Supply Chain

Reducing Complexity and Waste in Supply Chains

Paul Ericksen / Feb. 12, 2018

Honest Broker transactions should focus on reducing complexity and waste for both sellers and customers. What this implies is that the supply chain impact on a customer's business can be above and beyond the benefits of just piece-price reductions.  Although it is a fact in business that most sources must be ballpark competitive in pricing to be in the mix for a purchase order, there are other — arguably more important — considerations manufacturers should take into account when constructing and maintaining an efficient supply chain. Let’s look first at waste relative to both sourcing and order fulfillment.

Supply Chains and Order Fulfillment

I don’t think anyone will claim — even customers with a significant amount of overseas sources — that supply chain length (distance and duration) doesn’t add to both complexity and waste. Anytime material legally passes through country borders there are delays and fees. There are also additional costs involved in transporting material over large distances. And I’m not just talking about shipping. There are a plethora of case studies showing that the longer the supply chain the higher the potential — and actual — waste.

In other words, the longer the supply chain, the more lost dollars.

Sure, logistic services are available (for a fee) to help manufacturers with long supply lines manage shipments in “real-time” but, when you think about it, this only addresses this issue from a tactical perspective. The only strategic way to reduce the wastes associated with longer supply lines is to shorten them.

The gold standard of manufacturing effectiveness — the Toyota Production System — is to produce products in the market you are serving. This system allows manufacturers to minimize the number of days-on-hand of Finished Goods Inventory (primarily Dealer Stock) needed to support customer fill-rate targets. In fact, Toyota’s Finished Goods days-on-hand for their U.S customers is significantly lower than that needed by our country’s Big Three domestic automotive manufacturers.

Not only does Toyota assemble almost all products targeted for sale in this country, they also source the parts and sub-assemblies needed in that production near their own manufacturing facilities. Similarly, a decade or so ago I had the opportunity to benchmark Honda U.S.A. procurement strategies and processes and found that 96% of their annual “buy” was sourced within 200 miles of their final assembly facility. You’ll find that their U.S. competition does exactly the opposite.

Working Towards a Waste-Free Supply Chain

The biggest waste associated with long supply lines is not transportation or logistics costs, but rather the costs associated with the amount of finished goods inventory needed to support sales, as well as sales lost when the inventory is either not sufficient to support demand, or is comprised of the wrong SKUs. 

Therefore, the most crucial role an Honest Broker provides is reducing complexity and waste for both suppliers and manufacturer customers. Honest Brokers sourcing through only U.S.-based suppliers (such as MakeTime does in their model), with a finger on the pulse of their real-time capacities and lead times, offer a strategic opportunity for manufacturers to significantly reduce order associated fulfillment costs and wastes.

The Basic Framework for Sourcing Efficiency

You might be surprised at the significant amount of time spent prospecting for new customers (on the one side of a transaction) and suppliers (on the other side of that transaction). A shotgun type strategy where information is broadcast to a large enough audience leads to many, many false leads which are a waste of time and money— even if a business eventually finds a good partner for the transaction. For instance, I’ve heard of numbers on both the buyer’s and seller’s sides where the actual “hit” rates are well into the low single digits.

A framework with a pre-qualified supplier network, within which supplier’s capabilities, capacity and lead-times are well understood, means that customers searching to fill a job order can be directed only at the sources that fit their needs. On the seller’s side, that framework means that supplier strengths — above and beyond piece-price — can be recognized and showcased. For instance, if a customer wants to source with a supplier who can successfully fill short-fuse orders and/or has the production flexibility to support ongoing short-fuse schedule increases, this can be taken into account by an Honest Broker presenting a buyer’s job to potential sources.

Such a framework allows for rifle type precision and higher hit rates. For suppliers in the network that aren’t successful in getting orders, it helps them to understand where they stand relative to the remainder of the network in terms of price, quality, delivery and order fulfillment responsiveness, such that they can target improvements for any areas where they fall short.

The next article in this series will detail the advantage of being an early adoptee in the age of innovation.

Learn more about Paul Ericksen and his many years in the manufacturing industry here.