Where's the Beef? Industrial Justification for Next Generation Supply Management

Perhaps you’ve been persuaded by the arguments I’ve made over the last three blogs that adoption of a new, primary metric of supplier performance is needed for Next Generation Supply Management. And maybe, just maybe, you’ve bought-in to the proposal outlined in my most recent blog that Manufacturing Critical-path Time (MCT) should be adopted as that metric. Perhaps, though, you’re still wondering whether this is just an opinion from another “Ivory Tower” blogger—everyone has opinions and many don’t reflect reality—or whether industrial experience exists that backs up the concept. In other words, you may be asking, “Where’s the beef?”

This blog will summarize three “beefy” MCT industrial case studies. The first involves an original equipment manufacturer (OEM) that wanted to start selling products through “Big Box” stores. The OEM realized that in this, supply chain flexibility could be the key to a competitive advantage since it would allow for support of Big Box short-fuse order fulfillment requirements without the need for enormous amounts of pre-built inventory—which was what competitors already selling through Big Box stores relied on. 

To increase supply chain flexibility the OEM initiated a supplier development effort that focused on the reduction of “true” supplier lead-times, i.e., MCTs. Over a seven-year period the average MCT of suppliers who supplied parts for the product targeted by the OEM for the introduction of its brand into the Big Box channel were reduced from about 90 days to just over two weeks, i.e., a 78 reduction. This allowed the OEM to successfully launch its Big Box marketing initiative. But that wasn’t the whole story.

Like many OEMs, this one routinely measured and evaluated supplier quality, delivery and price. Over the seven-year supplier MCT reduction effort the OEM noticed that performance by impacted suppliers in these three traditional metric areas improved to the point that they were out-performing suppliers of all other products produced by the company. In fact, over that seven-year period:

• On-time delivery in parts per million defects went from over 2,000 to less than 500.

• As-delivered quality percent defective was reduced from about 9 to 2.

• Suppliers were more successful in meeting the OEM’s annual continuous improvement price reduction goals.

So, in this first case study, adoption of the MCT metric and having an over-riding strategy of supplier MCT reduction delivered significant supplier performance improvements (readers interested in reading a detailed account of this case study should refer to the two-part article “Lean’s Trinity” in the October and November 2013 issues of Industrial Engineer).

The second case study involved the Wisconsin Manufacturing Extension Partnership (WMEP), which utilizes MCT reduction in its Accelerate Supplier Development process. In fact, over the first decade of this century WMEP conducted 381 MCT reduction projects for 21 total OEMs, delivering an average 44% MCT reduction.

A subgroup of this work involved a program that WMEP managed for the Defense Logistics Agency called Accelerating Deployment of Defense Contracts (DLA contract N000140-01-C-L622), which covered 195 of the 381 total supplier projects. The final DLA Executive Summary report of this program detailed the following impacts for the value streams targeted by the MCT reduction projects:

• An average of $75,000 in annual supplier direct cost reductions.

• An average 56% reduction in supplier inventory (raw, WIP and finished product) with a $32,000 associated annual carrying cost savings.

• An average reduction of more than $100,000 in annual supplier quality-related costs.

Additionally, one participating defense prime reported that the delivery and quality performance of their 21 suppliers who had participated in the program had improved 56% and 26%, respectively.

The final case study was documented in a 2005 article titled “Improving Asset Management and Order Fulfillment at Deere & Company’s C & CE Division,” which was published in Interfaces. The slant on this case study was slightly different—which makes it all the more important to understanding what Next Generation Supply Management is all about. Acknowledging that “a responsive supplier chain with a manufacturing cycle time (MCT) of three weeks or less” was required, the article reported impacts of:

• Reduced and avoided inventory of $890 million, which translated into $107 million of sustained shareholder value-added.

• On-time delivery to dealers was improved from 63% to 92%.

• Service level to end-customers was maintained at 90%.

Here, an OEM supply chain strategy of short MCTs delivered a reduced need for finished goods inventory while supporting maintained and/or improved customer fill rates. These are executive-level financial exhibit impacts we’re talking about here! And that’s on top of any other resulting supplier performance improvements (quality, delivery and price).

In conclusion, actual industry data has been laid out that justifies adopting MCT as a primary metric of supplier performance and, even if I do say so myself, the three case studies presented represent “a lot of beef.” Further, a sense is provided for exactly what is implied by the phrase Next Generation Supply Management. Specifically, Next Generation Supply Management describes a procurement function that has a recognized role in impacting executive-level financial metrics “above and beyond” that of material variance, i.e., piece-price.

Elaboration on this topic will be the focus of the next blog of this series and should provide a very interesting read for procurement professionals who today have a primary focus on delivering annual price reductions—isn’t that just about everyone? Be sure to tune in.