Many people I run into have differing ideas on what the purpose of the supply management function should be. On one end of that spectrum are those who believe that purchasing’s primary focus should be scouring the world, looking for the source with the lowest possible piece-price. Once this is accomplished, all the rest of purchasing-related tasks are considered facilitative of getting usable parts to their point-of-use at minimal cost. From my view in the ballpark, this focus represents the vast majority of Original Equipment Manufacturer (OEM) thinking.
At the other end are those who believe the primary task of purchasing is to develop a lean performing supply chain. These folks—again, in my experience, few and far between—ascribe to the notion that with a lean supply chain, all of the other goals put in front of purchasing—quality, delivery, price, etc.—pretty much fall in line.
As with their counterparts on the other end of the spectrum, these people focus on source selection. But they use their criteria to find sources who already can—or seem to have the will and aptitude to develop—the capability to leanly support their customer’s order fulfillment goals.
Why is it important to define a company’s overriding supply management function? Because operating at either end of it—or anywhere in between—requires different skillsets and practices. Let me explain. I will base my explanation on two extreme goal strategies that necessitate difference focuses in two areas of supply management practice, those areas being logistics and warehousing.
Finding a Balance
Prior to that discussion, I want to define what should be a primary goal of all businesses—to optimally balance supply and demand. This is best accomplished when an OEM customer understands its markets well enough to define a purchased-material order fulfillment policy, and suppliers are capable of supporting the criteria laid out in that policy in a lean manner. And, since we’re talking about capabilities such as supplier responsiveness (lead times) and flexibility (being able to supply more product than forecast), we will need to take into account the costs associated with distant sources. In other words, we will need to talk how close a supply chain—up to and including its OEM customer’s manufacturing and distribution—is to build-to-demand capable.
It is a general understanding that to be a world-class manufacturer in today’s business environment, a company needs to have a world-class corporate logistics department. This department is generally quite large and sophisticated because of the prominent role it plays coordinating worldwide sourcing—which is the result of the sourcing based on piece-price. The cost of maintaining such a department is usually quite substantial.
Fresh out of college in the mid-1970s, I was hired by a Fortune 100 corporation that had factories around the world. At the time, the strategy of most of those factories was to source locally whenever possible. As a result, logistics was almost an afterthought. Our corporate logistics department was made up of one supervisor (not manager, director or vice president), a handful of transportation coordinators and a secretary.
There’s a big difference in the cost of logistics planning and execution from what most OEMs have today. And back in the day, those types of logistics functions were just as effective as today’s in their primary function.
But the cost differential between the traditional and current logistics operations is not the greater of the cost associated with sourcing from distant suppliers. I’m not disputing whether today’s logistics departments find the lowest-cost transport. Nor am I questioning whether they—for the most part—get parts to their destination on time. Rather, the primary cost differential lies in the remedial back-up steps required to ensure distant sources can support factory and business needs, including things like being able to capitalize on incremental sales where demand exceeds what was forecast. So, I am in fact questioning whether relying on an extensive logistics function is a lean approach to supply chain management. Or is it just a way of realizing incremental savings on freight?
If it is only a remedial back-up step to ensure continuity of supply, I’ll posit that in a pure sense of lean supply chain performance, logistics shouldn’t be a major consideration in supply chain management.
Referring to the goals of optimizing the balancing of supply and demand, there is no question that distant sources have longer lead times than local sources and—partly because of this—cannot react responsively to fluctuations in market demand. This negative situation is further intensified by the fact that overseas sources typically require longer firm order periods from their customers. So in my mind, the logistics function has evolved to what it is today because most current sourcing practices do not result in optimizing supply and demand.
A similar example can be cited between supply and demand and warehousing. During the mid-1990’s, my department bought a rather simple stamped product from a local supplier, but one that required sophisticated post-stamping processing. Because of this, there were not a lot of sourcing alternates, so we were more or less stuck with this supplier, at least in the short-run. This supplier’s lead-time was over three weeks, and this was a factory where completed parts were stored almost haphazardly throughout the facility. This supplier’s on-time delivery was under 50%, which required us to order parts before they were actually needed to ensure they would be on-hand to support our assembly schedules. This also led to our factory to keep a relatively large store of raw material safety stock on the parts coming from this supplier.
Read More Supply Chain Initiative columns by Paul Ericksen
After a series of serious discussions with this supplier, they proposed a solution which involved purchasing a rather expensive—costing in the hundreds of thousands of dollars—inventory control infrastructure and management system that would facilitate their being able to retrieve completed parts as needed to support our factory’s production schedules.
Instead of offering our congratulations to them on their proposal, we questioned it, asking whether this would increase their internal costs and/or really get at the root cause of their unacceptable performance. The supplier was confused at our response, so we went into more detail.
We explained that our department was in the midst of developing a lean performing supply chain that would meet our responsiveness and flexibility needs; i.e., have a capability to build as close to demand as was financially practical. And that it seemed to us that their proposal was a step away from this goal. We proposed sending in some of our factory’s production engineers to help them redesign their operational flow to give them the needed build-to-demand capability. They agreed to accept this assistance.
Together, we were able to re-engineer their processing so that with minimal capital expense—much lower than the inventory system they would have bought—they were able to reduce their lead time to two days and reduce the finished goods inventory they needed on-hand to our production schedules. And, by minimizing their internal pre-built inventory, it was much more easy to manage. As a result, their on-time delivery performance rocketed to over 99%. The re-engineering project had also taken cost out of their processing, which led to a price reduction—and we split the savings with the supplier. The lesson here, as was seen in logistics, is that warehousing is only needed when lean performing suppliers are not selected up front.
World-class manufacturers like Toyota have a strategy of manufacturing in their main markets and sourcing parts local to their factories for a reason. They require about half the finished-goods inventory at dealer lots—effectively, warehoused product—to support customer fill-rate goals, compared to their piece-price-chasing competitors.
Back in the day when overseas sourcing was the almost considered a religious principle, you were considered blasphemous if you questioned the validity of this strategy. But by sourcing with lean domestic suppliers, my group was able to develop a lean-performing supply chain. And when our company made the strategic decision to start marketing our products through big-box stores, and the president of our division asked me if the purchasing function would be able to provide the response and flexibility needed to profitably operate through that channel, my response was, “It will be a slam dunk!” Our lean performing supply chain led us to significant profits above and beyond what was expected. It was good for suppliers, too, as the actual sales far exceeded forecast levels—and consequently they, too, were able to harvest windfall profits.
So the lesson here is to not necessarily get in line and follow new procurement trends like so many lemmings, but rather look at practices with a fresh perspective to see if they actually support the best overall business case. If you have an idea that you think can generate additional products for you company, try to get permission to apply it. And if you can’t get that permission, do as I did—i.e., go ahead and do it anyway, hiding it if needed—and when your company needs it, you will already have the supply chain infrastructure in place to deliver it.
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.
