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Supply Chain People

Lean Supply Chain Performance: Onshoring's Secret Weapon

April 2, 2021
Reaching this level of capability should be the goal of every corporate purchasing department.

The issue of reshoring has been around for a while.  For instance, longtime manufacturing executive Harry Moser started his Reshoring Initiative over a decade ago. Working to get Original Equipment Manufacturers (OEMs) to re-source their purchases back to domestic suppliers is important. 

In addition, an effort also needs to be made to get OEMs to initially source purchased material within North America. This concept is called “onshoring.”

Facilitating such a change will not be easy. Sure, supply chain failures brought on by COVID-19 have led many OEMs to revisit their purchasing strategies, including sourcing criteria. And while it is true that sourcing with more “local” suppliers—shortening supply chains—improves supply chain order fulfillment consistency, very few strategic changes are made at large corporations without the projection that they will improve executive-level performance metrics.

There are two primary ways that more sourcing with local suppliers can positively impact these metrics.  The first is when individual suppliers have the ability to respond to differences between what an OEM has forecast and actual market demand. This is called build-to-demand capability, which is not possible with long lead-time supply chains such as those associated with overseas sources.

The second is when a critical mass of strategic suppliers within a supply base has build-to-demand capability. Strategic suppliers are those where re-sourcing would require excessive manpower, substantial cost and—more importantly—expose a customer to higher levels of order-fulfillment risk.  When strategic supplier status is reached, it is called lean supply chain performance. In my opinion, reaching this level of supply chain capability should be the goal of every corporate purchasing department.

Executive Level Performance Metric Impacts: Build-to-Demand

The positive financial impacts of having a build-to-demand supplier are less than what can be reaped from a supply base capable of lean supply chain performance.  But they are both real and meaningful.

For instance, the shorter a supplier’s “true” lead-time, the less safety stock raw material an OEM customer would need to have “on hand” to ensure their parts are available to support production schedules. Raw material is a primary financial exhibit—an individually tracked cost—at most companies, which puts it in the category of being an executive-level performance metric. 

Similarly, sourcing with more local suppliers provides more effective support of production schedules by reducing occurrences of assembly line downtime, another important financial exhibit.  Admittedly, these impacts are not “big hitters” but should be considered when making sourcing decisions.

Executive Level Performance Metrics: Lean Supply Chain Performance

Having a lean supply chain performance supply base, on the other hand, can deliver those “big-hitter” positive financial impacts—and thus should be the goal of all purchasing functions. When a critical-mass of strategic suppliers are build-to-demand capable, the positive financial impacts can be derived at a more macro level (vs. just with individual suppliers).

What do I mean by this? Two important executive level metrics are customer fill rate and finished goods inventory. In consumer markets, customers are only willing to wait a set amount of time—depending on product—for a product that is not immediately available. For instance, purchasers of coffee makers will usually not wait for a specific model of a specific brand if other similar featured products are probably in stock.  On the other hand, for lawn mowers they may wait a few days or possibly up to a week. In other words, if a specific model within a specific brand is not available in this “set amount of time,” the OEM will probably lose the sale. 

The primary strategy OEMs use to ensure they meet this product availability criteria is having pre-built, pre-positioned finished goods inventory. The costs associated with this inventory represent large contingency expense; i.e., waste.

With lean supply chain performance, the amount of finished-goods inventory can be reduced while at the same time customer fill rates can be maintained or increased. In addition, when demand outpaces forecast, there is a higher chance that incremental sales can be supported. This is because in addition to forecast error, there will also be error in the pre-built inventory levels, both in overall volume and product mix.

Read more of Paul Ericksen's supply chain management articles

For instance, I am aware of one company having established lean supply chain performance that avoided hundreds of millions of dollars in pre-built, pre-positioned finished goods inventory and, at the same time, was able to both maintain customer fill rates and support increased levels of incremental sales. Capturing incremental sales, by the way, is akin to printing currency, since fixed overhead costs are typically assigned only to forecast products. This means that they deliver significantly higher profits per machine sold than do those that were in the forecast.

There are additional executive-level performance metrics similar to those outlined above that can be positively impacted by either individual suppliers with build-to-demand or supply bases having lean supply chain performance capability. And just as with the ones described above, these need to be taken into account to ensure that the purchases are sourced with suppliers that can contribute financial benefit to their customers above and beyond actual material cost. I should again point out that build-to-demand capability requires relatively short “true” lead-times, which are usually not available from overseas suppliers.

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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