By Gerald Najarian
A materials planner identifies the need for a particular component part, prepares a requisition. The buyer surveys at least three vendors, selects one based on the economics (price) and issues a purchase order for delivery in thirty days. The vendor, new to the company or accustomed to sporadic demand for the item from this customer, forces the item into the schedule and begins the process of sourcing needed materials. When the item is finally produced late and isn’t delivered to the door of the customer’s plant as expected, the phone starts ringing with expedite requests. At last the item arrives at the plant and is received, inspected to pass an AQL standard, and stored in a parts stores area. There it awaits requisitioning to a shop order that has been delayed due to unavailability of the part. Sound familiar?
Now, fast forward to the other end of the supply chain. The customer in need of the product that required the component is now engaged his own round of expedite calls. The manufacturer chases the problem, finds that the part is now available, and expedites the shop order in question into production, disrupting the entire plant in an effort to make up for lost time and get the product out to the shipping dock as soon as possible.
It’s hard to imagine that this process was, and in many cases still is, in use. And it is even harder to see how such an approach can serve the synchronization of procurement through customer delivery demanded by modern Supply Chain Management and the need for manufacturers to deliver the “six rights” – right product, right quantity, right price, right quality, right time, right place. Indeed, delivering the six rights is the objective of Supply Chain Management and purchasing occupies the first position in the supply chain. So, what’s a Materials Manager to do?
FOCUS ON THE STRATEGY
If the procurement function is to move beyond the old start-stop paradigm of unsynchronized shuffling among functional silos, management must view procurement as an integral part of the overall strategy implicit in Supply Chain Management — all functions coordinated to support efficient and effective customer response. This means identifying with the needs of the customer base and seeing the six rights from their point of view. For the materials executive, this means becoming involved in the deliberations of marketing strategy and sales tactics to identify which of the “rights” are not being delivered and why. If the company is one of the fortunate few that is delivering all of the “rights” then our task will be to determine where improvement can provide significant competitive advantage in the near future. Focusing on the strategy doesn’t require that we immediately develop new programs and make quick changes in purchasing. Those will come soon enough. For now, it means attitude adjustment and a commitment to frequent and scheduled interaction with the folks in marketing. Later on, it could mean participation in a product line management matrix or marketing involvement as members of a supplier selection team. After all, we live in the era of the customer. And purchasing, to be a contributing part of the team, must be a full participant in efforts to ‘delight” the customer.
WELCOME TO THE FAMILY
As the “Lean” era dawned we were asked to see suppliers as adjunct departments of the factory. This is a useful image but there is a better one — family. The metaphor of family lets us get inside the supplier’s head and put our own house in order to become a “world class customer.” Of course, being a world class customer should not imply disadvantageous acceptance of a vendor’s terms. Rather, it should mean a willingness to share and compromise as one would in a family situation. So it is with supplier partnering and development that we seek out the areas of mutual self interest that make a successful partnership/family relationship. To be sure, supplier partnering is a major step in purchasing leadership. Let’s take a point-by-point look at this important element of the new procurement paradigm.
Partnering is hard. As anyone who is in a personal or business relationship is aware, partnering is hard work requiring significant attention. It pays, therefore, to seek out our old friend Pareto as we consider partnering and, at the outset, bring only those vendors who account for the majority of our material dollar purchases into the family.
Partnering implies a dramatically smaller supplier base. Focusing on the largest suppliers, initially, will have an impact, but an effort should be undertaken to reduce the total number of suppliers. This will serve to reduce complication in the procurement process and increase buyer leverage and supplier goodwill that come from sole or dual sourcing.
Partnering should give us a clear business advantage. Business advantage can be found in lower commodity costs in a price sensitive business or in help with delivery logistics. An example is how Dell Computer has arranged with its partner, Sony, for them to drop ships monitors in tandem with Dell’s shipment of processing units.
Partnering should be “win/win”. While seeking our own business advantage, going into a family relationship with our chosen suppliers involves two levels of providing them with a “win”: (i.) rudimentary provisions such as exclusivity of supply over a long term contract, prompt payment, fair price based on the initial economics, sharing of schedules and forecasts. (ii.) advanced relationship provisions like managerial assistance, plant pickups instead of shipments, personal contact above and below the buyer/salesperson level. Our side of the win/win can be focused on progressive price reductions based on shared cost reductions in the supplier’s process, smaller lot sizes, more frequent and on-time deliveries, and shorter lead times.
Partnering must be monitored. We are still the customer so it goes without saying that we should be monitoring vendor performance to insure that we are getting value in the partnership. The attributes of a competent monitoring approach are centered on criteria and standards, progressive levels of certification, reciprocal feedback, and fairness. For example, one might condense the six “rights” into three criteria and express them as cost reduction, quality, delivery reliability. Then numerical standards of performance can be established to serve as benchmarks of either progress toward or maintenance of the highest level of certification. Certification levels can range from entry level (approved vendor) through preferred vendor/partner. Reciprocal feedback and fairness imply the willingness to tell a vendor how they are doing, soliciting their views as to the program and our performance as a world-class customer, and upgrading them as their performance warrants.
The partner should hold the inventory. This element of the partnering arrangement does not mean that one ought to bully the supplier into carrying the large inventory we might, in other circumstances, have carried. It reflects the Lean preference to store material at the point of manufacture and thereby avoid multiple handling and potential damage in destination warehouses. When we ask a partner to hold the inventory, we are really asking that they manage the inventory to the needs of our forecast or schedule. If we have become a world-class customer, we will be providing the supplier with forecasted demand going out far enough in time for them to plan and produce to economic lot sizes and deliver frequently in mutually agreed-upon lot sizes.
A potential scenario for supplier managed inventories might look like this: on a monthly basis we, the world class customer, provide a three month forecast of purchases from the supplier to be shipped in quantities which are the size of our kanbans. We commit to actual purchase of the first month’s quantity, with the remaining two months’ demand provided to support the supplier’s planning process. During the committed month, we communicate production plans and kanban status and ask the supplier to ship when our kanban triggers replenishment. Such a scenario permits the supplier to act like an “adjunct” work center, synchronizing their production to our kanban requirements through an appropriate buffer. There are many variations on this theme for supplier managed inventories. Done right, this type of approach makes the supplier truly a part of the partnership family.
Cost reduction is an imperative. The burden of cost reduction falls equally on the customer and supplier. The large order quantities inherent in supplier partnerships will contribute to initial cost containment but the process must go much farther than just volume. Bringing the supplier into the design (and engineering change) process permits them to help design out costs, the benefits of which can then be shared with us. Aggressively targeting price reductions over the period of the partnership can foster shared responsibility for driving costs out of the purchased item. A great deal of the cost reductions can come from reduction or elimination of packaging requirements.
Personal contact brings it all together. All of the provisions of supplier partnering are held together by an atmosphere of mutual trust which is in turn fostered by frequent personal contact between the supplier and the customer. The contact has to go beyond the buyer / salesman relationship to technical, shop floor, and senior managers to insure that communications address real issues. (see figure 2. Traditional vs. Supply Chain Management)
Not at all like the old paradigm is it? We’ve replaced all of the clumsy stop and start actions and paperwork with a smooth process to link our entry of a customer order to receipt of the materials needed to fulfill it. A competently negotiated purchase agreement recognizing the supplier’s interests starts the process and all subsequent transactions are initiated by the supplier based on internal data which we now make available. We now monitor performance and work together to improve the “six rights”.
RETRO-FITTING THE ORGANIZATION: PURCHASING BY EXCEPTION
What does purchasing do now that it is focused in on the company’s strategy and has begun a process of progressive supplier partnering? In the old paradigm, the purchasing organization spent countless hours interacting with material planners, responded to purchase requisitions, was in touch with numerous vendors, and was involved in daily expedite and de-expedite tasks. With supplier partnering, most of this work will vanish as more of our suppliers come into the family and the daily interaction with suppliers moves to technical and shop floor people. Similarly, much of the material planner’s role will be simplified and the tasks of the traditional buyer and planner can be combined into a new position, that of an overall materials professional. Known by various names — buyer/planner, supplier scheduler — the materials professional will see a larger picture and can be an integral participant in simplifying the link between the receipt of a customer order and procurement of the materials necessary to manufacture and fulfill it.
The creation of a new and unified position to be a single point of coordination for all supply management should not be seen as an opportunity to cut headcount; rather it should be taken as an opportunity to utilize an expanded pool of resources to increase the number of supplier partners and manage the relationships to achieve results. The new buyer/planner position is an opportunity for the incumbents of the formerly separate positions to enhance their skills and develop as business-oriented professionals. Instead of the never ending parts chase, the supplier scheduler will be negotiating new contracts, developing cost reduction tactics with suppliers, sizing kanbans, developing forecasts with marketing, determining buffer stock levels, monitoring performance, and the like. Only rarely will the buyer/planner perform traditional purchasing tasks, hence, purchasing by exception.
MANAGING BY MEASURING
The traditional purchasing measurement, price (or purchase price variance), will no longer suffice to measure the modern procurement process. If procurement is to be seen in its strategic context, it must be measured by metrics which support corporate strategy for success in the marketplace and the materials organization has to “own” those metrics. Supporting the strategic measurements is a set of metrics which controls tactics and contributes to achievement of strategy in the manner of a balanced scorecard. The two sets of metrics can be seen separately as those monitoring “results” and “performance”(see figure 1. The Measurements Pyramid).
Results metrics. At the top of the measurement pyramid (figure 1.) is customer satisfaction quantified as the Perfect Fill Rate which is supported by another measure of material availability, Schedule Adherence (or shop order due date performance). Immediately below these data are measurements of Material Shortages and Raw Material Inventory Turns. The first of these final two measurements helps us to understand schedule adherence by monitoring a key contributor to it. The second makes sure that we are not achieving results at the expense of corporate cash and supports the financial objective of working capital conservation. Note that the top two results metrics are not entirely within the control of the materials organization; other areas of the manufacturing company can have an effect on them. That’s OK, we need to own our part of the results and be in on the action to make them happen.
Performance metrics. The foundation of results is performance. The performance metrics which underlie results are the tools that the materials organization uses to make sure that it is doing the job of supplier management in the most effective manner. Here the numbers direct us to measures of delivery accuracy and quality, noted in such data as on time delivery, accurate quantities and items, and observed defects at receipt and during manufacture. Price maintenance and reduction, purchase order count, and number of suppliers and parts tell us if the effort to manage supplier relationships is paying off in value to the company.
A final word on measurement of results and performance. The objective of metrics is to tell us about progress; in some cases, progress toward goals and after a while, progress toward an unattainable perfection. In the case of progress toward goals, measurement has a time frame. After the organization has achieved a series of goals, steps toward the unattainable goal of perfection represent the concept of continuous improvement.
WHAT YOU CAN EXPECT
A superior procurement process is the gateway to competitive advantage through the supply chain. When the materials organization is doing “purchasing by exception,” materials will flow without defect from superior suppliers in small quantities at the right time and at a competitive price. This smooth flow of materials will pay off for the company in shorter manufacturing cycle times, lower inventory investment, more rapid cash to cash cycle time, and higher customer satisfaction. All this results from an “investment” of the mind to accommodate the new procurement paradigm in modern supply chain management.
This article originally appeared in Mid-Range ERP magazine
Figure 1. The Measurements Pyramid
RESULTS METRICS
Fill Rate
(Customer Satisfaction
Material Availability Schedule Adherence
Inventory Turns Material Shortages
PERFORMANCE METRICS
On-Time Delivery Accurate Quantities & Items No. of Suppliers & Parts
Price Maintenance & Reduction Purchase Order Count Defect Rate
Figure 2. Procurement – Traditional and Supply Chain Management
| Traditional Management | Supply Chain Management | |
|
Supplier Selection |
Many sources; price competition |
Single or few; quality suppliers |
|
Supplier Location |
Irrelevant – has nothing to do with price |
Local – possible to do plant pickups |
|
Price |
Lowest price based on bidding leverage |
Recognition of a fair price; progressive reduction based on cost sharing |
|
Payment |
Stretched out; supplier’s terms plus thirty day |
Fairly negotiated; often fifteen to twenty days |
|
Inventory Location |
Our warehouse; large buffers |
Supplier’s plant; small buffers |
|
Delivery Quantities |
Ad hoc expediting based on frequent P.O.s; overages and underages |
Predicable delivery schedules in small quantities based on large contracts |
|
Quality |
Supplier’s responsibility to meet high design spec. AQL approach |
Joint effort to meet performance specs. |
|
Design Cycle |
Late and little supplier involvement |
Early involvement; high design input |
|
Communication |
Little, late and one-way; formal and monolithic contact point |
Frequent two-way dialogue on problem resolution by all affected parties |
