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A Tale of Two Suppliers

March 10, 2017
When an OEM offered supplier development assistance to two key suppliers, their responses were as different as day and night.

In my previous column I described how in targeting suppliers for a proof-of-concept trial of our new supplier development process I relied on personal relationships, i.e., the trust that had been developed in my role as a buyer. Seems like a good strategy—work with people who have previously exhibited a desire to collaborate, i.e., increase-the-size-of-the-pie. But it was more complex than that. I’ll relate an example that gives insight into one of the more thorny issues involved in rolling out a new strategy as well as the consequences of a lack of trust.

In most product categories my employer applied a sourcing strategy of limited redundancy. This type of strategy is beneficial for a number of reasons, including:

• It provides a check-and-balance on any supplier that may attempt heavy-handed leverage.

• It sets up a natural competitive environment that eases the need—somewhat, but not entirely—for periodically reviewing sources outside of the supply base to gauge the competitiveness of current sources.

• It simplifies commodity management by funneling business to a limited number of suppliers.

A multi-source construct, however, opens up an ethical question relative to supplier development. Specifically, would it be fair to offer assistance to one supplier within a product category and not to the other(s)? Our answer was no, and we integrated this position into a policy governing our program. And as it turned out, there were instances where one supplier within a product group would accept our offer of manufacturing improvement support and one (or more) of the others would not. I’ll describe such a case below.

At the time my employer conducted supplier capability audits every couple of years. Among other things these assessments focused on the potential we saw for supplier improvements going forward. In other words, we were interested in whether suppliers showed inclination and potential for not only incremental but also step-function-like improvements to their operations. We had recently conducted such an assessment within a two-supplier commodity group; call them suppliers XXX and YYY. Below I list the bottom-line assessment results for each supplier:

• While XXX was currently performing at an acceptable level regarding price, quality and delivery, they didn’t show much promise for making the operational improvements we were interested in. This company had been purchased a few years prior by a couple of Wall Street financial types. The plant manager confided in me that they rarely visited the factory—located in the Midwest—and when they did “he usually had a pretty bad day.” He told me that the owners were continuously asking him for improved ROI results, and to achieve them he had to do things like limit capital investment and reduce maintenance and quality control resources. If you read my previous article, this type of ownership smacks a bit like that employed by holding companies.

• YYY, on the other hand, had only so-so current performance. Their pricing and quality were good but they just couldn’t deliver our orders per schedule. In fact, their on-time delivery was typically in the 70% range, which had led us to order their parts for delivery before they were actually needed so that we had a better chance receiving them “on-time.” On the other hand, the owner/manager of this business had assembled a “blue sky” type of staff that was always looking for ways to make efficiency improvements, either through employee training or revised processing.

We really liked the open-mindedness YYY exhibited and because of it felt they were an ideal candidate for supplier development. Per our policy, however, we knew we’d need to offer similar assistance to XXX in order to keep things fair. The actual offer for supplier development assistance to YYY was triggered by a further deterioration in their delivery performance. Specifically, their on-time delivery fell below 50% one month and while because of our “order early” tactic we had kept their poor performance from negatively impacting our production, it had now reached a level that needed to be dealt with.

Consequently, I sent a letter to the owner explaining to him that while it pained me to tell him this, until they achieved 95% or higher on-time delivery performance they would not be considered for any new business. This communication got his attention and he responded that it pained him, too, to hear this! He contacted me and I explained that my company would like to keep them as a supplier and perhaps we could help them get out of their predicament through our newly conceived supplier development process. At their request I met with him and his management team to describe the details of that process. YYY subsequently accepted our offer and became our first proof-of-concept test case.

What about supplier XXX? I contacted its plant manager. He seemed genuinely interested but said he’d have to run our proposal by his ownership. A couple weeks later I got a phone call response from him saying that “ownership was not inclined to accept our proposal.” I asked why and he hemmed-and-hawed a bit before telling me that his ownership questioned whether they could trust us “not to steal their intellectual property” during the engagement. Hmmm. I replied that I understood this concern but felt we had dealt with it in our Memorandum of Understanding (MOU), i.e., the project charter, which would govern the conduct of the engagement. Specifically, relative to confidentiality, the MOU contained a clause to the following effect:

All information shared with our supplier development engineers during the project would remain the property of the supplier and could not be communicated to anyone outside of the supplier’s company without their prior written approval. This not only covered the potential sharing of information with the supplier’s competition but also meant that it could not be shared within the customer’s company, including with purchasing personnel.

As a sidenote: I had quite a fight with my bosses over this clause since it was clear to them that through our engagements supplier development would likely uncover data and other information that could be used as leverage in future negotiations. To get their agreement I had to make the business case that without such a clause very few (if any) suppliers would accept our offer of assistance. I did so using feedback I received during a supplier roundtable we had recently conducted for the purpose of reviewing and getting feedback on our “straw man” supplier development process. During that session the suppliers had taken the unanimous position that only with such a confidential clause would they be open to allowing our people access to the operational data needed to conduct a project. This feedback carried a lot of weight since I could cite the names of the suppliers who had participated in the roundtable, many of whom were well known by management.

I reviewed the MOU over the phone with XXX’s factory manager who liked it and asked that I write a letter of explanation to his ownership—with a MOU attached—pointing out the specific clause that addressed their confidentiality concerns. I did and a couple of weeks later I got a terse letter of reply from them again declining our offer of supplier development support. While their letter didn’t state it outright, it was apparent that they didn’t trust us to live up the MOU.

So what was the end-result of our supplier development engagement in this commodity? Since our process was based on Manufacturing Critical-path Time (MCT) (“true” lead-time) reduction, our first step was to quantify YYY’s MCT baseline, which was 14 days. We then focused on activities—mostly standard Lean practice—that had the highest potential to reduce that current MCT. Three months later we had figured out how to reduce their MCT to 2 days (an 87% improvement!). How did this affect YYY’s performance? A few months after we implemented the changes their steady state operations achieved the following performance:

• On-time Delivery went from an average of 74% to 99%.

• Parts-per-million defects improved from 4,500 to 300.

• Overall productivity increased 32%.

• Cost—as quantified by the supplier’s own accounting people—was reduced 11%. (Note: The supplier development personnel who had manned the project thought the impact was actually a bit higher but, since this was a proof-of-concept trial, we didn’t make an issue of it).

YYY benefited since the project had an immediate impact on their competitiveness. They ended up getting the bulk of our new business. The supplier development function benefited, too. I had agreed with my bosses that a prerequisite of their support for a broader supplier development initiative would be that the piece-price-related savings from our proof-of-concept trials had to offset the engagement costs, which this project did (and not by a little). We maintained this performance, too, once the full initiative was launched.

Based on three proof-of-concept engagements we ended up getting approval to hire full-time resources for a supply base-wide supplier development initiative. In supplier conferences where we rolled out our initiative, we (with the supplier’s written approval, of course) shared our proof-of-concept project impacts. YYY acted as the primary program “poster child” for us at many of these meetings. In fact, we ended up making a video of their project which we could use in convincing suppliers to invite us in to work with them.

After one such conference the marketing representative for XXX came up to me and was a bit perturbed. He had recognized that through our assistance YYY now had a competitive advantage. I replied that our previous offer of assistance was still open to his company and that I suspected they could expect similar results from an engagement. He said he’d get back to me. He never did.

Less than a year later the buyer of the product category came over to tell me that XXX was relocating their plant from the Midwest to the Southern U.S. to take advantage of state incentives—smokestack chasing?—and lower labor costs. XXX’s shop was union while YYY’s was not and they felt that their increasing lack of competitiveness was due to higher pay. I couldn’t tell them, of course, since it was confidential but I knew that the pay and benefits at YYY—while slightly higher—were not even close to being the primary contributor to XXX’s ongoing loss of business. Later XXX did relocate.

At that time the company I worked for had a policy of requiring comprehensive multi-day capability assessments of any new facilities it sourced from, whether from a new or current supplier. I’m pretty sure it still does. I was on the team that looked into the facility that XXX was setting up “down south.” We found that their new workforce was very green with most of the employees not even having prior background in manufacturing, much less experience in operating specific equipment. We also concluded that their relocation implementation plan was poor, at best. What do I mean by this? During the assessment we saw a large monument type piece of heavy equipment actually “sink” through the concrete floor where it was being set-up, i.e., adequate foundations hadn’t been laid. That represents a pretty amazing lack of planning, when you think about it.

So what happened next? Within a year after their move XXX was out-of-business. Relocating the factory wasn’t the solution. Several years later our assessment team’s initial capability evaluation of YYY—the one that indicated their potential for step-function type improvements—was borne out when they were named my former employer’s enterprise-wide supplier of the year.

My next article will delve into leadership from a point-of-view you may not have previously considered.

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