Value Chain

As a supplier, has a buyer ever tried to sell you dreams of a long-term relationship, repleat with lots of business opportunities and a harmonious partnership? You hear all the right key words: long-term, partnership, mutually beneficial, increased business, trust, win-win.   It goes something like this: we may be beating you down on your customary price because it will be worth a lot of business in the future. Is this a pitch or a partnership? Then you realize that the dreams may be based on an ugly reality — the buyer wants to trade for partnership futures. How about a deal where the customer wants to sell inventory back to the supplier for cash, and not even its own inventory, for a promise of future orders?

In the case of jewelry chain Zales, the deal is too good to be true — but for the customer, not the suppliers. A recent WSJ article, ”Struggling Zales Looks to Suppliers for Cash“ described how, in a bold and desperate move, the struggling company is trying to get its vendors to buy back inventory, including inventory that these suppliers did not even sell to Zales in the first place.  And what do these suppliers get in return? The opportunity to sell 2 times the amount of product back to Zales over the next near. Not surprisingly, it’s a deal with no appeal and a risky non-starter for the suppliers. The oddest aspect of the situation is that Zales is trying to get rid of inventory before Valentine’s Day and Mother’s Day, holidays that account for the most jewelry sales after Christmas. Talk about trying to initiate a downward spiral. If the supplier inventory buyback were to occur, there would be little to attract customers into the stores, and sales would surely continue to plummet. Just the suggestion of such a buyback from a vendor who is close to bankruptcy would make suppliers head to the exits. Suppliers would be putting themselves in a risky financial situation, if their boards or creditors would allow them to enter into this type of agreement in the first place. Word of financial distress could spread through Zales suppliers like a brush fire and no one may be willing to ship to Zales, not only pushing Zales into bankruptcy, but putting suppliers themselves at risk and potentially impacting the more successful jewelry chain such as Signet Jewelers, owner of Kay Jewelers and Jared the Galleria of Jewelry.

While so far suppliers don’t seem to be going for this inventory buyback deal, it sounds like there is no silving lining to the situation. Either way, the suppliers may lose.

-Sherry R. Gordon

If you didn’t think space exploration was dangerous enough, here’s something else to worry about. NASA has been looking into outsourcing parts of the space exploration program to outside suppliers, reasoning that this is the best way to speed up rocket development and to save money. They reasoned that private contractors would be able to provide the rockets that would carry astronauts into space much more efficiently and cost-effectively. A recent Wall Street Journal article reports that the Aerospace Safety Advisory Panel, an outside safety watchdog for NASA, has cautioned against this approach. They questioned the safety of this approach, especially the technical challenges that private firms would have to overcome. Many of the potential suppliers have rockets that are unproven and still on the drawing boards. So the advisory panel has recommended that  NASA stick with government-run rather than privately operated manned ventures.

Space contractors Boeing and Lockheed Martin are lobbying NASA not to outsource more of the space program. Interesting that Boeing in particular, which has a huge self-interest in keeping its share of space contracts, is playing the “don’t outsource” card. Boeing’s own outsourcing missteps with the Dreamliner are testimony to the issues inherent in outsourcing a complex system, although I’m sure that Boeing is not  going to emphasize their own supplier management challenges in relation to the the NASA outsourcing issue.

What are some of the important factors in making a decision such as this one?

• Outsourcing does not reduce the responsibility for managing the process or the outcomes. There is still a mangement and coordination function that would need to be performed. NASA would need to make certain that its subcontractors’ product development and other key business processes are robust and can produce the required outcomes.  NASA would need to be able to orchestrate supplier schedules and input so that the project comes together as planned. According to the WSJ, the advisory panel members have expressed concern about NASA’s “hand-off approach” in allowing development of private cargo spaceships. Outsourcing does not mean hands off. Successful outsourcing, especially in real mission-critical products, must be decidedly hands on.
• Contracting in this environment would be extremely complex. Liabilities seem problemmatic. Who is responsible if a rocket blows up and kills people? But on the other hand, if the private contractor is not liable, can NASA take on the liabilities for unproven technologies and unknown supplier performance to contract?
• Sole source issues. What are the incentives to a private firm to invest in technologies so specific to NASA that they might be totally captive to it and might be driven out of business by changing political winds (if the program is reduced or disbanded) or by having no other customers of its products. Or, if NASA finds a subcontractor incompetent or not meeting expectations, how can they fire them? What would be the alternatives?
• Protection of intellectual property. How can NASA be certain of not losing any of the intellectual property and technological capabilities to entities outside the U.S.?

Whether or not NASA outsources, the buck still stops with them. They still need the skills to manage the development of complex technologies, either internally or externally. It just seems that the risks are higher if these activities are external. The public sector has always held the private sector as the role model to be emulated when running a business. Recent events in the financial sector have again proven that idea a myth. Boeing’s challenges in managing its suppliers in a technologically complex product design, development and manufacturing scenario should provide a cautionary tale to NASA and the government about taking on such technologically challenging and complex outsourcing.

-Sherry R. Gordon

I’ve spent more brain cells than I care to think about on supplier evaluation and supplier scorecards. I’ve made a number of posts about the subject on this blog, which I will list in a future post.  And I’ve been a guest blogger on the subject. As part of its Best of Spend Matters series at the end of 2009, my guest post, “12 Reasons Why Supplier Scorecards Fail” made the the cut. Be my guest and refresh your memory on this subject.

And if you want to learn more about the whole subject of supplier evaluation and haven’t yet read my book, here’s my shameless plug for it: Supplier Evaluation and Performance Excellence (J.Ross, 2008). It’s gotten good reviews from ASQ (American Society for Quality), SupplyManagement.com, AME (Association for Manufacturing Excellence) and is on the ISM Business Book List as recommended reading. Also, there are 5 practitioner reviews of the book on Amazon. It’s available from Amazon, J. Ross Publishing, Supply Chain Management Review, and Barnes and Noble.

-Sherry R. Gordon

Looks like it’s really all over for NUMMI, the Toyota/GM joint auto manufacturing venture in Fremont, CA. Last summer, I wrote a post about the strong possibility of Toyota’s closing the plant (NUMMI: Things Are Looking Gloomy). The plant was losing money. Located in a high-wage area, even potential UAW concessions didn’t seem like enough to allow the plant to continue. And now Toyota has decided to close the plant in April as a result of GM’s pulling out of the joint venture when it filed for bankruptcy. Toyota couldn’t do it alone.

Besides the loss of 4700 jobs at the NUMMI plant, the toll on suppliers will be even greater, according to a December 24th Wall Street Journal article (subscription required). According to Bruce Kern, executive director of the East Bay Economic Development Alliance, tens of thousands of people work for first and second-tier suppliers to the plant. His organization is working on finding new business for some of these suppliers. While Toyota plans to continue use the top 25 suppliers, this still leaves many suppliers without their key customer. Many suppliers have had nearly total dependence on the auto industry and have not diversified. It looks like another blow to the California economy from this closing, one that will reverberate through the NUMMI supply chain.

While another WSJ article describes many suppliers to Detroit automakers as surviving the downturn better than expected, though perhaps not well-poised financially for any big ramp-ups, these suppliers appear to be in potentially worse shape. Many of the NUMMI suppliers are small businesses that have not gotten the credit and considerations that saved some of their larger Detroit brethren from bankruptcy. Of course, the threat of the NUMMI closure and its economic impact has been hanging over the supply chain for quite some time. It appears that some of the suppliers have faced the problem head-on as soon as the automotive downturn started and have been proactively pursuing other business opportunities to stay afloat. But how many of the suppliers did not? And how many can get enough new business to survive?

Because NUMMI was focussed on using lean manufacturing principles and practices that were flowed down to its supply base, there should theoretically be quite a few well-run suppliers who could be suppliers of choice for other industries, should they have the capabilities to make the transition to supplying products that take advantage of their core competencies. A few things are working against them, however. Not to make too many gross generalizations, but many manufactures are better at operations than sales. Customer diversification for a small company identified with the automotive industry is a huge challenge. Lean companies will have an advantage in eliminating waste, doing more with less and being suppliers of choice. Lean can help spur growth and give competitive advantage, but only when there are growth opportunities to take advantage of. Lean suppliers may be able to survive longer than their peers, but only if they find enough business to keep them afloat and new customers to enable them to thrive.

-Sherry R. Gordon

At the end of the year, and especially at the end of a decade, many top ten lists are popping up. So I’m joining in this list-making with the top ten reasons why firms should implement supplier performance management (SPM).

1. Find out how well suppliers are really performing
2. Improve supplier performance such as quality, responsiveness, customer satisfaction and delivery
3. Reduce the cost and operational impacts of poor supplier performance
4. Derive value from suppliers beyond lower prices, such as collaborative product development and business development opportunities
5. Better understand the supply base and who the most critical and strategic suppliers are
6. Find out current or potentially risky suppliers
7. Uncover and reduce supplier-induced problems (and cost drivers) such as customer complaints, quality problems and warranty returns
8. Gather the information that will help you set criteria for new supplier on-boarding and approved supplier lists
9. Find and disengage with low-performing suppliers
10. Identify specific, value-added supplier performance improvement opportunities

Supplier performance management is more than the quest for the perfect scorecard. It is a business process for measuring, analyzing and monitoring supplier performance and suppliers’ business processes and practices in order to develop productive customer-supplier relationships and to reduce costs, mitigate risk, drive continuous improvement and leverage supplier value. While firms can certainly derive “quick hits” from SPM, it yields the most value and impact when viewed as a premeditated, ongoing business process with multi-function participation and ongoing care, feeding and continuous improvement.

-Sherry R. Gordon

Die casting is manufacturing at its most basic and dirty level. Companies that use casting suppliers must allow additional lead time for procuring the castings, as they are typically a long lead-time item. And die casters are known for being generally at the low end of the manufacturing efficiency and innovation scale. According to a North American Die Casting Association (NADCA) report, the number of die caster was expected to drop from 367 in 1999 to 287 in 2008 and the association halfed its dues this year due to the rough economic state of affairs for the industry. Competition from China and the bad state of the auto industry are two factors. But if you thought that dangerous manufacturing conditions exist only in China, think again

Despite the difficulty of the business econonmically, the inherent danger and dirtiness of the casting manufacturing business was revealed recently in an article in the Concord Monitor about a Franklin, NH company, Franklin Non-Ferrous Foundry. The foundry sounds like a scene out of Dante’s Inferno. Thick brown dust containing lead, antimony, cadmium and other heavy metals covered everything in both the foundry and the office. According to the article, workers joke that they don’t dare drag their feet at work for fear of kicking up a cloud of this toxic dust. Workers were not wearing breathing protection and working near bubbling vats of 2300 degree molten metal without any heat protection. The company was slapped with numers OSHA fines for over 57 violations, 25 of which were in the serious category, which means potentially life-threatening.

What is interesting about this situation is how blase the company owner and workers are about the situation. Most seem more concerned about keeping their jobs than worrying about getting sick or hurt by the situation. As one worker said, as he was given a respirator when he started working there, ““I think it’s fun. You learn new things.” And while the owners have been slapped with hundreds of thousands of dollars in fines, it is not clear which fines have been paid. And OSHA cannot shut the company down, only report violations and levy fines. When a Concord Monitor reporter toured the facility recently, the owner told him that most of the violations had been fixed.

So what would you do if you had a supplier that operated like this, endangering its employees and the environment, yet still supplied you with quality parts at a good price that met your specifications? Die casters, particularly North American ones, are a dwindling species. Would you prefer to deal with Chinese die casters, who are likely to be operating like this without any governmental protections for health and safety of its workforce? If a manufacturer needs the parts to run their business, are they willing to do business with whoever can supply the parts without regard to how the supplier runs its business? What if none of the suppliers offered a clearly safe alternative? And, are you even aware of whether you have a directo or sub-tier supplier that runs its business without health and safety protections in place? It’s a tricky question of ethics and corporate social responsibility.

-Sherry R. Gordon

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Thousands of people have gone through Six Sigma training and many call themselves Six Sigma Black Belts. While they may have gone through black belt training and possess the technical know-how, many may not adequately fulfill the role and create successful changes and improvements in an organization. They have the book learning but not the street smarts. Expertise in moving an organization on an improvement path is hard to do and especially difficult to teach in a course. It is a capability that is gained over time. And not everyone is able to make it happen.  

One questions how good a Six Sigma Black Belt is when they:

–Think and act tactically and not strategically.

–Fish  for their associates rather than teaching them how to fish or the opposite — won’t get their hands dirty.

–Can’t leave their egos behind and are self-agrandizing instead of inspirational.

–Are unable to motivate others.

–Focus on the Six Sigma tools but not on organizational and political barriers to success.

–Don’t know how to be agents for positive change and overcome resistance to change.

–Are ill at ease interacting with senior management

–Are statisticians who are not effective communicators at all levels of the organization.

–Have Six Sigma book learning but little real application of the tools.

–Claim to be a Black Belt and “name drop” about it, but don’t actually demonstrate their expertise, just brag about.

—Have difficulty being a team player

–Focus internally without truly considering the customer

As in any continuous improvement methodology, practitioners must be more than tool heads. They must possess essential leadership and communications skills and the guts combined with tact to be a positive change agent.  Six Sigma must add up to more than the sum of disparate cost savings in different areas of the company, or it will  not succeed or be sustainable.

-Sherry R. Gordon 

Boeing recently announced that it was planning to replicate all 787 parts built in the Puget Sound area in a new facilities being built in North Charleston, South Carolina. According to a recent article in the Seattle Times,  Boeing machinists are seeing this as the first step toward moving all parts out of Boeing’s Puget Sound plants. The two-month machinists strike in Boeing’s Commercial division in 2008 seriously disrupted production. It was one in a series of glitches that has forced Boeing to postpone the 787’s inaugural test flight and deliveries to its customers five times. Boeing is now over two years behind schedule. The cost and penalties to Boeing are in the billions of dollars in addition to a huge loss of credibility. Boeing  is claiming that it is expanding production and not duplicating production to move away from unionized machinists.  However, their spokesman cited strikes as a major reason for doing so. South Carolina plants will not have to contend with the International Association of Machinists.

As a company that has experienced failures in its supply chain in the production of the 787 Dreamliner, this was an expected move that Boeing has made to avoid supply chain risks. When it bought the Vought Aircraft Industries plant in North Charleston, SC, it was ostensibly to stabilize a shaky critical supplier and also to avoid having to fly parts to the Puget Sound plants. Now it is clearer that Boeing is trying to avoid being at the mercy of its unionized machinists. Realistically, it is these highly skilled machinists who are needed to produce a high-quality airplane.  Boeing can’t seem to live with them or without them. It will be interesting to see whether or not using less experienced machinists in SC will prove to be a problem.

The other big supply chain risk that Boeing has experienced is in its poor selection and management of its global supply chain, which may be an even greater risk than machinist strikes. For a company that practically wrote the book on supplier certification, their losing control of their supply chain has been mystifying. There may be some parallels to the “too big to fail” mindset or “the left hand doesn’t know what the right hand is doing” situation that occurs at such a behemoth corporation. Even when processes such as supplier performance mangement are world class, they don’t do much good if they aren’t used.

As of this writing, Boeing is on track to meet its deadline of having its first Dreamliner test flight before the end of the year. It’s aiming for next Tuesday, December 22nd. In the meantime, in regard to its supply chain and machinist issues, Boeing needs to fix the problems, not the blame.

-Sherry R. Gordon

You’ve heard of supplier rationalization and “rightsizing” the supply base. What about too many KPIs on the supplier scorecard? I’ve mentioned the problem of measuring too many KPIs in previous posts. In 11 Reasons Why Supplier Scorecards Fail, I list measuring too many KPIs as a reason for failure. In Supplier Scorecard Metrics: Easy vs Meaningful, I discuss how KPIs can proliferate on scorecards just because they are available, not because they are particularly  meaningful. What could be the downside of too many KPIs? Isn’t the more KPIs the merrier? I know of a manager who had 80 KPIs on her scorecard. She found that it was impractical to manage that many metrics. The scorecard looked impressive. But the company found it impossible to get actual results with this huge list of metrics.

What are some ways to reduce the number of KPIs on a supplier scorecard to the most meaningful? How do you decide which KPIs to get rid of? Here are four approaches.

1. Look at each metric and test the extent to which it relates to your firm’s goals, objectives and strategies. If the metric is not directly related, it should not be on the scorecard. Supplier metrics need to support your overall objectives and help you achieve your  goals. Otherwise, they are taking up resources and space.

2. How realistic and achievable is the item being measured on the scorecard? Is it something that is likely to be achieved in your company? For example, if you are measuring supplier contract compliance, but have no solid means of determining compliance (or at least one that doesn’t require armies of people), then the metric needs to be rethought. Stretch goals are great. But until the business processes and resources are in place to achieve these goals, the metric isn’t ready to be on the scorecard.

3. What is the cost/benefit of the KPI vs the resources required to create the KPI? The effort to obtain the data should be commensurate with a KPI’s usefulness and ability to be actionable. If a KPI is more trouble than it’s worth, it falls into the category of “data for the sake of data” and should be eliminated.

4. How actionable is a KPI? If you look at it and cannot think of ways you can connect it to supplier performance improvement or to the improvement of the customer-supplier relationship, then it may no longer belong on your supplier scorecard.

When it comes to KPIs, sometimes less is more.

-Sherry R. Gordon

In a recent article in the New Yorker, author John Colapinto describes his adventures with a stealth Michelin Guide restaurant inspector in New York City as she visited some restaurants to see if they met the stringent guidelines to merit the coveted Michelin stars. The Michelin hotel and restaurant guide has enjoyed enormous success in France and many other countries worldwide — except in the U.S.  Back to that point a bit later. Michelin inspectors are careful to guard their identities from the hotels and restaurants they visit in order to ensure objectivity and no special treatment by the restaurant. Many restaurant critics have tried many ways, including  elaborate disguises, to keep their identities a secret, but mostly to no avail. At Michelin, even the company executives have never met the inspectors. 

Michelin inspectors are trained to rate the various aspects of the food and dining experience against a set of explicit standards. They perform a very detailed analysis of the food that compares it to these standards. They look for “quality of the products, mastery in the cooking, technical accuracy, balance of flavors, and creativity of the chef”.  They figure out the precise ingredients contained in sauces. They look for consistency and accuracy. Why, it reminds me of a supplier quality audit, except for the stealth aspect of the quality auditors. There are specific, documented standards, approved by the quality function. A supplier is rated in relation to how well it meets those standards. And in some industries, particularly biotech and pharma, suppliers are monitored to ensure the ongoing reliability of the identity, quality and purity of the materials — only in the case of a restaurant, those materials are food ingredients. The Michelin auditor questions the waitstaff about dishes on the menu to ensure that they are knowledgeable and not bluffing when describing the dishes. Likewise, in a supplier audit, employees are quizzed about their knowledge of the process and expected outputs. Receiving the coveted Michelin stars, like achieving certification from a customer, increases business.

Sounds like a perfect system for determining who gets the Michelin stars. It works well for the French. But so far it hasn’t caught on all that well in the United States. It may just be that when it comes to dining, technical accuracy is less important to Americans. Americans, according to the article, have emotional reactions to a dining experience that may not be measurable according to Michelin standards. In fact, I would venture to say that Americans love restaurants based on the emotional experience and even the entertainment element above the actual objective quality of the restaurant.

To carry the supplier audit analogy further, evaluating suppliers on much more than the cut-and-dried aspects of a quality audit may yield richer results.  This isn’t to say that a quality audit is not important. It is.  However, the qualitative aspects of supplier performance, such as responsiveness to customers, collaboration in new product development, the quality of the relationship, also matter. When supplier metrics are boiled down to the basic quantitative metrics, they can fail to capture some of the value-adding aspects of the customer-supplier relationship and supplier performance.   When a chef creates a special version of a dish for a lactose-intolerant customer, the chef may deviate from the standard. But the value to the customer may bring them back to the restaurant, whether or not the restaurant would be considered a great one by more objective standards.

As they say, it’s food for thought.

-Sherry R. Gordon