Dec 06 2006

The Weak Link in the Supply Chain

Published by at 5:53 pm under Uncategorized

You read it in the trade magazines; you see the notice on the bulletin board or through the grapevine: You or your friends are about to have the financial rug pulled out from under you because some manager has decided to take the business off shore.  The memo is simple BUT the risks are complex In many cases the high value added work is kept in your factory but the low value added work (i.e. plastics processing) is sent off shore under the guise of keeping competitive‚ retaining core competencies or some other such silliness.  Many companies are forced into this situation because their competition has already located off shore and the market has undercut them. We now have to dive into our books on CorpSpeak and come up with another catchy phrase that will generate a further layer of bureaucracy.  Before it was “Supplier Management; unfortunately managing your suppliers is about as successful as herding a dozen cats.  But when blindly soldiering on the new buzz word is now “Supply Chain Management.  In reality this is supplier management raised to whatever power equal to the number of people or companies involved in the chain.  Again this also raises your odds of success of herding thousands of cats.  With all silliness aside outsourcing some components is probably a good decision.  However there must be a critical eye kept on NOT whether something is a low value added components but what happens if the supply chain is interrupted.  Here are some points to give at as a dinner speaker to the local AMA chapter or simply to the executives of your customers.

Try this experiment. Go to the tool room or somewhere and borrow the long heavy chains they use on the crane. Pick up one end and pull. You’¢ll notice that once the slack is out of the chain as if you pull in one direction the chain will follow you.  Now change directions.  Notice the links closest to you change directions almost immediately; the end of the chain only realigns itself when all other links have changed directions.  The lesson is the more links in the chain the less control you have especially when distance is involved.

Supply chain management is today’s word for logistics. The practice of logistics had its roots probably before the Chinese Warlords in 4,000 BC.  If you marched your army to wage war on the neighboring Warlord, it would be nice if you knew how many troops you needed to be victorious, how many arrows your archers will shoot and how many spears you’d need to provide to your spear-chuckers, food for the folk etc.  With this forecasting you placed your appropriate orders complete with specifications.  Even with the goods manufactured, if the wagons or pack horses didn’t get these supplies to the troops on time, your war plans are probably already in the dumper.

Supply chains have several basic key elements:  (1) The forecast of the filling and the length of the supply chain. (2) The value (not the price, the critical nature to your process) of what’s in the supply chain. (3) The responsiveness of the supply chain measured by the time you place the purchase order to the time you receive the parts.  (4) The ability of the chain to supply the required amount of parts.  (5) The number of links in the chain how many separate steps are required from the initiation of the order to the receipt in your warehouse of inspected approved parts. (6) The (legal) environment you are operating in.

Supply chains are based on the presumption that volumes are accessible, quality level is acceptable and the delivery system is assured.  These are VERY RISKY assumptions because volumes are never fixed, quality always varies, and on-time deliveries depend on several variables.  A local supplier’s response time to a customer is quite short compared to someone who at the very least has to clear customs leaving his country and entering the USA, then waiting for a freight carrier to pick up you parts and bring it to you.

Ask yourself and your customer these simple questions and the probable reactions from you, an offshore supplier, and your customer.  Since this is more of an academic exercise leave the questions as open ended with the responses as fodder for discussion.

What is the response if the required volumes increase dramatically?

LOCAL SUPPLIER: You increase your production volumes, pull stock out of your Safety Stock JIT warehouse and honor the request.

OFFSHORE SUPPLIER: Put more parts into the pipeline.

CUSTOMER:

With the Offshore Supplier Take parts from the pipeline but backfill your shortages by (A) air freighting what you need, (B) Paying premium pricing for your freight container to be the last loaded and first to be unload, (C) Tell marketing you can’¢t fulfill the requirement for more product. With the local supplier: make the phone call.

What is the response if the required volumes decrease rapidly?

LOCAL SUPPLIER: Ship less parts or ship less frequently.

OFFSHORE SUPPLIER: Put less parts into the supply chain but its effect won’t be felt until the pipeline is empty.

CUSTOMER:

With the Offshore Supplier: Try to stall shipments from the pipeline or fill your warehouse with excess parts from the supply chain and wait until you use them all before re-ordering.

With the local supplier, make the phone call and either lower volumes received or suspend shipments all together.

What is the response when a rejected shipment is found?

LOCAL SUPPLIER: Accept the reject, get the lot back, run replacements as fast as possible.

OFFSHORE SUPPLIER:  Nothing  you don’t know if the next freight container will be perfect parts or a continuation of rejected parts.

CUSTOMER:

With the Offshore Supplier: Assume the entire supply chain has rejects.  Double your orders – Air freight what is needed to sustain production while refilling the supply chain with new, acceptable. However, if the reject was only momentary, the best you can do is stop the expedited freight.

With the local supplier: Make the phone call, take a meeting, solve the problem.

What is the response if/when the tool needs refurbishment?

LOCAL SUPPLIER: Invite engineering down, discuss and quote the work to be done, accept the PO and do the work.  When you’re ready invite engineering again and do the re-qualification run.

OFFSHORE SUPPLIER:  Knowing it will take several weeks to set up the trip and get the budget for travel both to approve doing the work, then the second trip to requalify the tool; invite engineering down, discuss and quote the work to be done, accept the PO and do the work,.

CUSTOMER: Do you trust the guy a hundred miles away or the guy eight time zones away to honestly quote the job then do it to your specifications?

The rest of these items offer similar questions you can answer yourself:

1. What if the freight container falls off the boat, is stuck in customs, or momentarily cannot be found?

2.  What if any one of the links is broken? i.e. a dock workers strike stopping your container from being either loaded on or unloaded from the boat.

3.  What if the molder’¢s normal lead time of three weeks from placement of order to shipment extends to six weeks because the molder is overloaded?

4.  What if you are cheated and you attempt to sue/pull the job?

5.  Because your accountant’s name is Osama, what if Homeland Security or Customs has you on some watch list and impounds and inspects every shipment you try to bring into the country whether by air, boat, or truck and releases it to you only after a 100% parts inspection?

Control or Management of a supplier base is a direct function of three major categories:

First, the number of links or the complexity of the supply chain.  Obviously shorter chains are better than longer ones.

Second, the distance  measured in miles  from the supplier to the customer.

Third, when the business goes out of the country your supplier, agreements, and requirements have no legal standing or recourse.

If the cost savings your customer enjoys by having his supply base across the International Date Line more than offsets the risks, the right decision was made.

An attorney friend of mine made a sage comment to me once that directly bears on this topic: “The strength of a business relationship is like a marriage: It doesn’t matter how long it lasts, or how good it is. The strength of the relationship is measured by what happens when things go really wrong. This is something everyone should consider.

Explain this to your customer, then sit back and listen.This will be quite an education for both of you.

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As always you can take my thoughts and use them, or print it out and scare the rats in the warehouse with them.  Your choice.

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