After reading my columns over time, you may have bought into the premise that reducing true lead times (manufacturing critical-path times, or MCTs) should be the primary driver of lean activities. However, you may also be a bit overwhelmed by the thought of planning and managing supplier development for a lean supply-chain performance initiative. This is because most original equipment manufacturers (OEMs) have hundreds if not thousands of suppliers and the possibility of working with each seems unrealistic.
The good news is that there is that a simple supplier-category analysis process that can greatly reduce the necessary interactions, making them more manageable.
Three Steps for Analysis
Interestingly enough, the first step in a lean supply chain performance initiative takes place outside of the purchasing department. It is the marketing department’s responsibility to set a data-based—and realistic— overall MCT goal that will give the OEM a competitive edge in the marketplace. The goal should improve customer fill rates and support incremental sales beyond the forecasted demand.
The second step also falls outside the realm of supply management. Specifically, operations and distribution need to define the MCTs related to their operations such that supplier MCT goals can be put in place, i.e., the three individual MCT segments needing to add up to the overall MCT goal previously set by marketing.
The third step is to categorize commodity and strategic suppliers. Commodity suppliers provide standard parts. Because of this such suppliers can easily be replaced and do not require MCT goals or the support of supplier-development resources. Strategic suppliers are sources of unique parts and components. Replacing an incumbent strategic supplier would require significant resources and an extended period of time, exposing the customer to increased order-fulfillment risk.
Of course, many suppliers fall somewhere within the commodity and strategic spectrum, so a decision must be made whether their product is truly strategic.
Read more of Paul Ericksen's supply chain management articles.
Sorting Even Further
My experience is that only 10% to 25% (at most) of all suppliers end up in the strategic category.
Strategic suppliers can be further separated and prioritized for supplier development assistance into two strategic subcategories. The first is for those who need only commodities—materials like steel sheeting, tubing, rounds, plastic resins, etc.—to produce their parts and/or components. Since, again, the lead-time of commoditiescan be considered “zero,” the Tier 1 in suppliers in this sub-category can reduce the overall value stream MCT of their product through basic lean activities completely within their factory walls.
Consequently, this subcategory of strategic suppliers should receive priority in any lean supply chain performance initiative, since the desired MCT results can bedelivered in a straight forward manner. I’ve found that these suppliers represent the bulk of strategic sources within an OEM’s supply chain
My experience is also that the MCT of most Tier 1 suppliers that rely on commodities for their raw materials can be reduced to support a customer’s market flexibility needs with a minimum amount of pre-built inventory. The goal of supplier development here, then, should be to help suppliers in this subcategory become build-to-demand capable with a minimum pre-built inventory.
The second strategic subcategory of suppliers requires multiple tiers of their own suppliers to produce their products. So, in a lean supply chain performance initiative, that poses the question: “How can we prioritize supplier development assistance in order to make production of a particular component in the value chain more lean?” It is unreasonable to expect an OEM to delve deeply into the second and third tiers to create the needed agile value stream. And it is unlikely that the cumulative MCT’s of the overall part value stream will meet the OEM’s “true” lead-time goal.
The approach here is to work with the Tier 1 suppliers so they have adequate build-to-demand capability, and then put the onus on them to work with their suppliers to develop their own lean value stream. In doing this, the supplier has two primary options. They can either provide their own supplier development support or quantify the pre-built inventory their suppliers will need to support the varying market demand of the end-use product
Why would they do the former and not the latter? Because the OEM customer can set the criteria that over time they will reduce the price they pay for suppliers relying on that pre-built inventory stash. In other words, a Tier 1 supplier having multiple subtiers can select to either lean-out their own supply chain or accommodate their OEM customer needs through waste … and an OEM customer should not have to pay for a supplier’s waste.
Phase-in Period
If this is the approach Tier 1 opts to take, there should be a phase-in period of a (at least) a couple of years, since it is unreasonable to expect a value stream to lean-up overnight.
The value-stream MCT reduction approach may seem a bit overbearing, but it makes sense to link an entire value stream to the needs of the final use customer, not just the OEM through their own strategy of prebuilt inventory.
Hopefully the above guidance makes developing a lean performing supply-chain more palatable. Of course, there are many factors for rolling out such an initiative. These are defined and documented in Part II of my book, “Better Business: Breaking Down The Walls Of The Purchasing Silo.”
Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
