Are Your Suppliers Putting You At Risk of Shutting Your Customers Down? Jim Price, VP, Service Delivery & Optimization

Transcription

1 Are Your Suppliers Putting You At Risk of Shutting Your Customers Down? Jim Price, VP, Service Delivery & Optimization

2 Are Your Suppliers Putting You At Risk of Shutting Your Customers Down? Jim Price, VP, Service Delivery & Optimization Executive Summary With the resurgence of the manufacturing sector in general and the automotive industry in particular, it is even more essential than ever to manage capacity planning. This white paper looks at supply chain realities, capacity supply and demand equations and negotiation tactics to arrive at the most efficient and agreed upon production capacity. It offers recommendations and solutions for managing supplier capacity. page 1

3 The Supply Chain Today Today s automotive and manufacturing sectors are enjoying a rebound from the economic downturn of Lower unemployment rates, low interest, and cheap gas are fueling the economy. In the automotive business, we are seeing volume increases, particularly in the light truck segment. Lower gas prices traditionally help to drive truck sales. These volumes impact the support industries: suppliers of equipment, and direct and indirect materials. The automotive and manufacturing indus- What Are You Doing To Prepare Your Supply Base? First, let s start with the contract which creates the commitment from your supplier. The contract consists of three basic items: Quote tries have moved toward more flexible man- Purchase Order ufacturing and more reliance on their supply Shipment chains. While the OEMs possess the ability to move and flex manufacturing, much of its supply base cannot. According to Duin et. al.,1 the automotive OEMs are well positioned with flexible lines and equipment. The supply chain has changed dramatically. OEMs account for only 20% of a vehicle s components. A typical automotive supply chain includes: The remaining 80% of components 6 10 tiers 3,000-5,000 suppliers delivering components Generally, the Request for Quote (RFQ) contains a requirement for a quantity included in the document. It may also include a quantity used for planning and the maximum quantity that can be produced. The quantity can be expressed in relation to the number of shifts required to produce it, for example, over 1 or 2 shifts. The capacity can be dedicated or shared with other programs or customers. With a quote, and a purchase order (PO) issued in accordance with the supplier s quote, we have the basis for an agreement. However, an executed contract only occurs once the supplier ships in accordance with the PO. The shipment confirms that the supplier has accepted the PO. page 2

4 While this is the generally accepted practice, it is critical to ensure that all of the POs or Tool Orders (TOs) specify the volume requirements. In regard to capacity, the PO and/or TO should restate the capacity requirements contained in the supplier s quote. The PO should also reference the number of shifts required to produce the quantity on a weekly basis and if the volume is part of a dedicated line or shared with other programs. The TO should state the capacity that can be produced off of the tools and the number of shifts required for that quantity of tools. Understanding Capacity Supply and Demand In the automotive industry, the requirements arrive via Electronic Data Interface (EDI). The customer provides an 862 Shipping Schedule to its suppliers. Additionally, the customer also provides an 830 Planning Schedule for planning and forecasting volumes for its suppliers. However, these releases can fluctuate in times of changing volume. The fluctuations can be caused by: Sales increases/decreases Mix rate changes Recalls/legislation Inconsistent material releases Operational issues/inventory management In addition to fluctuations from your customers, your volumes to your supplier may be further impacted by your company s operations, including: Release consistency with forecast Operational efficiency Inventory management Each level of the supply chain has its own view of demand. The OEMs have a direct line to customers and know what is and is not selling. Plus, their internal operations also add to the volume. Another supplier may have a capacity constraint or recall which impacts a product s volume. Tier-one and tier-two suppliers may, and should, monitor industry and customer volumes in trade publications or through services. Plus, the suppliers have specific knowledge about their own components that also will factor into their volume estimates. What Drives Volume? Volume can be driven by the economy, technology, and customer preference. For example, in the light truck and SUV segment, customers are choosing bigger vehicles for many reasons: Better visibility to see and be seen More internal room More capability to tow Lifestyle preferences page 3

5 Some component suppliers, particularly in the light truck segment, find that demand is influenced by seasonal considerations. Other component demand can be traced to technology particularly electronics. For example, free mobile phone apps have replaced what used to be a $500 option. When To Check Capacity As a buyer, the first check of a supplier s capacity usually occurs when the supplier informs the buyer that they: Need more capacity Have overtime payments See that volumes are way down and a price increase is needed Or, worse yet, the supplier informs the plant that they cannot ship to schedule due to high volumes Some organizations have positions that manage capacity or conduct capacity studies. The workload is usually driven by the customer not a tracking process to ensure that all suppliers have the capacity to meet their requirements. In other cases, a supplier business review may necessitate looking at all the volumes and seeing where the supplier s volumes are over or under the capacity baseline established at the time of sourcing. Maybe a supplier s quality and delivery ratings are low or trending downward. This may be a time to investigate supplier capacity Release and get consistency a sense of the with stress forecast being put on the Operational supplier s efficiency operations. And the stress Inventory management impacts all three main areas of an operation: Operators and staff Materials Equipment Excessive overtime leads to stress on the staff, both the blue collar and white collar workers. Material supply may suffer when the supply chain at a supplier is stretched to support incremental volumes. When there is minimal downtime, preventative maintenance is overlooked or pushed back. You may also see warning signs from the supplier s data. Low first-time-through or operating efficiency, poor launches of new parts and programs, or management changes may signify other problems especially when handling increased volumes. How to Manage Capacity Manufacturers use a variety of ways to handle capacity. Prior to a meeting with a supplier, the buyer can get an update from the plants and compare it to the quote volumes. Or, the buyer can track capacity with every new PO and get periodic actuals from the plant. Both of these are time consuming and require a significant amount of follow-up. page 4

6 The SYRE Software Solution Through our cloud-based SYRE software solution, we provide the structure to manage supplier capacity. It documents the committed capacity from each quote and PO. Each part has volumes defined by the programs it is used on regardless of the mix rate. Whether it is a 1:1, 2:1, or 8:1 usage on a program, SYRE accounts for the mix rate and multiplies program volumes. It also tracks the forecast for the parts on a monthly basis. Finally, it tracks the actuals giving a clear picture of the status including committed, forecast, and actuals. As shown in the figure above, SYRE reports dedicate one page to the capacity status. A buyer can easily see the issues coming and take action. Our cloud-based solution also provides the ability to look at capacity by commodity or by program. SYRE software enables the user to manage supplier capacity instead of capacity managing the buyers. Adding Capacity When there is not enough capacity to support the volumes and the material releases are outpacing the supplier s commitment and their production capability, it is time to add capacity. Discuss the volume and capacity question with the plant s materials, planning, and logistics (MP&L) team. We recommend securing a commitment to the volume from the plant/mp&l team. It is required to justify an expenditure, should funds be spent. Also, if an expenditure is required and the volumes do not materialize, it is proof of the approval. Also, the duration of the volume increase is important to determine short-term or long-term actions. Before determining a course of action, understand the supplier s operation. Review all factors of production. Are there sufficient resources, including trained operators, materials, machine availability? Examine support systems: Material handling Incremental dunnage and packaging requirements Freight and transportation requirements Make sure that the machine and the line can be supported from all standpoints: materials for production, maintenance, and trained workers. Use the data you have quality assessments, machine standards, and plant floor knowledge to start the dialogue. Also, review the run-at rate information in the PPAP to ensure that the supplier is getting the right volume out of its line/machine. page 5

7 Long-Term Solutions If the buyer finds the capacity is required in the long term, then a different approach is required. It probably involves investment. However, investigate alternative approaches: Short-Term Solutions The most efficient approach for all parties in the short term is to improve the productivity of the machine or line. This may take the form of a lean approach, a six sigma approach, or implementing ideas that have been hanging around. A continuous improvement action that raises productivity and is relatively inexpensive to implement is the best alternative. If the machine/line process has been optimized, the next alternative is to look at overtime. With overtime, it is critical to understand: The business can be resourced or outsourced. A supplier can move production to another plant that has capacity or can add capacity faster. The buyer can resource it to a second supplier. The supplier can outsource it to another supplier and manage the supplier. The solution will depend on the buyer-seller relationship, the speed of implementation, and risk. With foreign suppliers, there is generally a pipeline of parts in transport. In that case, a short-term action would be to air freight just completed items to supplement the pipeline. Air freight is generally expensive. Also, it will leave a gap in the pipeline that has to be filled by improving or increasing capacity. Are there trained operators? Are materials available? How will the maintenance be done? Finally, if you have an opportunity to build ahead and create safety stock, it is recommended that you take advantage of it. You may have a shutdown or holiday that can be used for extra shifts to produce addition volume. page 6

8 Negotiations Before negotiating, examine the business relationship with the supplier. Negotiations will take a different path depending on the relationship. Is the business important to the supplier? Is it significant in the supplier s overall portfolio? During the downturn, relationships played a key role in working collaboratively and prioritizing requests. A poor relationship can mean no favors and falling to the bottom of the preferred customer list. The same can be true in good times. It is important to assess the relationship with the supplier and the open issues. For instance, if the buyer has previously dismissed some of the supplier s claims, they may be brought up again. In the supplier s business, are there winners and losers due to the age of programs or low volumes? These are the types of issues that will be brought into the negotiation. The general practice is not to negotiate piece price with a change in volume. Be as tough and fair as possible, and pay for the incremental costs of the additional capacity support. If the assumptions change and your company is committed to the volume permanently, then open negotiations. But beware; when volumes fall, the supplier may return the favor and request a price increase. If you do not negotiate a permanent volume change, ensure that the supplier recognizes the approach you took: Use it as leverage in a negotiation Use it as a negotiating chip later Build a stronger relationship Conclusion Rising volumes are an opportunity and a challenge. Selling more vehicles or components benefits us all. It also requires that the contract be correctly established, ensuring: Proper production capacity That the plant and materials team work with the suppliers and buyers to understand the requirements That the buyer develops the right solution to support the increases and negotiates effectively. page 7

9 About APD, the Purchasing Authority Advanced Purchasing Dynamics (APD), the Purchasing Authority, provides manufacturers with market-leading solutions to streamline all facets of procurement and purchasing operations. Companies partnering with APD benefit from six service components: SYRE purchasing software, cost engineering, training, placement/recruitment, consulting and Service Delivery & Optimization of purchasing processes. APD s SYRE cloud software solution and precision cost engineering services deliver a real-time assessment of supply chain operations and identify ways to streamline processes and lower costs. Manufacturers gain value through APD by should be cost modeling, and automated purchasing analytics and reporting, resulting in improved decision-making. With the Purchasing Authority, enterprises decrease costs and improve bottom lines. Visit apurchasingd.com for more information. About the Author Jim Price, Vice President, Service Delivery & Optimization Jim leads the Purchasing Authority s shared services optimization and offshoring consulting and delivery practice, increasing the performance and ROI of manufacturing organizations. Jim implements SYRE-based services and custom tailored consulting to support supply chain processes. He aligns optimization and offshoring services with APD s purchasing consulting, cost engineering, placement services, and SYRE software offerings to reduce material costs and optimize administrative budgets throughout the supply chain. Reference Duin, Heiko; Hofbauer, Peter; Karacan, Ömer; Markl, Erich; Withalm, Josef; Wölfel, Walter; and Zand, Darius. Collaborative Demand Capacity Planning. Copyright 2015 Advanced Purchasing Dynamics and/or its affiliates or licensors. All rights reserved page 8