The global pump and valve industries have been riding a recent rollercoaster of swings over the past five years. The 2014 drop in oil price drove an oil and gas market decline; followed by a recovery that coincided with a slowdown of lesser proportions in the power segment. Trade wars and protectionism are currently driving incremental challenges, making life difficult for smaller, less flexible companies to succeed on a global scale.
Today’s decisions and success involve more factors than ever before. Technology needs to be best in class to meet new engineering, procurement and construction (EPC) and end user specifications. It also must do so while managing an overall complex total cost of ownership equation for the customer that involves a high degree of variations in local regulations, material sourcing restrictions and government trade tariffs while leveraging the latest technology and expertise to ensure product quality.
Setting up Shop for Success
When life was simple, customers made purchasing decisions on product technology with high quality, along with recognition that they could rely on local expertise for support over the life cycle of the product. Major pump and valve production factories were subsidized by a hub-and-spoke model of support from decades of expansion of service shops and aftermarket centers into remote regions. These shops were set up to provide rapid response product, along with local customer application support for peace of mind. Having a recognized product and brand carried weight, but combining this with a local footprint into the hotbed industrial areas of the world for service and support was a winning combination.
As more and more competitors built on this strategy over the years, and customers’ options expanded, the mark for success was also pushed to include an expanded range of products with an expectation for lower prices. Demand for lowest cost factories pushed pump and valve suppliers to expand into countries with best labor rates. India, China, Mexico and Eastern Europe were all thriving with expansion as the market volume increased in parallel to a push for lower prices of the commoditized products. Supplier capacity was increased, and overall costs were lowered all while the expertise and knowledge was stretched over a wider global range to support the business. Keeping up with this trend became the standard in today’s marketplace.
Building on Regulation Compliance
Just because you once did something does not mean you still can. New regulations are constantly emerging, and compliance awareness has become increasingly difficult to manage as organizations expand further away from a central hub.
Global industry standards, including the American Society of Mechanical Engineers (ASME), that govern segments such as the safety valve business with strict quality control requirements that mandate that suppliers rigorously enforce their process control qualifications throughout their entire network of qualified suppliers. Expanding shops into incremental territories adds compliance oversight to ensure all regulations and certifications are maintained, especially when these regulations may not be core to the region where they are producing.
For example, finding, qualifying and maintaining high quality from a pressure equipment directive (PED) welding supplier in a region outside of Europe can be an onerous task if this is not a common core competency of suppliers within the region.
In addition to global industry standards, emerging local regulations constantly add an incremental level of attention to detail and due diligence to stay on top. Over the last decade, China has increased control requiring several approvals to import product, including China Manufacturing License for Safety Valves, General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) certification for control valves, Northeast Power Systems, Inc. (NEPSI) certification for electronic equipment, explosion proof requirements for mechanical equipment, to name a few. Suppliers can spend hundreds of thousands of dollars achieving certifications, and a magnitude more extending these certifications around the world throughout a global supply chain footprint, if required.
Material Where You Source
Setting up a global supply chain involves a strategic approach to sourcing material. Finding a supplier with a high-quality product and necessary industry certifications, as well as best cost, can be tricky. Typically, most supplier development programs will start off in a region where a critical mass of technical and quality expertise resides, such as China or India where there is a high-volume of valve production. Both countries have some of the best foundries thanks to heavy investment in technology to deliver high quality and improve yields. Additional investments from OEM are pumped into these foundries through pattern development and qualifications to establish a stronghold for the best cost production.
This model is critical to establishing a baseline position to compete in today’s market where price is now a critical decision-making factor. However, many project specifications limit such an approved supply base for materials, and it is common to see these specifications include “No China” or “No India” content. This further complicates the minimum requirements to be a world-class OEM supplier today, adding the need for redundant options to ensure compliance to specifications that are relatively common practice. Once again, this includes keeping up with demands, duplicating capital investment, technical supplier development, quality control and management, and overall diversity of support around the globe.
The Trade War Dilemma
Economy and employment win elections. Challenging these forums introduces actions of government protectionism that provoke tariffs, trade wars and more complications to supply chain simplification. As we see many of the world’s top foundries, machine shops and OEM producers emerging within the Asia economy, we can expect drastic reactions to protect future job security and further trade deficits away from the United States.
Over the past year, tariffs assessed on products produced outside the U.S., i.e., China, have impacted the overall cost to import. Customers expect suppliers to manage these challenges without passing along further price increases as part of normal business operations. Again, another paradox for the pump and valve industry is how to logistically manage and compete with lowest cost on a global scale, while leveraging alternate, cost-competitive suppliers to fulfill the domestic U.S. market needs.
The Impact of Technology
Technology is often spoken about as we push applications to higher temperatures, pressures and even advance predictive algorithms integrated into digital diagnostic solutions. But, technology is emerging more prominently each year when it comes to productivity of advanced manufacturing. The high cost of replicating factories and training skill sets, and the demands for shorter lead time products are each driving the trends for greater manufacturing automation and localized additive manufacturing. Technology can allow us to print components on demand that are not available in inventory in a matter of hours, cutting back the long delays and logistics of overseas sourcing.
As tariff and import challenges continue to burden operations to localize content, and high cost labor coupled with training and learning curves delay expansion, investment in technology to automate must remain on the forefront of capital investment. Manufacturing development is shifting to become the new industry product development that differentiates one supplier’s capability over another.
Expertise Remains the Core
Through all the diversity, complexity and global challenges that exist in the pump and valve marketplace, the core remains in subject matter expertise and domain knowledge to separate the leading companies. Scaling globally and spreading product expertise support around the world are critical for supply chain success and stability. For each new challenge that emerges, core understanding of technical compliance, material and welding knowledge for supplier development, and fundamental product knowledge for configuration management are the factors that separate the leaders in this area from the pack.
Application engineering becomes the essential front-end gatekeeper to interface with our customers and match solutions to their needs. Knowledge of the technical product, as well as a deep understanding of compliance, sourcing capabilities and commercial requirements, are paramount to compile the full scope of detail. Without deep expertise at the front end, mistakes funnel into the supply chain that compromise the ability to supply a high-quality and compliant product. Success depends on depth of knowledge across the board.
Since its inception, the pump and valve industries have been a space where one thing remains constant—change will happen. Business models are constantly evaluated, and yesterday’s global suppliers may realize that they have quickly become niche if they fail to keep up with the emerging trends. New technology is emerging to accelerate manufacturing, and timing for this advanced movement could not be better given all of today’s challenges.
Through good times and bad, the lesson we should take from this industry is that today is always a great time to invest.