In many manufacturing companies today the supply side can represent upwards of 75% of direct product costs and often be the pacing factor in product lead time. When looking for leverage to improve your bottom line, the supply chain would be a smart place to start.
Your supply chain is only as strong as your weakest link. Sounds simple, right? Not so fast. How would you define your supply chain? Where are your weakest links? Do you know? Do they exist throughout the supply chain? Are they internal or external? How do we find the answers?
Many business strategies and models have just started to recognize the supply chain as an essential part of a company's success. It is often now classified as a "competitive advantage" and a "large contributor to improving the company's bottom line." Leveraging the supply chain into a company asset is no easy task. There are a number of variables that need to be considered including the dynamic nature of the business. To link the supply chain to company growth and profitability we believe there are three focus areas which are the critical first steps to leveraging the supply chain and improving the bottom line.
Creating Innovation And Change Using A New Perspective
The key to innovation and creating a revolutionary change within a company must first take place within the leadership; creating a shift in the way they think. Their thoughts, which they hold true, are depicted in their actions; their actions determine their results. For results to change the leadership must view their supply chain in a different light.
Supply chain management is not merely purchasing or procurement. In reality, supply chain begins with the business acquisition process (the first contact with your customer) and follows through to after market support. Many companies still label supply chain as purchasing and procurement. A new perspective must be adapted to create innovation and change; which in turn will improve profitability and growth. When looking at reducing costs for example; do you place the majority of your effort on trying to get price concessions from the supply base? Or do you look internally first to see what in your business processes may be driving the cost in the supply chain?
We have worked with companies in the aerospace and pharmaceutical industry which often impose additional quality testing on a product that has been certified by the supplier when it is delivered. We have even seen companies impose source inspection at suppliers on a process that they have already certified, which adds both lead time and costs, since the supplier needs to participate in the inspection again. If the data you are collecting continues to demonstrate an acceptable product and process, then why the redundancy?
We have also seen a case where the engineering and a portion of the manufacturing have been placed with a supplier to provide a product, only to find that the company buying the product has more engineers overseeing the supplier than the supplier has engineers to design the product. These types of redundancy and oversight can add anywhere to 10% to 20% to direct product costs, as well as weeks of flow time.
Where does your supply chain report organizationally? Is it embedded somewhere in operations or is it a stand alone entity? Why is this important? Unfortunately the corporate world is still plagued by the protocol embedded in the reporting structure which can often constrain asking the right question for fear of who one reports to.
How you define your supply chain will determine where you start to look for answers and understand how you can leverage those answers to sustain profits and growth for your company.
Supply Chain Process Optimization
Automation, the process quick fix, is often pursued without sufficient thought and usually involves sacrificing process for speed, regardless of the outcome. Moving with agility in the supply chain requires established processes internally and externally. Speed adds little value otherwise. Just like outsourcing, if it doesn't work well today internally, it isn't likely that outsourcing a problem will yield different results. Indeed, technology is important to achieving a competitive advantage, but should never be used as a quick fix just for the sake of going faster.
Never underestimate the power of understanding existing processes; knowing both what they can and cannot do. Understand the strategic direction of your company, the market and the competition and then assess how existing processes compare in terms of effectiveness and appropriateness.
During an analysis of an outsourcing of a fabrication process, we discovered the painful lesson that companies will experience by trying to move a process outside to a supplier without really understanding the process in detail. A large manufacturing center decided to outsource its fabrication shops and when the parts came back they did not fit the assembly. The supplier was building to the engineering and the planning provided per their contract, so the supplier was not held liable. What we found is that the fabrication shops built to the tooling, marked up engineering and planning, but never had the engineering and planning formally updated to match adjustments they made in the process. This lack of true process knowledge resulted in a cost of $2.2 million to send a team of engineering, tooling and planning personnel to the supplier to correct the problem.
If refinements or improvements are needed, incorporate them, document them and test them to gauge effectiveness. Technology is an asset that builds competitive advantage, but only after there is sufficient knowledge, repeatability and reliability of the processes that exist today.
The phrase, "Partnership Style Relationships" doesn't ring true and we are often left wondering what it really means? Everyone wants it; they just don't want to put it in writing. Just think about it -- the benefit of contractual obligations without having to make a legal commitment. Keep dreaming. When will companies and suppliers reach a point of open and honest communication of needs and expectations without being encumbered by a legal document?
Too often, companies want and expect more that they are willing to give in return. The external supply chain has never been as important as it is today, yet it is regularly treated with the same disregard as a bad relationship. At the end of the day, regardless of the contractual commitment, it is the people involved and the relationships that make the difference. Companies must pursue symbiotic relationships with their suppliers and be willing to give a little back. The true potential of the supply chain only can be realized once companies and suppliers recognize the importance of evolving and nurturing relationships.
Even when the cost analysis shows the savings associated with switching to another supplier, you may want to take just a moment to see if there might be another way, by truly working with a supplier to get the results you need. We are not talking about the age-old coercion tactic of "giving me what I want or I'm pulling my work" which everyone swears they never do.
We have seen this tactic appplied with a costs savings amounting to about $250K per year -- not bad one would think. The only way this would not be a good decision is if for some reason you had to rely again on the now alienated original supplier. Well, as misfortune would have it, we were working with a company where the new supplier could not make deliveries; in fact they could not even make the product to specification. Additionally, as if things could not get any worse, the president was informed there was no inventory anywhere, as the original supplier's contract was closed and not extended to provide contingency product.
You can see where this going; on bended knee, the president went back to the original supplier and pleaded with them to bail him out. They decided to provide the product, at 3 times their original price; imagine that. Needless to say it was quite some time before they realized that cost savings. The moral of this is not that you shouldn't pursue better costs or alternative suppliers, but you should always be careful how you treat the relationships that are in place today; you just never know when you might need them again.
When we begin to see the supply chain from a different perspective, understand what the current processes can really do, begin to accept that the performance of our supply chain is not just a contractual relationship, but an integral part of our company's; then we will begin to see the innovation, the growth and the profitability which is inherent to the supply chain.
Rick Moroski is the CEO and Co-Founder of The Leadership Caddie which is a diverse, cross functional experienced team providing a customized approach to business and leadership optimization while partnering with your company's leadership. You can contact him at [email protected] or call him at (302) 743-6457.