I’ll start this article by posing three questions to suppliers of OEMs:
- How many of your customers have given you demand-based order fulfillment flexibility targets? Another way of asking this is, “How many of them have tied their supply chain capability requirements to what they need to maintain acceptable Customer Fill Rate levels?”
- How many of your customers have given you short-fuse orders that required you to respond more quickly than the order fulfillment flexibility targets — demand-based or otherwise — that you were given?
- In the circumstance of the preceding question, how many of your customers have penalized your On-Time Delivery performance when you were unable to meet their short-fuse order fulfillment needs?
During my consulting days I asked those questions of every small and medium-sized manufacturer I worked with. In general, the composite of the responses I was given goes along lines of:
- Very few, in any. If given at all, OEM flexibility targets are usually generic, i.e., not related to actual market demand.
- Virtually all OEM customers make such requests.
- Well over 50% of OEMs.
I bet many of your responses are similar.
So what’s a supplier to do? I can tell you what they have done, for the most part — at least the ones I’ve worked with that operate under ongoing Blanket Purchase Orders. They — just like their customers, as mentioned in the last column — pre-build and maintain Finished Product such that they always have extra on hand in an attempt to maintain their own Customer Fill Rates, i.e. On-Time Delivery metrics.
When OEMs don’t institute demand-based Order Fulfillment Policies — both internally and in their supply chains — they pretty much force their suppliers to add cost in the form of just-in-case inventories in order to maintain an On-Time Delivery performance record that won’t disqualify them from getting future business. How much sense does that make, especially in a world of piece-price focus?
Why OEMs Avoid Making Demand-Based Order Fulfillment Policies
It should really be no surprise that the bulk of OEM purchasing departments haven’t instituted demand-based Order Fulfillment Policies. Why? For a variety of reasons, including the following.
First, the purchasing function seldom interacts with Marketing and Sales, which are responsible for maintaining Customer Fill Rates. More interaction would definitely need to happen to gain an understanding of the forecast error associated with OEM products and the type of order fulfillment flexibility needed to capture the bulk of the un-anticipated demand. These data points are critical pieces of defining a market-based (and therefore meaningful) Order Fulfillment Policy.
Second, purchasing would then need to quantify their own internal purchased part just-in-case costs that facilitate maintaining current Customer Fill Rates, i.e., primarily the inventories that were detailed and otherwise cited (through the Industry Week link) in the previous article.
Third, calculations would need to be made regarding how much these internal costs could be reduced given increased supply chain order fulfillment flexibility (at the same time maintaining or increasing Customer Fill Rates).
Fourth, purchasing would need to generate a projection of increased revenue available and costs eliminated that could be expected based on both the newly set flexibility standard and the anticipated forecast error. Remember, today OEMs are leaving money on the table when they can’t support unanticipated demand and end up holding un-needed Finished Good Inventory when forecasts for specific products are too high.
In short, the process is too much trouble and deals with too many uncertainties for most OEMs to justify making effective policies. Again, I’ll ask, “What’s a supplier to do?”
The Lean Endgame
I was responsible for planning and overseeing the supply chain side of project work to facilitate Lean Supply Chain Performance at a Fortune 500 company. A general description of this project was published as a two-part series (Oct.-Nov. 2013) in Industrial Engineer entitled, “Lean’s Trinity.” The distribution side was planned and overseen by a colleague of mine and his work is described in an article in Interfaces (Jan.-Feb. 2005) entitled, “Improving Asset and Order Fulfillment.” As he so succinctly put it, lean order fulfillment --- at least in our industry --- required “a responsive supply chain with a manufacturing lead time (or Manufacturing Critical-path Time) or three (weeks) or less.”
In light of this, suppliers have three main options relative to maintaining a good On-Time Delivery performance record under the inevitability of short-fuse orders:
- Have pre-built Finished Product — waste — on hand. And just like their OEM customers that pre-build Finished Product in order to maintain their Customer Fill Rates, you can never know just how much you’ll need, i.e., you’ll always have too much or too little. This adds cost without eliminating risk.
- Rely on Heroic Efforts — drop everything else — in rushing short-fuse OEM orders through the shop. Of course, this also adds cost both to the specific order being focused on and all of the orders that have to be pulled out of their normal processing in order to execute the rush job.
- Figure out a way to satisfy those orders through operational excellence.
Of course, option three is the best and most sustainable option. But how to do it? The solution is to reduce your normal lead-times. I have written manuals on how to do this and many clients have been amazed at how straight forward and achievable true lead-time (factory physics) reduction is. I will focus on that process in future articles, but it truly can be done in a relatively short time and at minimal implementation cost.
“Industry data shows that when true lead-times are reduced properly, quality improves and costs go down.” –
This article was supposed to be on OEM Supplier Performance metrics, and you may have wondered why to this point I haven’t discussed Quality and Cost. Again, this won’t be discussed in detail in this blog post, but I do plan to discuss it with depth in the future.A lot of industry data shows that when true lead-times are reduced properly, quality improves and costs go down! Along those lines, I trademarked the following phrase as the basis for my consulting business: “Build-To-Demand: The Lean Endgame.”
Summing Up OEM Supplier Performance Metrics and Goals
Over the last three articles, I’ve tried to lay out the case that OEM purchasing functions can have a greater impact on their company than they presently have if they will expand their focus beyond piece-price. As I mentioned in the last article I really don’t think that OEMs gain much — if any — ongoing competitive advantage when they operate with such a focus. For instance GM, Ford and Chrysler buy many components — such as seats — from the same suppliers. Do you really think that any of these OEMs gets a better deal from such component suppliers in spite of all of the leveraged negotiating they do? I don’t. Besides, a piece-price focus only takes care of one of the stakeholder legs of the three-legged-stool.
The key to increasing purchasing impact is to better understand and relate purchasing policies to actual customer demand such that internal and supply chain order fulfillment waste can be minimized while still maintaining acceptable OEM Customer Fill Rates. This means understanding forecast error and how it both affects such waste and negatively impacts the ability to service customer demand. It then requires the OEM to establish Order Fulfillment Policies that align with this knowledge and facilitate supplier understanding and compliance with them. Lastly, OEM’s should work with their strategic (non-commodity suppliers) to achieve the true lead-times needed to support those Order Fulfillment Policies.
Reducing Lead Time With U.S.-Based Suppliers
One of the major benefits MakeTime provides customers — and what initially encouraged me to become associated with them — is their policy of only doing business with U.S.-based suppliers. Even without including all of their other proprietary capabilities, they’ve positioned their supply base to be order fulfillment-capable for products sold in the U.S.
This greater focus on reductions in true supply chain lead-times can yield a real, ongoing competitive advantage through Lean Supply Chain Performance. MakeTime represents an advantage to domestic suppliers and OEMs whose primary markets are in the United States since true manufacturing lead-time includes logistics time.
If you are interested in reading the article I mentioned earlier — “Lean’s Trinity” in Industrial Engineer (Oct.-Nov. 2013) and “Improving Asset and Order Fulfillment” in Interfaces (Jan.-Feb. 2005) — but are having trouble locating copies let me know in the comments below. I have a limited number available that I’m happy to share with you.
My next article will lay out exactly what is meant by True Lead-Time.
Learn more about Paul Ericksen and his over 40-years in the manufacturing industry here.