AGCO, a public company with over $9 billion in revenues – has been extremely nimble and agile in navigating through the COVID-19 pandemic that has devasted so many multinationals’ global supply chains. AGCO manufacturers and distributes agricultural equipment and replacement parts throughout the world with a supply chain that includes 41 manufacturing and assembly locations, 37 distribution facilities, and thousands of suppliers. AGCO’s products are marketed under several well-known brands including Challenger, Fendt, GSI, Massey Ferguson and Valtra.
Agricultural equipment manufacturers have certain advantages that other multinational manufacturers do not. The world needs farmers to continue to plant and harvest crops. As such, companies like AGCO and Deere & Company are what the U.S. calls “federally designated essential critical infrastructure businesses.” That ungainly phrase means these companies are critical and can stay open if they can demonstrate and maintain safe working conditions for their employees.
The other advantage agricultural equipment manufacturers have is that despite the recession, demand for their products remains high. For AGCO, there are plants that have order banks extending many months. And the need for spare parts never goes away.
Behind the scenes there is a remarkable story of agility and resiliency occurring at AGCO. I’ve long admired AGCO’s supply chain risk management and strategic sourcing capabilities. AGCO supply chain executives have spoken on panels I have organized at various supply chain conferences. I reached out to Greg Toornman -Vice President, Global Materials, Logistics, and Demand Planning at AGCO – and heard how the supply chain organization has responded during the crisis.
The China Supply Chain
“The supply side of our global organization talks at least once every week.” Mr. Toornman explained. “Our global leadership team (Global and Regional) and front line reporting employees in each region align on activities, supply escalation, initiative implementation, and performance. We have been doing this for eight years. We talk about what we are hearing from suppliers and customers.” In mid-January, the supply chain organization began to hear about what we now call COVID-19.
The company did what they normally do around operational problems. They did a risk assessment. Their employees in China began talking to them about what was happening and what they might expect to happen. The company explored sourcing options and alternatives. “But things got worse. By the third week of January we put together a task force team for managing during this crisis. That team is still operating.” The task force started having calls with headquarters in Duluth, Georgia twice a week. Plant managers, Materials and Logistics managers, Purchasing, Supplier Quality, and Finance all participate in the sessions. Questions included: “Where are we at? What is our capability to get critical supplies from suppliers outside of China? What is your capability to ship needed components to our plants in Europe? When does it look like things will open up again?”
As China was getting ready to shut down, they began to prepare for when the restrictions would end and China would be authorized to return to work. They assessed whether their plants had enough personal protective equipment (PPE) to operate, and whether their Chinese suppliers had enough PPEs. “We started amassing PPEs in Chicago,” Mr. Toornman explained. The decision was made to distribute PPEs to their critical suppliers on the condition that they would work on AGCO orders before any of their other customers.
The mass buying started in January and has continued through the crisis. Initially, PPEs were purchased in Europe, North America, and South America and then moved to China. Now as China has begun going back to work, they are buying PPEs from China and moving them to the Americas and Europe.
To make sure European plants stayed supplied with components, they focused on producing as many of the critical components as possible. They then shipped them by train across Russia rather than using the longer transit time and less expensive Ocean mode of transport. “Rail was our fall back mode,” Mr. Toornman declared. “We payed 85 percent more than sea freight, but 90 percent less then air freight.” But most importantly, “Sites in Europe felt no impact from the China industrial shutdown.”
AGCO’s Material Planning team in China oversaw the Chinese supplier recovery and global shipping on behalf of AGCO plants across all regions. Partly this was because of time differences and because the AGCO local staff spoke Mandarin. But they also wanted centralized decision making on where the shipments were going. They did not want the different plants fighting each other for supply. Central allocation decisions were made – factories with higher gross margins got a higher allocation – and the China staff enforced those decisions.
Factories started opening in China outside of Wuhan on February 10th, after a 2-week shut down, if the plants could demonstrate and maintain a safe working environment. What is a safe working environment? Worker’s temperature is tested to make sure they don’t have a fever as they enter the factory. Workers line up outside standing at least two meters apart to wait their turn. Place mats on the ground are spaced two meters apart. Everyone in line wears masks. Workers are given a daily allotment of masks and gloves. Workstations were moved to insure the 2-meter spacing requirement. Proper spacing is respected during breaks and at lunch. Chinese authorities have the authority to make spot inspections at any time.
“We were not able to achieve full productivity in the beginning,” Mr. Toornman admitted. “But tach times were adjusted,” workers stepped up, and productivity has surged. The week of February 10th, the company shipped 10 containers out of China rather than the normal 75 per week they ship. By February 24th, the third week back, AGCO was up to its normal 75+ containers per week. By the first week of March, 105 containers were shipped in that week.
European and Americas Supply Chains
The China safety protocols are now in place at all their factories around the world. The lessons learned from the China and resulting pandemic operating procedures are being applied across all regions and facilities.
AGCO has a risk notification and visualization solution from riskmethods. This solution has a graphical view of the AGCO supply chain across multiple supplier tiers. If a supplier’s continued material flow becomes questionable for a wide range of reasons, the way that supplier’s components flow to various factories and nodes in the supply chain is graphically illustrated and the appropriate commodity managers are automatically notified. riskmethods works by continuously monitoring a wide variety of risks, identified based on monitoring hundreds of thousand online and social media sources, and then elevating risks in heat bubble maps.
This tool became a critical success factor during the pandemic. They were able to predict the South Korean shut down two to three days before it occurred and accelerate the impacted suppliers’ shipments out of that nation prior to plant closures. These suppliers’ plants are now operating again.
But their ability to predict when shutdowns would occur improved over time. In forecasting lock downs, they looked at infections per million people (PPM) per country. “Once infections got to 50-60 ppm, then governments begin to take action. By 100 infections PPM, restrictions are in place.” We were able to predict the Italian shut down seven days before it occurred.”
AGCO has 240 suppliers in Italy. 184 are located in the high-risk zone in Northern Italy. The seven working days lead time allowed the company to pull shipments out in front of the lock down. Mr. Toornman continued, “We could do this surgically. We knew a supplier in this postal code had a higher priority than one 50 kilometers to the west.” The shut-down forecast also allowed the company to position extra PPEs at its 3 Italian facilities. Then the company worked with their Italian lawyers to get a special industry designation that allowed them to legally keep working. They got those documents quickly, and then got them in the hands of all employees and suppliers in 24 hours. This allowed key suppliers to keep operating for another two weeks after many of the companies in the affected were shut down.
By March, the company had been impacted by incremental, country by country shutdowns across Europe. But this ability to forecast worsening conditions in nations allowed them to forecast lock downs in Switzerland, Spain, and Sweden ahead of time, and follow the same game plan they had at earlier impacted locations in Italy. They are also better prepared to start operations once governments give them the go ahead. They have prepositioned PPEs in the region, have visibility to where critical parts are, and have teams focused on intelligently expediting the most critical components.
In Brazil, it looked like they were going to have to spend money on expediting key materials into the region from the affected China and European supplier sites. But their sales team worked with customers and said “if you want the tractor you have ordered (every tractor has a unique configuration), it may take a bit longer, but we will fulfill the order. But the order is only being affected by a few components, if you are willing to accept a similar configuration, which is very similar to what you ordered, we will be able meet the original schedule.” Using this methodology and many additional local supply chain initiatives, the company was able to reduce projected air freight costs by 75%.
In North America all their sites are running full out while they are hearing about competitors starting to shut down plants in this region. The AGCO team in North America is utilizing the same innovative tools and approaches that were successfully executed in China, Europe, and South America. AGCO received several notices from suppliers defining shutdown schedules. AGCO was able to provide the supporting documentation to allow the suppliers to continue to produce and ship AGCO product needs as a result of the “essential” industry classification. AGCO was able to provide suppliers with PPE and documentation to sustain product that enabled suppliers to stay open or reopen in order to support AGCO’s global requirements.
Agility Does Not Just Happen
The story of their company’s current agility began back in 2004. In that year, AGCO began a transformation of its sourcing organization. AGCO moved from a fragmented and decentralized procurement to a centralized commodity management structure in order to balance buying synergies with an increased focus on risk management. Implementation of standardized roles and responsibilities, and global policies and procedures, were supported by an extensive change management program. The company formed a School of Purchasing to further develop the capabilities of the organization.
The risks associated with sourcing became part of each category manager’s job; these managers became responsible for supplier risk management, not just savings. For AGCO, a “best cost sourcing strategy” includes multi-sourcing, a certain percentage of components are produced locally and a certain percentage – depending on the brand and its go to market strategy – comes from companies in best cost countries. The percentage of goods sourced locally changes based on exchange rates, tariffs, the volume of goods needed, and other considerations. But the company almost always has domestic sources for the components that go into the agricultural equipment produced in that region. Local companies can respond more quickly when something goes wrong.
Back in 2008, Mr. Toornman said, “we needed to teach buyers that sourcing is about more than costs. We needed a risk factor in there. If something goes wrong, what is the cost to remedy that situation? If quality is bad, how fast can we respond? It is difficult to teach people that. People like to plan as if the glass is full. The glass is never full. It may be half full, or three quarters full, but it is never full.”
During this journey, starting in about 2012, they digitized their sourcing operation. They implemented an e-sourcing platform from Synertrade. This platform automatically captures material costs, overhead rates, labor costs, duties, inventory carrying costs, and packaging costs. These costs determine the total cost of ownership (TCO). “The buyer,” Mr. Toornman explained, “does not need to ask anyone for any of these costs, they can see the full costs in an apples to apples, supplier to supplier, comparison.” The platform also includes an analysis of what the cost of failure is, whether it is low, medium, or high. Higher risk materials pay a penalty that gets reflected in the total cost of ownership.
Material Planners are expected to regularly communicate with suppliers and learn what is happening at the supplier; for example, whether a plant learns a shipment might be delayed beforehand rather than after it has not shipped on time. Mr. Toornman spoke of a “relationship ratio,” that reflects how often Material Planners and their suppliers are talking. “We see a significant difference, if a material planner at a plant must communicate with 35 suppliers versus a material planner working with 55 suppliers.”
Mr. Toornman concluded by saying, “Years ago, we began our materials management transformation. We wanted to build a supply network that would be flexible, adaptable, that was digitized, standardized, and effective. Tools were important. But people and processes are also key. Culture binds everything.” AGCO is a company committed to continuous improvement, so improvements to their sourcing and agility continue to improve.
In this crisis, Mr. Toornman also points out that employee messaging has been critical. “People want to work. Farmers must get seed in ground. Customers want our products across the globe. It is critical.” Within the organization these messages, along with the efforts they were taking to keep workers safe, were used to mitigate fear and motivate people to come to work and work harder through these difficult times.