The feedback from my March 1 article about OEMs needing to increase their awareness of total supplier value-add above and beyond piece price was along the lines of: “Yeah, right. A nice vision that will never happen.”
Well, I disagree. Call me a cynic, but I believe the biggest consideration in a person’s decision-making process is self-interest. Another way of putting this is that when making a decision, people tend to ask “Which of the possible alternatives will result in the most personal benefit?”
Similarly, I think that most corporations think along the same lines, asking themselves “Which alternative will most positively impact company financials.” And that’s why I have hope that OEM supply chain practices can be influenced.
In the March column, I implied that most OEMs believe that the only significant positive contribution purchasing can make to its bottom line is through lower prices on purchased parts and services. I also said that while most OEMs would agree that developing an agile supply chain with minimal waste should be the primary goal of purchasing, the focus on piece price hasn’t delivered—nor is it likely to deliver going forward—that lean supply chain performance.
The question I have, then, is why haven’t progressive OEMs looked for higher-impact approaches to source selection? A large part of the answer, I believe, is that today’s Request-For-Quote (RFQ) process does a very limited job in collecting information on overall supplier capability.
Let me explain. Piece price is just one aspect of an OEM’s Cost-Of-Goods-Sold (COGS). Overheads are another that, by the way, influence a company’s competitiveness much more than piece price. Most corporations have initiatives to reduce internal overheads. Unfortunately, their overhead reduction initiatives tend to be inward-focused, since OEMs haven’t made the tie between overall supplier capability and the impact it can have on their own internal overheads, even though they are pretty straightforward. It is a mystery to me why they this connection isn’t being made. I think we can facilitate changes in OEM purchasing practices by pointing them out.
Relative to these ties, I “know where-of-I-speak” based on personal experience. In the mid-to-late 90’s, I oversaw a supplier development function that helped facilitate a lean-performing supply chain. The business driver for this was our desire to start offering products through big-box-type stores. We realized that our current supply chain wouldn’t allow for us to do so and still meet our profitability targets. While the story of that activity is for another column, I can tell you our launch was financially successful largely because of the overheads we were able to reduce by taking advantage of increased supply chain capability.
You are probably wondering what I mean by this. The biggest impact was being able to avoid significant amounts of pre-built, pre-positioned finished goods inventory and still hit our customer fill rate target. The resulting savings significantly overshadowed the benefit our piece-price reduction efforts delivered. But I’ve heard of few companies that link their ability to reduce pre-built finished goods inventory to purchasing and, if it is reduced, credit a portion of the resulting savings to purchasing. Rather, the marketing function, in my experience, usually “owns” a company’s pre-built inventory and gets credit for the savings associated with being able to reduce it.
Back to the topic at hand, the RFQ process for today’s OEMs does not have a consistent way of defining a supplier’s overall capabilities. For example, there is currently no metric for supplier lean-ness. And if there was, OEM purchasing departments are not positioned to get credit for the improvements in it can have on OEM overheads. But as I’m going to discuss, a metric for supplier lean-ness does exist and could be collected through the RFQ process, a process that hasn’t changed much since the advent of the purchasing function.
You might challenge this last statement and say that the RFQ has changed, especially with the advent of the internet. I’ll admit that electronic communications have streamlined the process, but streamlining produces only incremental improvements. For instance, “three keystrokes and cloud of dust” doesn’t really represent fundamental change over “three quotes and a cloud of dust”. What are needed to realize the impact of a lean supply chain are step-function-type changes.
An indicator of supplier lean-ness is the supplier’s “true” lead time. And here I need to state that suppliers don’t have lead times. Instead, the parts and products they manufacture have lead times. This shouldn’t surprise anyone, given that the Toyota Production System is the basis for today’s lean, and the following quotes reveal how Toyota felt about the importance of lead time:
Taiichi Ohno, considered the father of the Toyota Production System:
“All we are doing is looking at the timeline from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time by removing the non-value-added wastes.”
Simon Nagata, previously vice president of purchasing and later chief administrative officer of Toyota North America:
“Time is the shadow of waste.”
Second, there already exists a proven metric for “true” lead time called Manufacturing Critical-path Time (MCT), whose definition follows:
“The typical amount of calendar time from when a manufacturing order is created through the critical-path until the first, single end-item of that order is delivered to the customer.”
There is a lot of power in this definition, including:
- It reflects “true” lead times due to its critical-path focus, in which pre-built/pre-positioned inventories (raw, in-process or finished product) are translated to elements of lead time.
- It is based on what end-use customers care about when ordering product—Calendar Time, i.e. the unit of time they will typically have to wait for a product that is not in stock.
- Delivery of a single end-item penalizes batches that are above and beyond current customer demand. The larger the batch size, the larger lead time penalty—batch sizes above current demand do not lower overall operational costs, i.e., a concept that industrial engineers have been trying unsuccessfully for generations to get across to accountants.
- Delivery to the customer means that manufacturing isn’t done until order fulfillment is complete, tying Manufacturing Critical-Path Time (MCT) directly to the customer.
MCT can be applied to both micro- and macro- situations. MCTs are, in fact, additive such that once a value stream and its MCT are defined, MCT can then be broken down into values for each of the individual supporting operational segments.
One question I get a lot is whether measuring “true” lead-time in days is discrete enough for a lean-ness metric. In a word, I believe the answer is “yes.” My experience with MCT shows that most end-use products and/or value streams—depending on their complexity—have MCTs of months or (at best) weeks. This means that using days to quantify the metric provides sufficient precision. It also means that if you can’t reduce MCTs by days or weeks, you are either very lean or aren’t really working on what needs to be worked on. Finally, using days as the basis for MCT overcomes the urge to engage in analysis paralysis, something lean practitioners are often accused of.
I have always found the following Jim Womack story very revealing about the importance of focusing on a product’s critical path:
While being walked through the factory of a large U.S. aircraft manufacturer, Mr. Womack was shown an operation that had just undergone successful kaizen-based set-up reduction. After hearing about its impact on the process’ operational metrics, he asked his guides how the work had improved overall final assembly throughput, i.e. “Had the project shortened airplane lead-times?” After a bit of discussion, they replied that the operation that had been worked on wasn't on the overall product’s critical path, so the project hadn't impacted finished throughput. Womack replied "Then why in the world were you working on that operation!“
A list of order-fulfillment-related impacts that occur when “true” product lead-times are reduced
- Customer fill rates go up.
- Sales go up when forecast volumes are exceeded, generating both normal and windfall profits.
- The need for pre-built/pre-positioned finished goods inventory is lowered.
- Costs associated with forecast error/product discounts are not needed to move overbuilt inventory.
- As deliveries become more consistent, the need for raw inventory safety stocks is decreased.
So how should MCT be included in the RFQ? Simply stated, define and ask for it as part of the quote process. Once you have an individual part’s MCT, you can make decisions based on its impact to your overheads. And when you have MCTs for all of the parts in a product, the positive financial impacts increase by magnitudes.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.