non value added costs

Supply Chain Management
By Bill Gaw

Supply Chain Management in its broadest context deals with the flow of material and information form the natural resource stage all the way through to the ultimate customer. Consequently, supply chains cover several enterprises such as raw materials suppliers, companies who transform the materials by adding value, finished goods suppliers, distributors and retailers. In order to optimize our business processes, we must make sure that all the resources within the supply chain share the gained benefits equitably.

On a more local level, this means that a manufacturer will include both its sup-pliers and customers in the supply chain with the intent of minimizing constrains and addressing all major business objectives. These objectives almost always include issues such as: Inventory reductions, reductions in lead times and cycle time, development of Internet communications, improvement in the order fulfillment process and improved customer satisfaction.

Slide 4-18 presents a review of the subjects covered in this supply chain management mini-presentation. Hope they provide you with a few ideas on how to improve your supply chain. Get out there and try them out—remember that inventory management can be only as strong as the weakest link in the total supply chain.



Before we can even start to put on paper a new layout for a sequential production line with point-of-use-logistics support, it is necessary to review and update our procurement strategies. Slide 4-9 provides inventory objectives.

Lesson Learned: A critical success factor relative to establishing an effective pull system is the building of a world class supply chain. Purchasing parts based on the lowest selling price and establishing second sources of supply no longer are winning strategies. Instead of price alone, we need to evaluate a supplier’s flexibility to change, quality attitude, schedule reliability and total cost. We need to shrink our supplier base to a manageable number and identify our key suppliers. Key suppliers will require an on going program to identify and achieve continuous performance improvements. In short, we need to develop our suppliers as if they were a department within our factory. With this mentality there is no longer a need to second source parts. Would you second source parts that were made in your factory? I think not!



Slide 4-10 presents the objectives of focused procurement. In this example the case study company has reduced their vendor count from 771 to 215 qualified suppliers and has identified 50 key suppliers that the purchasing team interfaces with to continuously improve their performance.

Lesson Learned: Intimidation used to work fairly well as a method of getting vendors to tow the line. But today, vendors have become suppliers—they’re more sophisticated in their dealings with customers and the good ones are more selective in choosing their partners. Some suppliers will be classified as key suppliers and contracted into a unique working relationship called the partnership.



Slide 4-11 applies the Pareto Principal to gain key supplier focus. Key suppliers can be classified as commodity suppliers or outsource suppliers. Commodity suppliers will usually contract for a wide variety of like parts such as electronics, structural, hydraulic, pneumatic, etc. Outsource suppliers will provide cabling, printed circuit boards, electronic assemblies, machine components, etc.

To receive world class service from key suppliers we need to treat them as extensions of our company—they need to have access to real-time data on what’s happening in the company and where it is headed. The more we communicate and work with these suppliers the sooner they will reach their full potential.

Lesson Learned: The days of vertical integration are over. No longer can we tolerate the cost of maintaining a total in-house capability to make every part that is needed in the final product. Outsourcing all non-core processes is today’s rule. Why? Because the supplier marketplace has specialty houses that can do almost every manufacturing and business function better and at a cost savings.

A good example is the outsourcing of a total machine shop at our case study company. The tooling business (proprietary and a core competency) was growing so fast that the strategy was to gradually outsource the non-core competency machine shop parts and convert the machines to tooling work centers. Not only was this strategic objective a winner, it was implemented in record time and the aggregate cost of outsourced parts was reduced by 20% below in-house standards.



Supplier selection is a crucial part of a supplier development program. Purging and upgrading from a price only vendor structure to key supplier partnerships requires a tenacious pursuit for high performance suppliers. The creation of a supplier selection team is a requisite of a supplier development program. Slide 4-12 identifies a typical supplier selection team.

Lesson Learned: In selecting outsourcing suppliers, it is advisable that the planner/buyer be skilled in the purchasing process and have technical expertise in the outsourced processes. For example, when our case study company outsourced their machine shop, they converted a machine shop supervisor to a planner/buyer and provided him with planner/buyer training. They rightfully concluded that it was speedier and easier to acquire the planner/buyer skills. You never want a planner/buyer that lacks technical expertise managing an outsource supplier. 



It is important to have a procedure that documents the process of supplier selection. Slide 4-13 provides the basics of a supplier selection process. Consistency and integrity are paramount to an effective execution of the selection process.

Lesson Learned: It is amazing how many suppliers will be eliminated simply by requesting them to fill out and mail in a supplier pre-survey. If you are in search of suppliers for on-site visits to find a particular commodity supplier, the pre-survey will insure that the suppliers selected for an on-site visit will be what you are looking for and will save much time and frustration!



Selecting outsource suppliers requires a deeper investigation than what is done for commodity suppliers. A lot more is at risk and you want to make sure that the supplier selected is compatible with your company’s management philosophy and business culture. Slide 4-14 lists the more important business elements and processes that should be included in a key supplier on-site audit list.

Lesson Learned: Outsourcing non-core production requires special attention to the planning process. For example, our case study company outsourced machine components to three machining companies. Their plan was not to establish second sources but to tie each supplier to a specific product and sequential production line. This way they could work with each supplier to develop the material handling and scheduling methods that best fit each of the products. In electronics, they worked with two suppliers. They started out with cables, added  PC board stuffing, added sub-assemblies and finally successfully out-sourced black box, plug-and-play manufacturing.



Communication is the name of the game and the better they are the better the results will be from key suppliers. There is no substitute for on-site visits to key suppliers. The practice of MBWA at supplier sites has more payback than any other option available. Email is good, telephone is better, but the on-site visits are best.

Lesson Learned: When our case study company established a partnership with a machining company that was 1200 miles away, most everyone thought we had gone mad. But this company was perceived to be much better than the rest of the competition so the selection committee accepted the distance risks. The responsible planner/buyer spent 50% of his time at the suppliers facility at the beginning of the partnership. After six-months, he was down to once a week and by the end of the first year he was down to monthly visits. How well did this supplier work out for our case study company? Well, they have the best quality and on-time delivery record of all key suppliers, their parts go directly to the production lines with no in-house inspections performed and they have never shut down a production line. All this at an aggregate cost reduction of 14% from the previous in-house production costs.



Performance measurement is just as important for key suppliers as it is for in-house production. The graphs in slide 4-16 are self explanatory but it should be noted that the graphs use the rolling ten-period format that we discussed in the balance scorecard module.

Lesson Learned: Do not create a “cookie cutter” supplier measurement system and then dictate it your suppliers. Key suppliers should have their say about how their performance is to be measured—it should be a negotiated process. It is crucial that key suppliers are committed to the standards by which they will be measured. 



An annual key supplier conference is a good business practice. But don’t think that you will solve any problems at such a conference. Such a get together should be a feel good event. Who should attend and some topics for discussion are listed in Slide 4-17. Awards for exceptional performance is a good practice but don’t get carried away.

Lesson Learned:  A supplier of the year award can be demotivational and should be avoided. A much better approach is to give out specific accomplishment recognition awards, such as a supplier that has developed a special parts handling innovation, or a supplier that contributed over 5 suggestions on how to reduce costs through parts redesign. These types of awards are specific and consequently accepted and respected by all suppliers.


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