Supplier development doesn’t have to be daunting
After reading my columns over time, you may have bought into the principle that reducing actual lead times (manufacturing critical path time, or MCT) should be the primary driver of Lean activities. However, you may also be a little overwhelmed with the idea of planning and managing supplier development for a lean supply chain performance initiative. This is because most original equipment manufacturers (OEMs) have hundreds or even thousands of suppliers and the ability to work with everyone seems unrealistic.
The good news is that there is a simple vendor category analysis process that can significantly reduce the interactions required, making them more manageable.
Three stages of analysis
Interestingly, the first step in a lean supply chain performance initiative takes place outside of the purchasing department. It is the responsibility of the marketing department to define an overall data-based and realistic MCT goal that will give the OEM a competitive advantage in the market. The goal should be to improve customer fill rates and support incremental sales beyond forecasted demand.
The second step is not supply management either. Specifically, operations and distribution should define the MCTs related to their operations so that the supplier’s MCT goals can be put in place, i.e. the three individual MCT segments should add up to the overall MCT goal previously set by marketing.
The third step is to categorize the commodities and strategic suppliers. Commodity suppliers provide standard parts. Because of this, these vendors can easily be replaced and do not require MCT goals or the support of vendor development resources. Strategic suppliers are sources of unique parts and components. Replacing an incumbent strategic supplier would require significant resources and an extended period of time, exposing the customer to increased order fulfillment risk.
Of course, many vendors fall somewhere on the spectrum of core and strategic products, so a decision must be made whether their product is truly strategic.
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Sort even further
My experience is that only 10% to 25% (at most) of all vendors end up in the strategic category.
Strategic suppliers can be further separated and prioritized for supplier development assistance into two strategic sub-categories. The first is for those who only need raw materials – materials such as steel sheets, tubes, rounds, plastic resins, etc. – to produce their parts and/or components. Since, again, commodity lead time can be considered “zero”, Tier 1 suppliers in this subcategory can reduce their product’s overall MCT value stream through activities Basic Lean completely inside their factory walls.
Therefore, this sub-category of strategic suppliers should be given priority in any lean supply chain performance initiative, since the desired MCT results can be delivered in a straightforward manner. I have found that these suppliers represent the bulk of strategic sources within an OEM’s supply chain.
My experience is also that the MCT of most Tier 1 suppliers that are commodity dependent for their raw materials can be reduced to meet a customer’s market flexibility needs with minimal pre-built inventory. The goal of vendor development here should therefore be to help vendors in this sub-category become capable of building on demand with minimal pre-built inventory.
The second strategic supplier subcategory requires multiple levels of their own suppliers to manufacture their products. So, in a lean supply chain performance approach, this raises the question: “How to prioritize supplier development assistance to make the production of a particular component of the value chain more lean?” It is unreasonable to expect an OEM to delve deeper into the second and third tiers to create the necessary agile value stream. And the cumulative MCTs of the global parts value chain are unlikely to meet the “true” OEM delivery time target.
The approach here is to work with Tier 1 suppliers so they have adequate build-on-demand capability, and then give them the responsibility to work with their suppliers to develop their own lean value stream. In doing so, the provider has two main options. They can either provide their own vendor development support or quantify the predefined inventory that their vendors will need to meet varying market demand for the end-use product.
Why would they do the first and not the second? Because the OEM customer can set the criteria by which, over time, they will reduce the price they pay for vendors who depend on this pre-built inventory. In other words, a Tier 1 supplier with multiple sub-tiers can choose to lighten their own supply chain or meet their OEM customers’ needs with waste…and an OEM customer shouldn’t have to pay for waste from a supplier.
If this is the approach Tier 1 chooses to take, there should be a transition period of at least two years, as it is unreasonable to expect a value stream to weaken. overnight.
The MCT value stream reduction approach may seem a little overbearing, but it makes sense to tie an entire value stream to the needs of the end customer, not just the OEM through its own predefined inventory strategy.
Hopefully the tips above make building a successful, lean supply chain more palatable. Of course, there are many factors to deploy such an initiative. These are defined and documented in Part II of my book, “Better Business: Breaking Down the Walls of the Purchasing Silo.”
Paul Ericksen is IndustryWeek’s Supply Chain Advisor. He has 40 years of industry experience, primarily in supply management at two major OEMs.