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Supplier Roulette

Supplier Roulette

OEMs’ approaches to risk have changed, but at what cost?

Production of the Boeing 737 Max 8 airplane is on hold until the cause of the recent crashes is defined and addressed.  At first blush, it appears that the failure lies with autopilot programming and/or electronic sensor failure. 

Depending on what a formal investigation reveals, the Boeing crashes may be a cautionary tale for Original Equipment Manufacturers. Many OEMs have increased product performance risk through changes in the way they manage their employees and suppliers—by trading risk, rather than mitigating risk.

What do I mean by trading vs. mitigating risk? Trading risk involves reducing product cost, maximizing product performance or adding product features at the risk of reducing product reliability and safety.  Mitigating risk implies focusing on reliability and safety first, before considering cost, performance and features. 

I have always regarded strategic suppliers as part of their customer’s extended enterprise. In other words, I have managed strategic suppliers as off-site departments of the factories they supply, focusing on mitigating risk. That's why I feel it appropriate to compare OEM management of their own operations and employees to how they manage their suppliers

Let’s take a look at the different approaches, both with employees and with suppliers, for some insight into how the OEMs’ current approach might lead to bigger issues.

Plug-and-Play

On the employee side, plug-and-play involves laying off experienced salaried workers, only to replace them with lower-cost recent hires who may have very little training in their new roles. On the supplier side, it means the shift from buyers at OEMs having extensive on-site knowledge of the suppliers they are responsible for, to managing suppliers from behind a desk using analytics spreadsheets.

No longer are periodic visits required—visits that led to understanding of both the current status of a supplier’s operations as well as the supplier’s capability above and beyond their machine list and pricing. The lack of site visits and decreased emphasis on building relationships reduces the number of buyers required, but can also hurt quality and require more time spent fixing issues.

Many OEMs—based on spreadsheet data—tend to regard strategic suppliers as interchangeable in the same way they regard commodity suppliers: plug-and-play. They undervalue a supplier’s tribal knowledge in favor of competitive price, supplier processing capability and production support performance history. 

Suppliers, I might add, are very good at gaming their performance metrics—a topic for another column. 

Lean or Anorexic?

Boeing, like many OEMs, has an extensive lean program with substantial people and infrastructure dedicated to working on continuous improvement.  But without a common strategy aligning these resources, lean projects have only tactical and isolated impact—and end up with workers working harder, not smarter.

What do I mean by this?  Production workers at Boeing’s Auburn factory—the plant that supplies wings to the Everett 737 Max 8 assembly facility—are required to work mandatory overtime.  During a surge in demand, this may make sense. But when overtime becomes significant, it takes a toll on workers physically and detracts from their personal lives.

The question then becomes: Does a company expect its employees to live-to-work rather than work-to-live?

When employee performance suffers, the company is exposed to product risk. Why do OEMs operate in this manner, then? The answer is simple.  They avoid hiring additional employees, keeping their employee benefit costs down. This is definitely an example of trading rather than mitigating risk.  It is also an example of where operations are run in an anorexic—rather than lean—manner.

Boeing and other OEMs can, on a dime, demand significant price reductions from their suppliers, and sometimes these price reductions are not included in the contract. When you’re a small or medium-sized supplier, and 50% of your business is with a Fortune 100 OEM with a large legal department, contracts don’t mean much. This has led to suppliers cutting costs in any way they can to meet price demands, sometimes in ways they shouldn’t. Anorexic indeed!

When employees and/or suppliers are managed so that cost is the overriding factor, it increases the OEM product risk.

Virtual vs. Real

High-tech manufacturers are increasingly on relying things like computer simulation rather than physical testing to verify product function, reliability and safety. This may lower OEMs’ costs, but again, increases the risk of failure and in each of those areas. I don’t know about you, but I’d rather put my trust in a manufacturer that relied more on physical testing—rather than computer simulations—to certify its products.

Similarly, suppliers have lost a lot of the physical contact they used to have with their customers and for the most part—as laid out above—interact with them through electronic means. How has this affected the product optimization? Back in the day, it wasn’t unusual for suppliers to participate in in-person reviews with the customers, which resulted in suggestions aligning more closely with available manufacturing processes so that costs could be optimized. 

Today, suppliers are more apt to get a print or electronic model and expected to quote on it without any collaboration on design. While this may streamline the quoting process, it adds cost to the design.

One result of the move away from real towards virtual supply management is that many OEMs no longer have the infrastructure to effectively review supplier suggestions. It can take months for a slight cost-saving revision to a basic part to be reviewed and approved, when the actual review and approval process only takes five minutes. 

The manner in which suppliers are being managed today contributes to risk and costs relative to the overall business. We shouldn’t be surprised to have reached this state, since at most companies purchasing is seen as a tactical function not related to other operational areas except through the piece price of the parts they source.  Check out my recent article Rest in Peace, Piece Price if you doubt this. OEMs can change their approach to benefit both themselves and their suppliers.

Paul Ericksen, IndustryWeek’s supply management advisor, will be a featured speaker at the Manufacturing Technology Conference in Pittsburgh. On April 2, he will lead a session in the Supply Chain track called “It Takes Two to Tango: How to Keep Both Suppliers and Customers Satisfied.” On April 3, Ericksen will conduct the workshop “Build-to-Demand: The Lean End Game.”

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