Another Ducking Digest?!
November 6, 2023: 6 Key Supplier Management Practices for Small-Mid Manufacturers
Good morning, and happy Monday! Lindsay is having his coffee, I’m having my water (the no-caffeine girl). Today, we are going to talk about one of my favorite subjects, which is working with suppliers. I actually asked Lindsay to dedicate a whole show to talking about this because I think it’s so important. Many people I know working in manufacturing are planning their budgeting and strategy for next year. One of the conversations people are having is around supplier management and what is the best way to manage suppliers when you are working for a small or midsize manufacturer. You don’t have a significant budget or a lot of time or resources. Often, you’re not going to have the ability to have a person dedicated to doing this. So, this is something that’s going to be spread across the team.
So, Lindsay, with that, I think you’ve broken it up into five or six different things that should be considered for supplier management. Would love to have you walk us through what those best practices are. Thank you, Sarah. Good morning. Yeah, the idea of the six is focusing on or leaning in on the ones that are going to affect the day-to-day life of the SC practitioner in this small manufacturing environment. So, what we’re trying to do really is realign a company dialogue and get away from the quality system defaults around supplier management. The defaults are always: on-time delivery, quality, cost, which are all important. But there are some other facets to supplier management that either are pain points or have selfish personal gain for us if we can focus on them as well.
So, one, get beyond the quality system default, and then two, lean in on the concerns. Don’t be caught off guard, flat-footed, or tongue-tied when management leadership raises their concerns on a regular basis. This is important because we want to promote the supply chain agenda. So, you know, my kickoff idea was from a strategic standpoint. We want to avoid supply chain being in a reactive expediting mode, and we obviously do that by ensuring the timely delivery of good stuff. And then, secondly, we want to avoid the incremental supply chain stress of having to deal with dysfunctional supplier relationships. So, we want to zone in on suppliers whose working relationship is more healthy.
So first off, how do we choose the supplier, right? That’s the first of our six. And you know, the get beyond the philosophical, understand what the Sweet Spot looks like. How, you know, what does a good supplier look like? Rather than get philosophical, you know, give examples. You know, we’ve probably got a couple hundred suppliers to choose from, so who are the good ones? And even if that conversation peters out quick, pretty quickly (and I’m talking within the supply chain organization, within the purchasing department), then who are the bad ones? Who, who, who don’t we like? And from these two composites, figure out, you know, here’s what we want to avoid and here’s what we want to gravitate towards. And then, of course, we have to be more quantitative than qualitative. So, you know, put together the composite score. And the composite score, of course, is going to include the on-time delivery, the quality receiving inspection, the avoiding an unfavorable PPV, you know, cost and financial stability, and probably an ISO 90002 quality check mark. But we, we also want, from the supply chain standpoint, we also want to squeeze in a couple of our own thoughts, and that, you know, what makes a good supplier for supply chain is responsiveness, flexibility, proactiveness, maybe, and the access to the management relationship when we need to escalate an issue. So, you know, use these ideas to drive the supplier selection. I’ll also throw in there, Lindsay, I think it’s important to know what good looks like because it’s hard for a supplier to be able to know what you’re measuring on if that’s not communicated effectively. So figure out what do you want and make sure there’s ways to track and measure that.
And also, supplier selection, we talked about this a lot throughout the show this year, don’t rely on one supplier for everything. That’s absolutely critical for your business. You’ve got to find alternative suppliers and have them queued up and ready to go, right? And great segue to the putting boundaries around our communication. That clearly, you know, I, I think my, my, my notes were to have a regular clear communication and to know what the escalation path is within a supplier when things go right. And then, the base level, the base level communication, of course, is going to be our purchasing order document. And that’s going to cover the price to delivery, even the terms and conditions. But to your point, Sarah, you know, what does good look like? And the, we want to have as well as the clear communication, we want to have an understanding of what are our cadences going to be and who speaks to who in the supplier. And, obviously, our buyer speaks to a salesperson or an inside sales salesperson or a reentry person. But, you know, there’s, there’s other conversations going on, you know, even in the small manufacturing environment. Engineering is getting in there, and maybe they don’t even tell us. They just, they just go over. They take it upon themselves to go and visit the supply and talk about something. Quality gets involved, and maybe we’re less concerned about quality because quality might be checking a box if it’s just a regular audit. If it’s a corrective action, we want to be all over that, and we want to be helping frame that conversation. And where it’s going to go. Engineering, we want to be very careful. That, great, that engineering’s in there, as you said, helping define what good looks like, provided they’re in Lo step with quality around what the acceptance criteria is and provided they’re not having a conversation about that has cost impacts or changes without involving purchasing. So, very important for supply chain to explicitly clarify to the supplier who’s going to speak to who and what the expectation is. And, hey, if, if, if three engineers show up one day and speak to your QA folks, give me a heads up, you know? The, if, if, if no one from supply chain was there or if you get a strange request out of left field from anyone else in the organization, let me know so I can push it back into context. And obviously, we want, on the plus side, you know, if that’s sounding too negative, we want, we want to embrace our suppliers to be collaborative. We want them to, at the very least, to be open and, you know, not be hiding stuff from us. But we want to, you know, for them to be part of the problem-solving and, you know, ideally, you know, continuous improvements.
Quantifying all this, we, we’ve selected our supplier, we’ve decided how we’re going to speak to them, who’s going to speak to who, how do we quantify? Of course, with KPIs, and of course, with the standard one. On, for those who are counting, we’re on number three P, which is performance metrics. So, of our six best practices, we’re on number three. So, thank you, so performance metrics, KPIs. We don’t want to waste, even in a small company, it’s a bad thing is supply chain has to waste time going and generating the KPI for on-time delivery, for acceptance rate at receiving inspection, for PPV. We want these to be standard deliverables from IT, along with, here’s my monthly spend, and here’s my inventory number. And I’m going to take the spend and say, okay, how much did I sell? So, what’s my purchase cost of goods? And my inventory number, going to take my cost of goods and say, okay, here’s my turns and then here’s the trend based on where it was last month and the month before and the month before, and all of that I’m going to pull together and do two things. One, I’m going to communicate to leadership and say, here’s how we’re doing. But two, I’m going to sequence it to my advantage. One, I’m going to start with their pain points because leadership has to know that they’re being hurt. So if leadership is concerned, is leadership concerned about the amount of money we’re spending? Is leadership concerned about how much infantry we have? Or is leadership concerned about availability or on-time delivery? Is leadership concerned about our reliance on certain suppliers? So we start with that in our reporting to show that we’re aligned with the pain points. And then we want to break it out. We want to drill into an extent that overall averages are not our friend. And what I mean by that is an overall average of receiving inspection acceptance rate gets skewed by off-the-shelf parts and commodities. So if we’ve got build-to-print parts in there, if we’ve got machined parts, high-tolerance machined parts, or even low-tolerance machined parts, if we’ve got painted parts that are being po potentially rejected for cosmetic criteria, we want to break that stuff out. So we want to break out, say, here here’s where we’re at for machine parts, here’s where we’re at for painted parts, here’s where we’re at for subassemblies, TurnKey Outsourcing of maybe a cable assembly or a prince circuit board. And we want to be able to carry that information forward when we speak to the suppliers and say, you know, tell me about tell me about your acceptance rate for these products with your other customers. And we’ll talk about that in a couple of minutes on quality control.
Inventory management, inventory management, obviously, is a KPI. But it’s, it’s so very, very important, so fundamental. You know, my, my mantras where inventory is where the rubber meets the road between planning and purchasing.
So, and often times, to the extent that it will display some on customer on-time delivery, is the number one KPI in the organization, especially when cash is an issue, as it often is in small manufacturers. So, we want a tailored strategy that addresses the pain. So if the pain point is to contain costs, then what can we do with vendor-managed inventory? If the pain, as you said, is availability due to supply chain challenges, then what are we going to do about it? How does our safety stock strategy fit in? If our pain is the overall inventory, then what can we do with just-in-time delivery? If our pinpoint is excess inventory, what are we doing to reschedule? A great one for Source Day, right? This is the part of the ERP recommendations that so often is just overlooked every week because we’re too busy expediting and too busy placing new buys. And yeah, it’d be nice if we could get to the deferrals and the reschedules. And not getting to it costs us a lot of money. And then just the sheer scheduling our deliveries. Scheduling our deliveries to match the production schedule. Scheduling our deliveries to maybe even match the inventory reporting so that if Finance is doing a month-end inventory snapshot report, then let’s bring in high-dollar stuff the first week of the month. Right? Easier said than done. Sounds fabulous, right? And we wouldn’t do it for everything. We wouldn’t do it for all the cost Class C, but we would make sure and pay attention to it. We would be sensitive to it for those suppliers that can give us flexibility, those suppliers that have Assurance of Supply, those suppliers that are carrying high-dollar parts, and a local next day opportunity. All right, winding down.
The quality control. Five, quality control. We’ve got to keep our numbers so people can stay on track. Quality control. Know our acceptance criteria for each commodity. So, you know, like I said, especially for build print, it can be a ballpark thing. But what we’re doing is we’re getting away from the overall average. And then when we go and visit the supplier, we have to scope our supplier right? You know, what’s your revenue range? You know, what does that translate to? And how many shipments do you do a day? How many customers do you have? And then as we go on our site audit, okay, tell me about your returned product workflow. How many transactions do you do? Is it one a day? Is it one a week? And then basically understand from that, okay, if one, is there a clear return product workflow? Because that’s very important to me around reworks and replacements. And two, how often is it exercised? And then three, what I really wanted to know was what’s the percentage? You know, if they’re shipping 10 a day and dealing with one return a day, okay, we got a 10% reject rate. How does that compare to my commodity group? If I got other suppliers in that commodity group? And how does the supplier feel I’ll be on that 10% scale? Am I going to be worse because I’ve got a more demanded product? Am I going to be far less because they only have that high number because they’ve got a crazy demanding customer in Aerospace, high-tolerance division?
So, Lindy, what are your thoughts on intervening with operator training with a supplier? Thank you. So, yeah, base level one quality management of the supplier is the site audit, the audit sheet, put it in the file and say we’re ISO 902, right? So, next level is where it’s not a nice-to-have thing but we need to do, we’ve got a problem. You know, parts keep coming in dings, parts keep coming in with the bottom corners chipped, parts keep coming in with this assembly not tightened up or this part of the assembly not tightened up, or this bit missing. So, go and get in the weeds, roll up your sleeves, go and visit the supplier, take a multi-functional group, a quality dude, a manufacturing dude, a supply chain dude, and go and meet with the supplier and do the root cause corrective action. And then ask them to walk through their root cause corrective action. And the standard rules that, you know, we expect everything to be a management problem, we discount anyone who says, ‘Oh yeah, we’re going to do more operative training,’ that means nothing. You know, I expect a broad range of root cause corrective action on both the occurrence as well as the detection and lack of detection of the defect and addressing man, machine, method, and materials. So, potentially, I come up with six or eight root causes.
And then, Sarah, to your great question, sit down with the operator. Now, it can be as simple as changing a work instruction to people. Got crazy excited in Singapore when I changed a work instruction that said, ‘You know, when L, Sarah figures, Sarah tightens this up and gives it to Lindsay, Lindsay is meant to put on the next cap on the hard drive assembly. But the first thing he does is check that it’s tight, the Sarah’s assembly is tight. And if it’s not, he hands it back to Sarah.’ So, it’s that buddy system there. But actually putting it on as a step on the work instruction to check, Sarah, you know, it all of a sudden, you get a far tighter execution. And I think it shows that you really care about the supplier and that their relationship is important and that you want to collaborate. So, I think it goes a long way by offering that. And the funny thing is that, oftentimes when you dive into the weeds, supplier management sometimes is hands-off, which is a learning, right? I spent several hours with a lovely young lady and my materials manager in a factory in Guadalajara, and we walked through her order entry process and how she received her PO, how she created a work order, what dates and setback dates she used on her work order. And the realization was that her work order opening date was the same as our requirement dates. So no one had explained to her how to do a setback date on a PO entry workflow. And she, you know, perfectly intelligent, educated young lady, very dedicated, being just overlooked by management, no training. And it was like, ‘Oh my god, of course everything’s late. You’re plugging in the opening the work order the day we’re expecting it to be shipped.’ So, you know, the operator training can be the production line, the operator training can be all workflows.
All right. So, our sixth best practice is around risk management and Plan B. What happens if things don’t go as they should? Yeah, and, and, you know, right there, there’s no answer to that, right? But what there does have to be is we do have to have some sort of semblance of a plan. So if the strategy is to buy stuff cheap from China and put it on a boat and carry 45 days of buffer stock in case the boat’s late or the ports backed up or there’s a delay on the Eastern Seaboard of mainland China, what’s the Plan B if that falls apart? You know, do we have a local supplier? Can we put it on a plane? If so, who would we use? Do we have a local supplier within the same commodity group that we can pay 10% more and Source it locally and have these drafted out so that we’re not completely flat-footed? In all likelihood, Sarah, ironically, right, that if we do 10 Plan B ultimates, none of them will ever get exercised in the coming year. However, that said, we will have gone through the mental process of how do we, that stuff happens. And here’s what we’re here’s what we expect to do about it when it does happen. So, we’re demonstrating some level of preparedness. We can equally important we can demonstrate to the rest of the organization, both to the Quality Department as auditors, our customers, as well as leadership that, hey, we’ve given this some thought, and we’re prepared. We’re, we have some level of preparation. I would also suggest having key stakeholders get their eyes on your cont you creating your own plan. You get in the weeds, and there may be some things that are missed. So, having another couple set of eyeballs on for key people that will be involved is really important as well. Yeah, and that’s a good example of supply chain is responsible for it but doesn’t necessarily have to have the answer, you know? There are other intelligent people in the company who can lend their vote, and maybe Finance is going to chime in and say, ‘Hey, you know, listening to this, I’d far rather we paid for the long lead components at our supplier and have them prepaid there so that if they buy them and have them ready to go, then we’ll, they can go ahead and give us an invoice for a partial assembly, and we’ll pay that just so that we have that increased Assurance of Supply. You that kind of out of out of the box thinking.
All righty. So those were our six steps. There’s lots more, but I feel like that gives a good overview of the main things to focus on when putting a supplier Management program in place. Have a wonderful start to your week, Lindsay, and I will be back next Monday to talk about another topic relevant to small and midsize manufacturers. Thanks, Sarah.