply chain companies to shorten their supply chains? You know, we have a very large, we have three very large, very, very large manufacturers here in Connecticut, Pratt & Whitney, Sikorsky, and Electric Boat, right? We make jet engines, we make copters, and we make submarines. And so, with all of that supply chain that exists in the state as well, there are lots of opportunities for us to be able to work with the suppliers of those companies to make those suppliers, those medium-sized suppliers, more resilient. So, I spend a lot of time with those large manufacturers, saying, “Tell me where you’re going, so that I can then put programs in place that will allow the supply chain to go there with you.” So, I work hand in glove with them, and we provide Grant programs, and we have initiatives, we have an Industry 4.0 initiative that we’re working on right now, we have a digital transformation initiative, an additive manufacturing initiative that are all designed around small to medium manufacturers, to allow them to not compete, but to support our large manufacturers and large OEMs within the state, and even outside of the state.
So, you know, my job is to really work hand in glove, to make sure that the resources are being applied, and that we can grow the manufacturing sector. I do four things. I do Vision, Strategy, Leadership, and Funding. I don’t do execution. Execution goes to non-profits, because a non-profit can hire somebody in three days. Takes me a long time. Let’s put it that way. I work for government, takes me a long time to do that, and the burden rate in government is not where you want it to be. So, I consider that to be how does government turn three into 300, right? I have a department of three, but I can work with non-profit organizations that have 300 employees. I can fund them, and we can drive impact, and that’s my mantra. It has to be strategically aligned to drive impact at scale. So, how can we do things that are scalable? When it comes to supply chain, we’re looking at things like cybersecurity and CMMC, and how do we help supply chain companies be able to make sure that they’re protecting their data in such a way that large defense OEMs are going to require them to do that.
You know, we look at supply chain resiliency around connecting suppliers together through a common database and a common platform, which we use the CONNSTEP platform, which is in multiple States as well, and supporting the supply chain. So, it’s also workforce development issues and driving innovation as well within the ecosystem. You know, one of the big ahas in Connecticut, and it really should be nationally and quite frankly internationally, is that we’re never solving the workforce challenge with people. There’s just not enough people. I mean, it’s forecasted in 2030 that manufacturers will have two million. There’ll be a two million workforce shortage. There’ll be two million open jobs by 2030, which will lead to a trillion dollars in lost GDP in the U.S. So, we have to look at how do we drive innovation to do the work for workers we can’t find, right? How do we use industrial automation? And so, that’s what I do from a government perspective, is to think of those big issues and then to go out and to put programs together and to fund those programs so that we can drive that kind of innovation and to drive that supply chain resiliency through the supply chain in Connecticut.
And then part of what I do is we get federal grants and federal funding to work with our large OEMs, and my vision on that is to build a system within Connecticut that the OEMs can replicate across the country. So, we’re looking at digital transformation and model-based definition, and we’re creating centers of excellence in Connecticut here through federal funding that an Electric Boat, who has suppliers in 47 states, can then take that and replicate that in those 46 other states where they have suppliers. And I want to be able to enable them to have all the tools that they need and the resources that they need. So, when Connecticut gets done, I step out as the project manager, they step in, they can look at doing it systemically. So, that’s the role that I play in state government as the chief manufacturing officer, as it relates to supporting and growing manufacturing here in Connecticut. I’ll be curious to do a check-in in 10 years from now and see how many robots are in the warehouse. There needs to be a lot of them, robots making boxes. So, Dave, you are working with organizations in manufacturing and probably seeing levels in all aspects of the supply chain. So, I’d like to have you share the biggest supply chain-related pain points or issues you’re noticing that your clients are experiencing this year in 2023, because things have changed a lot now that we’re kind of in a post-era state. Yeah, it’s interesting, Sarah. I mean, yeah, everybody, we’ve beat COVID as a dead horse, so we everybody knows this story. But I think if you look post-COVID, you would expect things should be getting better, right? And it’ll be interesting to hear what Paul and Malissa think about this. They can either validate this or not. But we look at indexes like the global supply chain pressure index, and we start to see that, yeah, supply-side pressure is abating in many industries, not all of them, but it’s really just on the supply side. And now that backlog of material, labor, and investment that happened during COVID is finally catching up at the same time that we’re kind of seeing a decline in demand, right? And so we’re really shifting very suddenly from a supply-constrained environment to what looks like it’s going to be a demand-constrained environment. I guess you know, we can think about the analogy of a car, right? And nobody likes to step on the accelerator and then step on the brake suddenly, but I take the view of supply chain as a thermostat, right? We’ve got the control limits we’re supposed to be keeping the temperature very stable, but yeah, we’re kind of shifting from summer to winter without a fall in between right now. So, it’s still to be determined. We’ll have to see what the future holds, but definitely some changes in the wind.
Paul, from your perspective, what are you seeing in regards to supply chain issues for the organizations that you’re working with this year? You know, we’ve seen some lessening of supply chain challenges in that we’re seeing less challenges with getting parts and getting components and things like that. There’s still some that exist, but what we’re really starting to see a lot of is we’re really starting to see a lot of manufacturers who are coming to the conclusion that they really need to shorten their supply chain and they really need to look at reshoring manufacturing that they may have sent overseas and bringing that back in. They’re looking a lot more at vertical integration strategies and saying, “You know, I no longer want to depend on the supply chain for my needs,” and kind of going through COVID, and I want to bring more things in-house.
And we’re starting to see more trends towards, you know, near-shoring or friendly-shoring and looking at ways that we can bring things, you know, like, for example, we’re very close here in Connecticut to Canada, and so we’ve had the Canada General Consul come here and talk about how we can increase trade with Canada and looking at ways that we can leverage what Canada might have that Connecticut would need. We’re also looking at taking a look in the defense sector and also I’m also the state lead for offshore wind. So, we’re taking a look in the renewable energy sector about regional approaches to supply chain, and especially in offshore wind, and saying, “Listen, offshore wind, you know, it’s much bigger than all of us.” And so, we’re really taking a look at a regional consortium with Massachusetts and Rhode Island and Maine and New Hampshire and Vermont, and basically saying, “Let’s take a look at a regional supply chain and not necessarily a state-only supply chain,” and understand that that’s very, very, very different thinking.
You know, across most states are, you know, remember my state within a state, they generally fight for economic development and other things, you know, “Why did you send this company to my town and not this town?” And now we’re thinking about talking about that. So, I think going through what we went through with COVID is really taking manufacturers, taking a step back and saying, “Is manufacturers just take a step back and say, listen, I can’t live like that again, and I really want to shorten my supply chain, and I really want to look at vertical integration.” And seeing a lot of activity around that and a lot of activity around reshoring. And then when we look at very large initiatives that we deal with at states, they’re starting to be able to look at that and say, “We ought to start thinking more regionally and not think just within our own state, because we can’t necessarily be everything to everything’s everybody.” So, we’re seeing and along with that, I mean, you know, that comes a whole different set of issues and concerns. I mean, if you’ve gone through acquisitions and tried to integrate those acquisitions, restore product lines and stand up new product lines when you thought China was making things to your specifications and they weren’t, and then you start making them to your specifications and customers are telling you you’re not making the parts right, and you’re saying, “How can I not make my parts right?” You know, so, you kind of go through some of those problems.
So, that’s, I think that’s those are the things that we’re starting to see, that we’re seeing, we’re right in the middle of it actually, in seeing that here with, again, going back to really looking from a cost driver, but also, you know, lead time is still the new currency, right? Cost is no longer the currency, and as long as lead time is the currency, reshoring and bringing in supply chains closer is still going to make sense. But I’ll tell you that I tell manufacturers this all the time, the pendulum is going to swing back, and if you’re not looking at driving costs out of your business today, right? Three years from now, things are going back to China, because, you know, people are going to start to look and say, “Hey, you know what? I can get those kinds of lead times from China. I can get a better cost,” or, you know, pick Vietnam or pick another, you know, any area, and those things will start to go away. So, I think we’re in this unique opportunity where we can strengthen, strengthen USA manufacturing, but we have to be driving costs out of there. And that’s where, again, innovation and automation come back into play as well. So, I think those are some of the factors that we’re starting to see here in the states, certainly in Connecticut and regionally as well.
So, Malissa, pivoting back to our ERP conversation, which you mentioned in the beginning as well, one of the things that can be a challenge when you’re going through acquisition is all these different ERPs that then become acquired, and you have three or four or five different systems running and trying to centralize. And I know that your company transitioned to a new ERP system last year, and now you’re going to be involved with integrating five acquired companies into this new ERP system this year. So, what are some of the challenges that you’ve had in doing this?
A little bit of background here: last year in July, we went live with the full D365 finance and operations module of our ERP. And though everyone wants an off-the-shelf product and wants to avoid customization, we were one of the first chemical companies, chemical batch companies, that utilize D365 to migrate from a sunsetting platform, AX. So unfortunately, we customized probably more than we bargained for, and with that, of course, comes a lot of depth that’s needed in the supply in the ITP, so the supply chain partnership to manage and those batch jobs, make sure they’re running, make sure they’re healthy, and regulate that across the network.
So just getting the whole network stabilized after we went live with our legacy sites was a challenge in and of itself. I mean, our procurement module for three weeks, we couldn’t buy raw materials. And then suddenly, our MRP was sending all the wrong signals on the fourth week, and we bloated our inventory, which compounded all of the struggles that we were still trying to claw back from a cash perspective, you know, from COVID. And for those who are unaware, the chemical industry was bombarded with also the Texas freeze, which locked up a lot of our base chemicals, you know, in the Texas-Louisiana corridor, forced us to make significant changes in how we procure, multiple suppliers, so on, so forth.
So, compounding all of that, just trying to stabilize the legacy base was a challenge. But on top of that, we have an integration team which is made up of subject matter experts from each of the different functions: customer service, finance, invoicing, all of the transactions related to cost. And then we have a group that manages our warehouse module and our manufacturing module. And this year is going to be an extremely aggressive year because we put on the back burner, due to all of the instability in the supply chain during COVID, you know, five-plus integrations. And I don’t think we’ve ever done more than two integrations in one year.
Not but a month and a half ago, one of my largest sites, which was acquired about two years ago, that was very deep-rooted in a previous ERP system called The Vision, had really robust processes, went live on this new ERP system. And I’m sure this will be common that you’ve heard before, Sarah, but all I hear every day from my plant team is, “Too many clicks, too many clicks to do the same thing I did in one or two data.” In the sense of, you know, just visualizations to be able to do your day-to-day job is in a very immature state because we’re still rebuilding that core data warehouse and migrating all that into visualizations, just to see all of the fields that you need to manage an open order report, all of the fields that you would need to see to, you know, procure raw materials, to release work orders to the shop floor, so on, so forth.
So, we’re in this kind of stage of like, “Okay, we implemented the core ERP system, but we really have to go back to our starting implementation and say, what do we want to do better to help every integration after this and to also help our base plants who are struggling through inventory control modules and just managing cycle count programs which was completely not, you know, totally set up the way we wanted it to item movements from the floor to the kettle, which is where we manufacture, to pack-out consumption, everything that touches each other and that integration migration kind of needs a revamp and a phase two.
So, we’re trying to balance our priorities between, do we continue to plow through our strategy, or do we go back and reset and say, if we did an after-action review, what would we do better? What modules would we fix? What integrations would we fix? And then, what do we need from a resourcing strategy on the IT and the operation side? So, we have good partners who have the subject matter expertise in the system and have lived it, right? Because a lot of functions have lifted, but our integration team has just deployed it. So, a lot of that is falling on a lot of the core functions, including myself, which I really never thought I’d get that deep into the guts of our code between our warehouse module, you know, in our manufacturing module.
But it’s just really the state of where we are in our infancy and trying to completely determine what we want to be and how do we want the system to support us doing that without over-customizing and creating this resource constraint for us in totality. We have Kathy in the audience who says data integrity is so important, 100%. One of the things we’ve invested in heavily is extending our planning function and charging them with data quality management for that exact reason. I think what we’ve found is just inexperience and immaturity and poor training training modules and set up to reference and SOPs on how to even set up, you know, item coverage on which plants produce, which plants transfer, which plants buy, right?
Some of just that monitoring, you know, becomes kind of boring and tedious but could completely lock up, you know, a customer who’s expecting a sales order have been delivered yesterday, and the plant hasn’t even seen the demand to be able to produce, right? So, we’ve invested for that exact reason and managing our data quality through our planning team, so that we can be a little bit more robust and proactive instead of reactive to some of these issues.
So, Dan, when we were prepping for the call today, you said something that really stood out to me, so I want to ask you to expand on it here. You said, “Supply chain is often disconnected from strategy.” I’d like to have you explain what that means and maybe a couple nightmare stories that you’ve actually lived through or you’ve worked with on with your clients.
Yeah, sure. I think there’s a few stories here. I see my co-panelists smiling too, but I mean, the most simple way to put it, the bottom line is that different strategies require different supply chains. And I think cognitively at the executive level, we know that, but unless there’s a strong supply chain presence in the boardroom, it can get neglected and then misalignment between strategy, meaning product sales, and supply chain can start to get misaligned. And I think one universal example, it’s not even going to be a specific client here, it’s probably everybody, but one classic example is going to be skew proliferation. So, in general, we’re really good at adding products to our portfolio, right? But not so good at going back and pruning them. We tend to add a lot more than we get rid of. I mean, engineering can always design another variation with different features, sales easily sees the opportunity for more market share capture, but at that point in the process, supply chain is rarely consulted, if they’re ever consulted about product portfolio.
But in most industries, there’s going to be supply chain consequences to this, right? So, more products with the same manufacturing assets, that’s going to lead to more production changeovers, which is going to have an increased cost, right? So, we have some misalignment there. More products is going to lead to more slotting spaces in the warehouse, longer picking tours, so you see an increased cost there. And then more SKUs, you’re going to have more inventory to stock, which is going to tie up more cash. And so, you know, this happens and we don’t prune our product portfolio, and over time, we start to see it develop this long tail of slow-moving inventory, and it’s like the Pareto rule on steroids. It’s not uncommon to see that, you know, 5 percent of the products make up 50 percent of the company’s profit, and vice versa, 50 percent of the products make up just 5 percent of the profit.
And I think there are probably products if people are looking closely enough that are actually detracting from profit, right? And my advice there is stop selling those as soon as possible. But yeah, if we’re just using conventional accounting methods and maybe not even providing any analysis at all, you might not even realize that you have these products that have a negative margin associated with them. And I do want to counter this and say that, you know, a broader product portfolio, that’s a legitimate strategy, but it does have to be conscious. And when I say conscious, it means that everybody has to be aligned on it: product development, sales, and supply chain.
And maybe just like the classic example that everybody can relate to, no matter what industry is, is grocery, right? Because we all shop for groceries, so I kind of now have a feeling for where each one of you are geographically located, so I’m gonna have some fun with this. But I’m gonna say that, Malissa, you’re definitely at Kroger, right? Okay, Paul, I don’t know, Wegmans, maybe something like that.
Stop and Shop. Stop and Shop, okay. And Sarah, look, I don’t know if you’re HEB, maybe Sprouts, I don’t know, something like that. That’s the feeling that I’m getting. HEB, Sprouts, and Trader Joe’s, girlfriend, they’re all within like half a mile, so I can do my route.
All right, well, I’m gonna keep it simple. I’m gonna take Trader Joe’s and Sprouts off the table for now and just focus on again just a just an example here. So the Kroger, Wegmans, HEB, they all serve as a One-Stop shop, right? You go there, you can get your canned goods, you can get your fresh produce, you can get your pet food, you can get greeting cards, all that stuff, right? And there’s a cost to that, right? They have a larger physical footprint to house all the inventory in the store. They have larger distribution centers. They tie up more cash in their broader assortment of inventory. But you may not realize it, but they’re charging a premium for their products. We don’t really think about it because grocery is a traditionally razor-thin margin industry.
But when you start to look at the counterexample of this, like an Aldi or a Lidl or another discount grocer, that’s when you really see it. And I’ll say that somebody like an Aldi, their competitive advantage is their smaller assortment. That is a conscious strategy for them. It helps them keep their footprints small. They have faster inventory turns and better cash flow, and smaller physical format stores as well. So, they save on capex. So, it’s again just different strategies for different supply chains. So really, yes, as Paul was saying, the pendulum is going to swing back and forth with cost versus lead times, but also it’s kind of in the DNA of the company and what your strategy needs to be that needs to be the guiding metric there.
I love Trader Joe’s, I’m obsessed. That’s all I’m gonna say. All right, so Paul, back to you. I want to ask you a question now about your experience when you were running, I think you said you were the GM of Kerry Manufacturing, when you were running their plant. So one of the big projects that you worked on when you were there was you re-shored an entire product catalog, which is a massive project. Maybe walk us through why and how, and then what are a couple of the key lessons that you learned from this?
Sure, so the reason why we re-shored was really we found we were able to find equipment that made it economically viable for us to do it. So a lot of what we do is labor intensive, and we were able to find equipment that would do multi-orders of operation in our… So, basically, it’s metal stamping, metal bending, laser cutting, you know, making, you know, thinking, making latches, catches, and handles all the way from, you know, a latch that would go on to a first aid kit to a handle that would go on a black box of a Boeing aircraft, right? So some complex handles, some simple handles, and that. And so, there are also multiple components into our parts and things, so we were able to find equipment that will do multi-orders of operations and made it really economically viable for us to, to bring the, the manufacturing back. We had sent it in 2001 to China because we just couldn’t competitively manufacture.
So, when you’re standing up an entire manufacturing line again, I, I alluded, foreshadowed our biggest challenge, and our biggest challenge was it was our catalog. They were our prints, but they were manufactured in China. And so, when they were manufacturing in China, our customers had been using them for over 20 years. And the biggest mistake that we made was we didn’t reverse engineer our own parts. What we basically did is we said, “It’s our catalog. Here’s our catalog. Here’s our catalog part,” and we started to manufacture to the catalog. Well, China wasn’t manufacturing to the catalog, and there were, you know, and these are parts that have, if they have subtle differences, if a hole is off, you know, 0.050, you know, it’s, it’s not going to work, right? And so, we were, you know, we were shipping parts to our customers, and our customers were saying, “Your parts don’t work.” So, they used to work, now they don’t work. What’d you do different? We’re like, “Well, we now make them.” Like, “Well, how’d you screw that up?”
So, yeah, that’s the bad news. The good news is we could fix it quickly. So, you know, we were, we were, and we had situations where, where on, you know, Monday, they told us the parts didn’t work. They shipped them overnight to us on Tuesday. You know, our engineering team got on them. We, we produced samples on Tuesday, sent them to them. They said the samples worked. We went into production and we sent full production load to them on Friday. You know, if that was a China issue, if we were still manufacturing in China, that wouldn’t have certainly happened. And then the other, you know, the other, the other really challenge to that was we had had another catalog that we were manufacturing, always manufactured here in the U.S.
So, when you think of a shop floor now that has a very, a legacy product line with legacy machines and, quite frankly, legacy people, so people that have been doing this for years, and then you stand up a brand-new production line with brand-new equipment and brand-new people, and you put them side by side, now all of a sudden, you’re thinking of, you’re dealing with other, other issues that, and one was, one was experience and one was, you know, so the average age on one was 50, 55-plus, and the average age on the other was 25 and less in the, in the new production line. So, we were balancing that, a little bit of, of, you know, bringing that those folks in and, and blending those cultures together and, and blending the people together as well. And, and, you know, we, as we said, we made every mistake in the book, so, but, but it was, this was 2016.
So, this was well before anything had happened with COVID, and I will tell you that it was one of the smartest decisions that were made because there were customers that had not bought parts from Kerry Manufacturing in 20 years calling, saying, “Do you still make this part?” And we would say, “Sure, it’s in our catalog. It’s our part, we make it.” And they said, “What’s the lead time?” And we’d tell them six weeks. They’d go, “Okay, that’s great.” And they’d say, “What’s the price?” And then, you know, when they finish with that kind of conversation because it wasn’t what they were being quoted in China, you know, again, lead time was king. So, we were now making, you know, we had the ability to make those parts and to fulfill their orders and to be able to grow the business. And so, the business is now growing significantly because of the new-old customers becoming new customers again because of lead time. And that’s where, you know, again, that’s where making sure you’re driving costs out of your business really has to come into play.
Paul, you’re doing them another service too, which is you’re taking balance, you’re taking inventory off of their balance sheet when you can supply them on a shorter lead time. If you’re invoicing at the time of shipping, you’re taking inventory off their balance sheet. And if you’re able to provide a more reliable lead time than when it was coming from China, then you’re also helping them reduce their safety stock because of variability as well. So, it’s really a service to them and they should be willing to pay the extra premium.
Yeah, well, and as we say, you know, there’s, you know, there’s three things, right? There’s lead time, there’s quality, and there’s price. You can have two out of three, right? Yeah, right. So, you know, if you want great quality and short lead times, you’re not going to get the best price, you know? And so, and if you want the best price, you’re going to sacrifice one of the other two. And, you know, that’s the conversation we’d have. And they’re, you know, we had quite a few customers who were basically saying, “I’m willing to recognize the fact that because we’re getting better quality and a better lead time, and you’re right, Dan, we would hold product and ship, you know, we would hold the inventory and ship on demand, and so they were only, and, you know, we’re only invoicing when it shipped, so they were getting just-in-time, which, you know, as you know, through COVID, just-in-time went right out the window. It went, you know, what really happened was if you got it, I’m buying it, is really where it is now, and I’m putting it on my shelf, which really had the cash flow issues. So, that was really another reason for re-shoring.
Yeah, I think what we see on the B2C side with next-day delivery and Amazon Prime and stuff, that starts to spill over into our mentality for B2B as well. But on the B2B side, we have an opportunity to tell our customers, “Look, we’re helping you with the cash flow situation, so you’re going to charge a little extra price on this as well, but sometimes you have to help them see that.”
Yeah, and when you’re, you know, and when you’re a catalog company, to some degree, you’re expected to be in stock, and we were 60 in stock, and that was my mantra. I would, I, I said this all the time. We live in an Amazon society, right? Everybody expects that when they call in, they’re going to get their parts, you know, and they’re, and they don’t think, and this was pre-COVID, they weren’t necessarily thinking of lead time, and they were thinking that they needed it right away. And so, which allowed, you know, we had to carry more inventory as well. And so, you know, it’s that it’s that really that delicate balance, but now, you know, now post-COVID, through COVID and post-COVID, it really is about quicker delivery, better quality, and, again, price not being as sensitive as it was. But, again, my fear is that, you know, that’s, that pendulum is going to swing back again, and driving costs and staying, and staying price competitive should always be a strategy, you know, should always be a strategy for any manufacturer, should be, how do I continue to grow margins and drive cost out of the business every single day. So, Monica says, re-shoring thoughts brings to mind the 2019 Netflix show “American Factory,” which, Monica, I have not seen, so I have to, it is quite interesting.
I would say probably if Paul watched it, it’s probably had some similar woes, especially the side-by-side experience, on-the-job training, so yeah, yeah. There was a book on re-shoring that my head engineer, who’s now the general manager, replaced me. He said he goes, “I read the book,” he goes, “and I felt like we wrote it.” He’s like, “I was living it all over again.” So, yeah.
So, Malissa, you and I both are in Texas. I moved to Austin about two years ago, so I was not here for all of the freeze and power outage craziness. But you work in the Specialty Chemicals industry, and so not only did you and your team have to battle COVID, but a lot of your raw materials were locked up during the Texas chemical freeze. How did you manage to weather the storm and continue to maintain raw material safety stock for your batch production processes during this time?
Well, first, to kind of tie to this whole conversation of what do you want to be as a business and aligning your commercial strategy with your supply chain strategy, I literally just sent an email this past week of like, “What do we want to be? Do we want to be carrying three sigmas of safety stock and delivering our make-to-order single SKUs to single customers in five days?” Well, that’s going to cost us a carrying cost on the raw material side, right? In exchange for carrying the finished goods on their behalf, right? On the flip side, you know, if we want to lean out our cash position, we want to lean out of raw materials, we have to be okay with accepting longer lead times because I’m not at two sigmas gonna have my raw materials available 99% of the time to deliver that one cleaner that goes to Anheuser-Busch three times a year, right? So that’s just not going to happen in that circumstance.
So, what ended up happening with us and most of Specialty Chemicals and chemical manufacturers, you know, my husband works for Procter & Gamble and chemical sourcing for a significant amount of time, so unfortunately, I bring my work home pretty regularly, but I’d say I learned from him a lot. He’s a chemist by trade, and I am not, so, you know, a lot of chemical manufacturers had to go take chances on second-source distributors, right? A lot of people weeded out distributors, you know, to go to lower-cost producers and take on the larger MOQs to deliver. We ended up kind of shifting that strategy and going back to distributors so that we could just have a second source or a third source or a second producer that we didn’t normally, you know, want to support because they had lower quality in the market. And downstream, I mean, we had significant quality issues on certain products because that’s kind of where we ended up, right? I think if we looked at our system today before the Texas freeze, we would have maybe one bill of materials, two bill of materials max for every product, one alternate. There are some, you know, high-running products. One of our largest customers is, you know, a car wash, right? And I have five alternative formulas in there with five different raw material combinations just to have weathered that storm. And now we’re trying to call back out of that and, you know, whether cost and try to reduce cost internally, as Paul kind of referenced, and try to clean some of that up so that we don’t have all of that chaos in our system and across all of our raw materials. It also created a significant amount of excess inventory for us and trying to manage the alternates versus the primaries across the board.
So, I think, you know, now that the chemical market has somewhat stabilized, other than a recent Dow explosion in a Louisiana plant not too long ago, most of what we used to live through, you know, in early 2021, every week it was this supplier on force majeure, that supplier on force majeure, who’s your alternate supplier? You know, every location and just trying to handle that with our customers while also increasing prices was a challenge for the commercial team and trying to be aligned on what can we do, what capacity do we have with the constraints that we have was a challenge. But we had to kind of take chances, particularly in partnership between our procurement team and our R&D team, as well as, honestly, move production around the network. I had oil plants producing cleaners that they had never produced before just because they could get the material faster in the Chicago corridor than I could in Ohio, right? And there was capability and supply there.
Being flexible and having enough capability and capacity across the supply chain, even though we try to optimize our network, really worked to our advantage during that timeframe. Because we not only dual-source suppliers, created multiple bills of material, but we also moved manufacturing across our plants that had capacity, even if that wasn’t their, you know, skill set or core or book of business, you know, from the get-go. And unfortunately, that added a little to the cost, which now we’re trying to, you know, extensively call back from. And I think we’ve been, you know, pretty successful with that and kind of trying to mitigate some of our working capital challenges through that time as well.
Dan or Paul, either of you lived through a weather-related disaster?
I had a supplier, I had a client that was basically in the same situation that Malissa just described. And it’s just so interesting, right? Okay, just to make it, it’s probably the simplest, on the surface, the simplest manufacturing business. So, it’s uh PVC extrusion, right? So, basically, PVC compound comes in one side of the building, it gets extruded into a shape or a form, and then it comes out the other side of the building ready to ship, right? So, it’s not that complicated, right? But yeah, they were experiencing some shortages due to the Texas freeze. And basically, their lead times from this on the supply side, okay, doubled, quadrupled, maybe longer. Went from two to three weeks to, you know, two to three months, right? And meanwhile, their demand, they’re in a building materials industry, so during COVID, their demand was actually increasing dramatically. And so, they are quoting orders, at first of all, they’re contractually linked to a commodity index for PVC, right? So, their pricing is linked to that and invoiced to that index. It sounds smart, right? But they’re locking in that price at the time that they book the order, but the lead times to get the raw materials are again, have gone from two to three weeks to two to three months. So, by the time they actually get the raw material to fulfill the order, they’re eating five to ten percent of that margin because the commodity index, the commodity prices had increased so much month over month in that time. So, I don’t know any company that can sustain a five to ten percent margin compression for an extended period of time, but it was just the situation that they found themselves in. How ironic because that was actually one of the pieces of our customer base. We provide oils to support that manufacturing process and probably some of our larger customers screaming delivery times and lead time for that exact reason, right? So, when you described it, it triggered me to thinking about that case.
But yeah, anything from your experience?
Nothing is as exciting as that, other than, you know, a storm that kind of went through our manufacturing plant and there were four ways to go home and three of them were blocked. And our facility was down for five days, literally no power for five days, which meant no production for five days. And then a recovery plan out of that. And I think, as you all know, when you have a sudden electrical loss of electricity throughout the plant, then, you know, when you bring when you bring all your machines back online, there are all kinds of little surprises of, you know, control boards that are burnt out and other things that you don’t anticipate. But, you know, those are all, you know, I think those are all, you know, just kind of things that happened, you know, based on natural disasters. I did fly into Texas right after the freeze for a wedding and couldn’t understand what the big deal was. Like, I’m from Connecticut. What’s wrong with you people? You don’t even, you don’t even plow your streets. I don’t know why you don’t do that. So anyway, the world seems to shut down here when there’s any ice or snow on the road.
Yeah, yeah. Well, I want to thank Malissa, Paul, and Dan for joining today. If you are not connected with these folks, I would recommend following them on LinkedIn, reaching out if you’d like to continue the conversation. Our Tales of Manufacturing Supply Chain Woes will be back next month with another expert group of manufacturing mavens, is what I should call you, that have a lot of experience in the supply chain and are going to continue to share their trainwreck stories with us.