Value Chain

A few weeks ago I was attending a meeting of my local ISM chapter. I was speaking with the purchasing manager for a local college about supply risk and mentioned the risk track and the session at the ISM Conference in San Diego in April, “Understanding and Choosing Supply Risk Solutions: Software, Content and Analytics” that Jason Busch (Editor, Spend Matters) and I are giving on April 28th. He replied that he didn’t have the budget to attend the conference nor did he have the resources even to think about buying a supply risk software solution. Was there anything someone in his situation can do? I told him that there are still things a smaller organization can do to address supply risk, even if they can’t buy a software solution. The key: know your suppliers.

Here are some of my suggestions about the most important things small businesses can do to reduce supply risk are:

• Make sure you have a good process for selecting suppliers
• Determine who your critical suppliers are
• Develop closer business relationships with those suppliers and get to know them
• Understand their business issues and challenges
• Measure and understand their performance

For a small business, none of the above requires fancy software. And none of those items cost anything other than time. Sure, it would be easier to have a supplier performance management system to measure supplier performance. Being small can (and should) mean fewer suppliers to get to know and track. Just the vital few; that is, the 20% of suppliers who have the most impact on your business. Understanding their performance can be done with a few simple metrics and even using Excel spreadsheets to track them. Or simple survey tools on the Web to ask your internal stakeholders about how suppliers are doing. Understanding supplier performance is probably the best and most underrated way to prevent supply risk.

Being a smaller business can give the advantage of not being stuck in an airless silo and not knowing what’s going on in the other silos or the rest of the business. You may have to wear more hats and therefore have a broader perspective on the business than your large-company compatriots. And as long as you don’t let suppliers turn into an airless silo unto themselves, then you can reduce the chances of a risk buildup that can explode unexpectedly.

-Sherry R. Gordon

As part of the public flogging of Toyota for its massive quality problems and recalls, some are calling lean and the Toyota Production System into question. A recent WSJ article, How Lean Manufacturing Can Backfire, describes how Toyota’s use of common parts wreaks havoc during a recall. Part simplification is considered a lean practice. Many companies, especially GM, did not strive for part commonality and ended up with part proliferation, which is a costly and inefficient. GM didn’t have an integrated product team to design a vehicle, but a different design group for each system in the vehicle.  GM has paid for this inefficiency or rather the U.S. taxpayers are paying for it.  Why design a different braking system for every model? A common platform makes more sense.  However, when it comes to an auto recall, part proliferation means that fewer vehicles will contain the exact same part. That doesn’t mean that part proliferation is safer for the consumer, even if it is far more costly and inefficient. To say that lean has backfired because of this one practice is to throw out the lean baby with the media bathwater.  Ford, by the way, has adopted a common platform and common parts strategy for the Focus. Should Ford go back to the old platform proliferation approach? Probably not.

Toyota’s reputation for quality is now badly tarnished. And how they will get out of this mess is still not clear. But is this an indictment of lean? One of Toyota’s problems may be cultural. They kept known issues secret for far too long, possibly to save face, but in the long run making the situation more devastating. In lean, people are supposed to be rewarded, not punished, for uncovering problems as part of continuous improvement.  I think that lean at Toyota has in fact been lean manufacturing, confined to the manufacturing floor, and not lean enterprise, which encompasses all employees, including senior management and indirect employees.  Many companies think lean is just for the blue collar folks, not for management. It seems to have been counter-culture for Toyota to expose problems outside the factory walls.

I also wonder whether Toyota rested on its lean laurels and did not continue to evolve and improve its own system. In an AME discussion group, it was noted (and I have observed this myself) that Toyota employees are rarely seen at the many lean workshops and conferences that AME runs. If they do show up, it is only to present and then leave.

What I find typical in this situation is the lean bashing that ensues. Remember when this happened to the MBNQA (Malcolm Baldrige National Quality Award)? As soon as an award winner runs into trouble, as happened to the Wallace Company, critics pile it on and pronounce the whole system a failure. Wallace Company was a family-owned pipe and valve distributor received the Baldrige Award in 1990 and then filed for Chapter 11 bankruptcy protection in January of 1992. According to one observer, a consultant brought in to turn the company around said, “Instead of shoring up, officials spent time leading tours through the firm and on the lecture circuit.”  

It seems that Toyota was better at listening to its internal customers than its external customers.  It is better at fixing problems that associates find on the factory floor than the ones brought to its attention by its customers who drive the vehicles. The Toyota quality disaster will continue to be examined and written about for some time to come. And perhaps the causes of the problems will become clearer. But I believe that it wasn’t a failure of lean, but a failure of Toyota to follow the very system that made it successful in the first place. Toyota has the tools and the know-how to improve its quality and avoid quality and supplier glitches and potentially dangerous product failures. As I said when I wrote about its Tundra recall in November, Toyota had better reaffirm its commitment to quality and strengthen its resolve to fix underlying problems or suffer a decline like a couple of its American automaker brethren.

-Sherry R. Gordon

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