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My recent book, “Better Business: Breaking Down the Walls of the Purchasing Silo,” is based on the proposition that purchasing is not part of the overall business at most original equipment manufacturers ( OEM) and, as a result, the function’s positive contribution to the bottom line is mitigated or, in the extreme, muffled.
I have justified my position by showing how lean supply chain performance, which should be the goal of all supply management departments, can lead to better business by impacting metrics. management performance.
With this article, I’ll explain these claims by looking at four scenarios: two related to silos between purchasing and their own factory operations, and two involving silos between purchasing and suppliers.
OEM customer fill rate
Customer fill rate is an important measure at the management level. In fact, this is perhaps the most important. The metric quantifies the percentage of time that the business has a product available for sale to a customer when that customer wants to purchase it. Of course, there is usually a period of time when a customer waits for a product that is not available before switching to a competitor’s offer, but that period – under normal market conditions – is not not very long and gets shorter and shorter.
How many purchasing staff are aware of their employer’s customer fill rate goals and performance, and why is this important? In my experience, few are aware of it. The challenge of maintaining customer fill rates arises when actual customer demand differs from what was expected. And in today’s markets, especially consumer markets, demand is becoming increasingly difficult to predict. This is due to a variety of issues, including ever-increasing availability of SKUs within product lines, the commodification of many end-use products, and on-demand customer expectations that drive them to switch to a competitor.
Customer fill rate is an important metric because it ties a business to its customer base. In my opinion, the metrics that do this are usually the most important in understanding what is needed for a business to maintain and / or increase its competitiveness. And there is an important – and often overlooked – link between this metric and supplier management, which will be discussed in the following example.
Inventory of prefabricated and prepositioned finished products
Finished product inventory is a dressing that OEMs apply to maintain fill rates for their customers when they lack the capacity and / or flexibility inherent in their business. extended enterprise– not just their own factories – to do it. Inventories of finished goods are expensive to build and maintain. It can negatively impact a company’s finances when oversized, whether in general or SKU terms, and needs to be reduced in order to be sold.
The conundrum here is that while a larger percentage of OEM factories focused on increasing their own ability to meet varying customer demand, they used little or no resources to facilitate the ability of their supply chains to do so. The problem, then, is the lengthening of supplier delivery times and / or the lack of capacity. In my mind, when OEMs don’t facilitate the increased flexibility of order fulfillment outside their own factory walls, at their strategic suppliers, they are making a big mistake, which contributes greatly to an external purchasing silo. .
I would like to make an observation. As a technical buyer in the late 1980s, I spent a lot of time in my suppliers’ factories learning how they made parts, gaining a first-hand appreciation of their operational capabilities, strengths and weaknesses. . Today, it is not uncommon for buyers to avoid supplier site visits, even to considered suppliers. strategic-in an effort to reduce the department’s purchasing costs. In effect, this means that today’s buyers mostly manage their suppliers from their desk, based on performance metrics, typically price, on-time delivery, and quality-on-delivery.
So even if an OEM had supplier development resources, a supplier’s lack of order fulfillment capability would only become apparent when it was unable to flexibly meet the varying demand of the supplier. Marlet. In other words, vendor development would be reactive / tactical rather than proactive strategically, focusing primarily on assisting the vendor in âfirefightingâ efforts. Most OEMs I know don’t rely on firefighting to manage internal risks, so it’s another conundrum that their primary support, if any, is related to firefighting.
Therefore, if you ask most buyers, they probably don’t have a precise understanding of the ability of specific part number suppliers or critical path times to meet expected demand. This lack of knowledge increases the height and thickness of the walls of the purchasing silo by reducing – or eliminating altogether – a buyer’s understanding of suppliers’ operational capabilities, including flexibility in order fulfillment. .
If you were to ask most buyers about the amount and cost of their employer’s finished goods inventory, they probably wouldn’t have a clue; that is to say an internal silo.
Supplier’s “true” delivery times
It is important to distinguish between the times indicated and the ârealâ times. To shorten the discussion on this subject, I will make the following two general observations. First, most suppliers cite lead times based on what they think they need to get an order, hoping they will rarely be asked to support them. In other words, if customers request changes within the stated timeframe, it will either require the supplier’s firefighting efforts to meet them, or they will not be honored at all. This situation was what I have generally seen in the 10 years that I have consulted. In fact, I had a customer who regularly ordered three months in advance because they believed that all of their suppliers would be able to respond to changes in orders within that time frame.
What OEM customers should demand is that suppliers offer delivery times based on plant physics; that is, the time it would take to fulfill an unexpected sales order along the critical operational path. This means no pre-built inventory. Knowing this would either allow a purchasing department to offer development assistance to a supplier by reducing lead times, or facilitate a supplier. good size its required pre-built inventory. And indeed, most of the vendors I’ve worked with over the years themselves don’t understand their ârealâ deadlines and quantify their pre-built inventory without much of a baseline, instead of âpulling fromâ. hip “.
If asked, I don’t think most OEM buyers would be able to quote their supplier’s delivery times based on plant physics.
Supplier part specific capacity
While capacity is closely related to turnaround time, there are separate issues that are important enough that the topic merits its own discussion.
From an OEM’s perspective, there are two main approaches to capacity planning. First, when the OEM relies exclusively on a supplier’s existing internal generic processes for the production of its projected requirements. The most common example is when suppliers run job shops. Second, when the OEM needs to purchase special tooling to be used on the equipment from a supplier.
Read more of Paul Ericksen’s articles on supply chain management.
I will first discuss the workshop scenario. When an OEM relies on general supplier processes, it competes with the supplier’s other customers for processing time on generic machines. The point here is that this means that the supplier’s ability is not just based on the supplier’s own predictions and errors; this means that the available capacity is tied to the forecasts and errors of their other customers. This adds an element of uncertainty as to whether adequate capacity will be available to support the range of specific OEM requirements. When different OEM forecast errors overlap or are excessive, in my experience, the customers that the supplier considers to be the most important get the deal, while the rest are sorted, implying that some customers will not see their schedules supported.
The above situation can be magnified when a large percentage of a supplier’s customers share seasonal demand.
In the second case, most OEMs I have had experience with try to minimize their tooling costs for the parts purchased. For this reason, they tend to budget for a “best case” scenario. When this happens, even when vendor tooling and equipment is dedicated to a particular OEM, capacity planning has not included a plan B to account for âvendor lack of capacityâ, increasing lead times. “Real” without the supplier having previously constructed inventory.
An ironic remark must be made here. When the above situation occurs, it often results in a drop in the supplier’s âon-time deliveryâ performance. However, the first cause of this performance is the customer’s lack of tooling budget !!!
Are buyers today aware of supplier capacity that is not on the best deal, and if not, do they have a plan B? I doubt.
So what could happen if buyers knew about the above four metrics? They would understand that it is their suppliers who are the primary cause why their employers have to rely on stocks of prefabricated finished goods to maintain customer fill rates. Based on the costs of this, they might justify some level of additional resources for the purchase, with the ROI occurring when the OEM is able to reduce that inventory, for which the purchasing function would then need to get. financial credit. And once this resource is paid for, the OEM will dramatically reduce the cost of fulfilling orders, which would be a major step in breaking down the walls of the buying silo!
I could go on and on with more scenarios and questions that should be important to buyers, and I do that in my book. If you found the above discussion interesting and useful, you can order it.
Paul Ericksen’s new book is called âBetter Business: Breaking Down the Walls of the Purchasing Siloâ. Ericksen is IndustryWeek’s Supply Chain Advisor. He has 40 years of industry experience, primarily in supply management with two major OEMs.