Bridging the Gap between Buyers and Suppliers | Robert Moakler | IndustryWeek

“Creating high performance, collaborative alliances between buyers and U.S. suppliers will ensure rebuilding a strong and sustainable American supply chain.”



Michel Baudin‘s comments:

Robert Moakler reiterates the well known fact that collaboration between suppliers and customers is a win/win, and offers an e-sourcing platform as the better mousetrap that will make it happen.

As COO of an “online marketplace exclusively developed for the American manufacturing industry,” Moakler is forthright about where he is coming from. But is lack of technology the reason why adversarial, arm’s length relations between suppliers and customers remain the norm?

My own findings on this matter — summarized in Lean Logistics, on pp. 342-350 — is that each side stands to gain a short-term advantage from unilaterally breaking a collaborative relationship, and that the business history of the past 25 years shows examples of this happening.

On the customer side, a new VP of purchasing can instruct buyers to use the information suppliers have shared to force price concessions. Conversely, suppliers can leverage intimate, single-sourcing, collaborative relations with a customer to charge above-market prices.

None of these behaviors is viable in the long term, but not all managers care about the long term, and the toughest challenge in establishing collaborative relations is defusing well-founded fears about the future behavior of the other side.

While wishing Mr. Moakley the best of luck in his business, I don’t believe technology is the problem.

See on Scoop.itlean manufacturing

Supplier Assessment — It’s The Gut That Counts Says Nobu Morita | Pat Moody

“Beyond Report Cards, Beyond Balance Sheets?  When Evaluating Suppliers, Why It’s Your Gut That Counts.

What’s the best way for supply management and manufacturing pros to evaluate current and potential suppliers? And is there only one “best way?”  There are hundreds of supplier assessment tools, books and checklists, but there is no single standards committee that absolutely dead nuts certifies what’s out there, especially when your supplier is located two continents and three oceans and four hand-offs away!”


Michel Baudin‘s comments:
When assessing a manufacturing organization, I always look for information from three sources:

  1.  Data, and preferably raw rather than cooked into metrics by recipes unknown to me.
  2. Direct observation of production.
  3. What people tell me, which may or may not agree with the data and what I sense on the shop floor.

I don’t see Morita as disagreeing with this, but I think we must be careful about basing decision on a “gut feel,” which may be no more than the expression of prejudices you didn’t even know you had.

Still, when your gut feel tells you that something is not quite right, it often is. I wouldn’t base my decision on it, but I would take it as a signal that further investigation is needed.

Ohno Disciple Led Earthquake Recovery in Semiconductor Plant| The Truth About Cars

See on Scoop.itlean manufacturing

“After the March 11 monster earthquake and tsunami wiped out large parts of Japan, headlines focused on the near-meltdown of Fukushima. Recently, I learned that there was a strong likelihood of a worldwide economic meltdown, caused by a microchip factory 80 miles south of Fukushima. Here is the story of how the crisis was contained.

‘I was already retired when the earthquake came,’ remembers  a Toyota official who requested that his name is not published.  He is a seasoned production expert, one of the few alive who received personal training from Taiichi Ohno, the father of the Toyota production system. ‘I thought, let others handle the problem, but I was wrong.’ He was recalled and asked to spearhead the Toyota part of the reconstruction effort.”

Michel Baudin‘s insight:

While critics have often claimed that low inventories made Lean supply chains vulnerable to natural disasters, Toyota’s record in actual events says otherwise, in cases including, in the US,  the Mississippi flood of 1993 and, in Japan, the Aisin Seiki fire of 1997 and now the Fukushima earhquake of 2011.

As it turns out, the combination of vigilance in logistics and relationships that make it possible to enlist the supply chain in rapid recovery works better than inventory. In the case of the Fukushima earthquake, more inventory would simply have meant more losses.

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Lloyd’s Confuses Lean with Outsourcing | The Strategic Sourcerer

See on Scoop.itlean manufacturing

“Lean manufacturing practices can create efficiency and reduce waste, but smaller inventories put companies at risk for major supply chain disruptions. Many organizations are reconsidering their procurement strategies for emergency preparedness after discovering their operational vulnerability in the aftermath of the 2011 earthquake and tsunami in Japan, as well as the flooding in Thailand, according to Lloyd’s.”

Michel Baudin‘s insight:

Since when is purchasing parts from half-way around the world a “Lean manufacturing practice”? Toyota and Honda do import parts into the US from Japan, but they have been working steadily to increase the domestic content of the cars they build in the US.

In a Lean supply chain, you use as many local suppliers as possible and  only buy from afar if you can’t help it. And local suppliers are subject to the same disasters as you, and inventory in the pipeline is just one more asset that can be destroyed in the earthquake or tsunami.

In the late 1930s, the German aircraft industry organized its supply chain in a system called “ABC,” which involved frequent deliveries from nearby suppliers and almost no inventory at the assembly site. It was in anticipation of a man-made disaster: enemy air raids. Allied bombs could not destroy components that had yet tp be made.

The article just reiterates the old belief that you can protect yourself against shortages by holding inventory. It may work for crude oil, but not for the 30,000 items needed to build a car. To protect against a Fukushima type event, you would have to keep weeks of safety stocks of all the items all the time, which is not a practical idea.

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Deming’s Point 4 of 14 – End the practice of awarding business on the basis of a price tag…

(Picture from TYWKIWDBI)

The complete wording of Deming’s Point 4 is as follows:

“End the practice of awarding business on the basis of a price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.”

Today, you will encounter no one involved with supply chain management who would argue against the idea of basing purchasing decisions on the total cost of having the item on hand when needed for production and developing collaborative relationships with suppliers. The idea of single-sourcing every item, on the other hand, makes many managers nervous, but, without such a committed relationship, you cannot have information exchange at the depth required for collaboration to pay off.

As of 2012, however, very few companies have followed through on this recommendation. What we have seen instead in the past 20 years instead is “We’ll skip Lean and go straight to China,” based exclusively on temporarily cheap labor, without due consideration to local infrastructure, quality and productivity issues, and logistics. Companies that are “reshoring” after being burned at this now have an opportunity to implement this most specific and least controversial of Deming’s 14 points.

It breaks down into the following specific recommendations on what is now called supply chain management:

  1. End the practice of awarding business on the basis of a price tag.
  2. Minimize total cost.
  3. Move toward a single supplier for any one item.
  4. Develop long-term relationships of loyalty and trust with suppliers.

1. Stop awarding business on the basis of a price tag

In this area,  companies don’t behave like individuals. Whether you buy food, clothing, household appliances, or the services of a plumber, you don’t systematically choose the lowest price. Like the astronaut on the launch pad, you do not want every part in the rocket to have been made by the lowest bidder. Even if you are hunting for bargains, you also consider quality, delivery, and the availability of support. You willingly pay more for appliances that are reputed for working well, lasting long, operating quietly, match the design of your house, and have spare parts and service readily available.

In principle, a company’s purchasing agents should think the same way. When they don’t, it is because they are evaluated on the prices they are able to negotiate and because they are not familiar with the actual use of the materials or equipment they buy. If you hired a third party to do your shopping, with instructions to find the lowest prices, you are unlikely to be happy with the results or even to same money over time.

Because they don’t use what they buy, purchasers rely on specs to decide whether a supplier’s product meets the company’s needs. As Deming points out, however, conformance to specs is never synonymous with fitness for use, no matter how carefully the specs are written. Specs only work as a one-way filter; if a product is out of spec, you know you can’t use it, but, if it is within specs, it does not guarantee that you can. Juran distinguished between true and substitute characteristics. The true characteristics are what you are really after, like the taste of a cake. Unfortunately, you cannot verify it without eating the cake, so you use substitute characteristics that you can measure, like the cake’s diameter or the sugar content of the ingredients. If they are out of specs, you know there is something wrong with the cake, but they can all be within spec and the cake still taste awful.

Relying on specs in purchasing is therefore taking necessary conditions and treating them as sufficient. But how do you avoid doing this? Deming does not say. I recommend the following:

  1. Avoid perverse incentives. Use metrics for purchasing that do not overemphasize the price.
  2. Implement Lean supply chain management. It is a broader subject than just buying based on price, but it provides a context for a more balanced approach to evaluating suppliers.
  3. Rotate professionals in and out of Purchasing. This means treating purchasing as a skill employees should have rather than a career. If you have people in Purchasing who have previously worked in Production or Engineering, they will have a better understanding of the issues.
  4. Give end users a voice in Purchasing. Purchasing should not have the authority to switch suppliers without the approval of those who consume the materials or use the equipment.

2. Minimize total cost

For manufacturing, it means considering everything it takes to have good materials within arm’s reach of the production operator for as long as the line is running on this product, as opposed to the price on a purchase order. For equipment, it means looking at the total cost of ownership (TCO), also a term that was introduced after Out of the Crisis came out.

The only issue Deming raises is that of quality, but it is not the only one, particularly when you consider switching from a  supplier located 10 miles from your plant to one that is 6,000 miles and 10 time zones away in an unfamiliar country. You have to consider transportation, longer lead times, communications and travel.

Furthermore, discussing cost and quality in the same breath leads naturally to thinking about what the literature calls “cost of quality.” The literature on quality defines this cost as the sum of the direct costs of failure, appraisal and repair, and omits the impact of quality on sales, as being too “controversial” and difficult to measure. This “cost of quality,” however, is the tip of the iceberg; it grossly underestimates the business consequences of quality problems, as shown, for example by the Firestone tread separation issue in 2000 or Toyota sticky accelerator pedals in 2010. A car maker’s reputation for quality is its crown jewels, and the answer on how much effort it should put into nurturing is is whatever it takes.

While transportation costs are relatively easy to calculate, the cost of expanding lead times from days to weeks or months is, in some cases, much larger than the cost of having inventory in transit. For example, toys sold in the US during each Christmas season are made in China the previous summer, but you cannot tell bestsellers from duds until late in the fall, by which time there is nothing you can do to adjust the supply.

To follow Deming’s recommendation here, you consider not the unit price of the item but all the outflows of funds generated by the decision to buy it for a given supplier for as long as you intend to do it, knowing that this may vary from a few months for fashion-related items to several decades for airplane parts. The question is not the price of one unit but, for example, what it takes to make, say, 1,000 usable units available on your production line every day for the next four years. And you have to write at least a best-case, worst-case, and most likely scenarios of how it may unfold in terms of volumes, quality and delivery performance, and  technical support of the supplier. Each scenario results in cash flow schedules that can be compared.

Such an analysis cannot be done without making assumptions about product life, demand, and supplier capabilities. It is more complex than picking the lowest bidder, but the stakes are high.

3. Move toward a single supplier for any one item

What happens when your single supplier fails? It happened to Toyota with the Aishin Seiki fire of February, 1997. The plant was Toyota’s single source of proportioning valves for Toyota in Japan. Toyota’s factories shut down within four hours of the fire, the supplier network was mobilized, production was restarted within a week, and was back to full volume in 6 weeks.  In the Japanese press, the fire was initially viewed as a failure of Toyota’s system; by the time it ended, it was a vindication of it.

If you buy thousands of items, even with a single source for each, you will have hundreds of suppliers. If you have a policy of having at least two sources for each item, you will have even more suppliers and more complicated relationships to manage. Deming emphasizes the impact on quality, but it touches in fact every aspect of supplier relations. Juggling multiple suppliers for each item is playing the field; having a single source, a monogamous relationship.

If, for each item, you have a single source for whom you are a major customer, your plan for dealing with emergencies like the Aisin Seiki fire is to rely of the strength of your supplier network to come up with an appropriate response. The Wall Street Journal article about the Aisin Seiki fire in May, 1997 described the response of Toyota suppliers as the manufacturing equivalent of an  Amish barn raising.

Sudden surges in demand are not an issue in car manufacturing, but they are in other industries, like semiconductor production equipment. If you are a machine shop making components for this industry, you may see demand doubling overnight simply because  one semiconductor company placed a big order for machines in a new wafer fab. You know that sudden changes in the economy may cause this order to be cancelled, and you cannot count of other orders filling up you slack capacity once this order is filled. In this case, rather than investing in additional equipment that is unlikely to be permanently needed, suppliers have been known to make second-sourcing agreements with competitors to provide surge capacity. One consequence of such arrangements is that the parts arriving at the customer plant may come from different suppliers. From the customer’s perspective, however, it is still a single-sourcing arrangement,  because the primary supplier remains responsible for quality and delivery.

4. Develop long-term relationships with suppliers

A six-year contract representing 30% of your sales to be a customer’s sole supplier of a component sets the stage for a different working relationship than a one-year contract representing 10% of your sales, in which you are one of a stable of suppliers among which the customer splits the demand. Exclusive, long-term relationships are clearly a required foundation for the collaboration that the entire literature on supply chain management agrees should take place between suppliers and customers, but generally doesn’t.

“Arms around” is better for both sides than “arm’s length” and adversarial. So why is it so rare, and what can we do to make it more common? The abundant literature on supply chain management fails to see what I think is the elephant in the room: unlike a plant, a supply chain is ruled by the interaction of multiple, independent economic agents. This is discussed in Chapter 19 of Lean Logistics (pp. 341-352). The summary is as follows:

In the lean supply chain, the traditionally adversarial, arm’s length relationship between supplier and customer makes way for a collaborative approach, centered on long-term single-sourcing agreements, and extensive exchanges of business information and technical know-how. This approach increases the total payoff of the relationship, but transitioning to it is difficult because it requires behavior changes on both sides.
Sustaining it over time also requires management to consistently forgo the short-term windfalls that can be reaped through a unilateral return to the adversarial approach. That supplier and customer should collaborate to increase the total payoff does not prevent each one from negotiating aggressively with the other on sharing this payoff.

Once you acknowledge that a collaborative relationship takes a long time to build and are easily destroyed by either side, you can manage it accordingly and give it the attention it requires.

How natural disasters test Lean supply chains

Via Scoop.itlean manufacturing

The floods in Thailand are the latest. Before, there was the Fukushima earthquake and, going back further in time, the Aisin Seiki fire of 1997 in Japan and the Mississippi flood of 1993…   Each time, the press has faulted Lean for making the economic disruptions caused by theses events worse. The actual record is that the vigilance inherent in Lean Logistics and the strength of customer-supplier relationships in a Lean Supply Chain are in fact key to a rapid recovery.

In 1993, Toyota logisticians in Chicago reserved all the trucking available in the area a few days before the flood cut off the rail lines to California, thereby allowing the NUMMI plant to keep working during the flood.

In 1997, when the Aisin Seiki fire deprived Toyota in Japan of its single source of proportioning valves, other suppliers came to the rescue in what the Wall Street Journal a few months later called the business equivalent of an Amish barn raising.

You can, and should protect production against routine fluctuations. That is what tools like Kanbans are countermeasures for. But there is no way you can afford to protect your business against all possible, rare catastrophic events. What you can and must do instead is be vigilant and prepared to respond quickly and creatively to whatever nature or society might throw at you.
Via the Bangkok Post