Last month, U.S. Sen. Sherrod Brown (D-Ohio) and Phil Angelides, Chairman of Apollo Alliance, along with other business, labor and clean energy leaders introduced the “Investments for Manufacturing Progress and Clean Technology (IMPACT) Act of 2009,” a bill intended to facilitate the development of domestic clean energy manufacturing and production. The purpose of the bill is to give loans and technical assistance to manufacturers to help those, particularly in the automotive industry, retool to manufacture clean energy components. This bill would infuse $1.5B into the Manufacturing Extension Partnership (MEP), a national network of manufacturing assistance centers that is part of NIST (National Institute of Standards and Technology) and has focused on assisting small to medium-size manufacturers by providing consulting and training. MEP has been on the front lines of teaching and coaching these SMEs in lean manufacturing principles and practices. This funding would used, according to an article in RenewableEnergyWorld.com, to “help manufacturers access clean energy markets and adopt innovative, energy-efficient manufacturing technologies”.

Interestingly, the Bush Administration tried to kill MEP repeatedly during its tenure. This always puzzled me, as it seemed counter to their stance of helping small business as the engine of the economy. Now, MEP seems as if it could be getting a new life. However, some people question the potential re-purposing of MEP in clean energy manufacturing and not focusing on its  current mission of lean implementation and education.

First, MEP was never supposed to remain in the lean business indefinitely. Having a publicly-funded organization charging market rates and competing against private sector lean consultants is not my idea of competition or a good use of public funds. Second, while some may argue that pursuing green manufacturing is push to the customer instead of pull from the customer (a violation of lean principles), green is indeed part of lean and certainly not at odds with lean. In fact, focusing on manufacturing of green components for clean energy, 70 percent of which are produced outside the U.S., is very compatible with lean manufacturing. In the nineties, I was running New England Suppliers Institute, which delivered some of the first public lean workshops as well as lean training and coaching to manufacturers, before MEP had even thought of lean and was eyeing our business as a good idea to pursue. There was not a big customer demand for lean at the time. However, MEP got into the lean business then because they saw the potential business for themselves and huge benefits to manufacturers. Green manufacturing also has the potential to be very successful.

If this bill passes, time will tell whether the clean and green repurposing of both MEP and manufacturers in the automotive industry will pay off. In my opinion, that’s what public funding is for – for investing in public good and national security in new and promising areas. It’s not just for supporting an already plentiful resource, i.e., lean consultants. Retaining and strengthening the U.S. manufacturing base is a good purpose. However, in our increasingly service-based economy, appreciation for manufacturing as an engine of growth has decreased. Breathing in new, green life may be just what it needs. Manufacturers need to be always looking ahead to the next big thing and not become complacent with what is successful at the moment.

The recent article in Purchasing, “Allegheny Technologies Designs a Broad Risk Strategy”, (8/14/2008) is one of the rare glimpses into how some companies are actually dealing with supplier risk. Rather than just talking about risk or not acting on Sarbanes Oxley directives to address supplier risk, some companies are taking action. What I found particularly positive was Allegheny Technologies’ cross-functional approach to supplier risk mitigation. As in many supplier issues, more than the procurement function needs to be involved, as the impact typically reaches beyond the procurement department. Other functions may have knowledge of risk areas that procurement is not aware of and thus need to be part of the risk planning process. Another contributor to supply risk can be a lack of information or poor information for making decisions. For example, if the results of supplier performance scorecards are not shared or are inaccurate, appropriate action cannot occur and supply risk can increase.    Senior management support, often in the form of resources, is much more likely when procurement is looking out for the best interests of the entire company and involves the appropriate parties. Another important reason to involve other functions in the company is that other functions may, in fact, be making decisions that increase rather than reduce supply risk. SOX-mandated risk planning is here to stay. Linking supplier risk planning to overall corporate risk planning is a logical and essential step.

McKinsey recently published the results of its global survey on managing global supply chains.  To boil down a seven-page article: they aren’t managing the risk.  Or to quote the article: “relatively few respondents…say that their companies are translating the importance they place on these [risk] factors into corporate action.” Are we surprised at this conclusion? Of course not. Managers who are not addressing risk seem to be a favorite whipping post lately for supply chain pundits.  

So if risks are so important, why are they not being addressed? And, can risks really be avoided or overcome? There are several possible reasons why executives are not addressing risk. Perhaps they are unclear how to do it. Risk is not something that you can eliminate, as many articles on supply management seem to imply. The probability of some supply risks can be reduced, but many catastrophes or supply chain failures cannot be prevented, only mitigated once badness occurs. There is no magic solution. Or perhaps companies have focused global supply chain management on chasing the lowest price for goods and services and have not paid attention to the resulting supply chain complexity and increased risks. In the process of seeking to lower cost with lower price suppliers, companies may be giving up reliability and sustainability.  Another contributing factor to global supply risk is that businesses processes, including supply chain processes, simply evolve over time and are not consciously designed, planned or improved. The resulting processes can become out of control or just inefficient, ineffective and prone to failure.

While it’s discouraging, McKinsey’s study comes to the same conclusion as other similar studies (e.g., Aberdeen Group’s report, “Supply Risk Increases as the Market Stands Still” – subscription required) – supply risk management is still in its infancy and not yet widely adopted. It’s still in the lots of talk but little action stage.

What can companies do about supply risk? I discuss this in Chapter 9 of my book, Supplier Evaluation and Performance Excellence and will post some more thoughts on the subject in future blogs.

In a rush of enthusiasm about a lean supply chain, some firms expect that their suppliers will embrace lean with equal passion. Passion for lean can be contagious, but getting suppliers to adopt lean requires much more work than lean inoculation or indoctrination. Before rushing off and sending out an announcement that suppliers should adopt lean, a lot more must be in place. Some enthusiastic suppliers may be eager to learn more about how to become lean, and you need to be prepared internally to work with them and have a path already thought through. The firm should first identify which suppliers would make the most business impact and from whom both they are you would derive the most benefit by their adopting lean; which are likely to be willing candidates for lean; and who is already on or at least contemplating a lean path. This can be done through a supplier segmentation exercise focused on lean.No, supplier segmentation isn’t just for sourcing. It can be used for lean supply chain and for supplier performance management. Segmentation is a way to determine appropriate resources for managing, developing relationships and working with suppliers, depending on their relative importance to the business. Segmentation is not a science. And it should not become a long, academic exercise, either. It is best when used as a team exercise to help come to a common understanding about and categorization of the current state and for identification of future opportunities for, in this case, lean in the supply chain.

For some strategic suppliers who are vital to and have a high impact on the business, lean supplier development may be the best path. That is, a customer firm may wish to get a supplier to adopt lean principles and practices throughout its business. We are talking real lean adoption, not lip-service lean adoption (which, unfortunately, is an all too common occurrence). However, for other types of suppliers, targeted lean projects geared toward a specific result may provide the best use of resources and a quick win that can help gain support and pave the way for more lean in the future.

Thus, supplier segmentation for lean is a good first step. Actually, there is a step that must be taken before the segmentation – defining first what a lean supply chain really means to your company.

 When my company was a small supplier to Boeing, I was of course happy to have landed them as a customer. Our relationship was excellent and added value to both parties. Boeing took a chance with my company, an emerging technology business. And the initial bureaucracy that we had to go through to become a supplier to such a large company was challenging beyond even their expectations. But on the other hand, there was a lot in it for them. The value that we added was clear. They got the following benefits from using a smaller technology supplier: thought leadership, alignment with and accommodation of their needs, excellent service, and a supplier who would always “go the extra mile” for them.  And for us, they used our product and got benefit from it which helped affirm our value as an emerging company. Together we created synergies that we would not have done alone, in spite of our disparate sizes. Clear value is a key ingredient for success in creating mutually beneficial relationships between customers and suppliers of disparate sizes.

This takes me to the point that I was making in my last post about when your supplier is bigger than you are. A smaller company, whether in a supplier or customer role, can develop a mutually beneficial and cooperative relationship with a bigger organization. Another key is developing and fostering good working relationships among the people at both companies.  The old adage, it’s all about the relationship, applies just as well to customer-supplier relationships.  While companies do business with each other, it’s really the people who do business with other people. Of course, you need to choose wisely when developing relationships, as doing so requires resources. Not every customer or supplier merits the resources required to develop deeper and trusting relationships.

Relationships can and should be built at different levels of the organization. When the time comes for getting a larger company to cooperate with a smaller one, several things may happen. Your contacts are more likely to go to bat for you when needed or break through the bureaucracy. Especially when senior management develops relationships with counterparts at the larger company, then making the business case for change, such as better business processes and practices, becomes much easier to accomplish. However, if the relationship is purely transactional and arms-length, then introducing new processes, business ideas, opportunities, etc. will taken longer (best case) or won’t happen at all (likely case). Transactional relationships are less personal and do not require high levels of interaction and trust, important ingredients for getting a bigger company to work cooperatively with your smaller one. Interestingly, the nature of the relationships between companies may not necessarily indicate the importance of the companies to each other, depending upon whether a company has segmented its suppliers and customers and is pursuing appropriate relationships based upon segmentation.

Many companies are concerned about suppliers who are larger than they are. How do you get a 500-pound gorilla to cooperate with you? Can you actually use the term “manage” in relation to a big supplier company? Actually, can you ever really manage even small suppliers? Not really. You can try to manage and influence the relationship, but you can’t actually manage a supplier. Customers and suppliers are part of the same value chain, but they remain independent entities, no matter how big or small you think your leverage is. Once you stop thinking about managing suppliers, then new possibilities arise.   Many companies assume that because they have no leverage over their large suppliers in terms of their size, they do not even attempt to get suppliers to make changes and improvements in the way that they do things that impact them, the customer.  They focus on the smaller guys over whom they feel that they have financial clout. Or, in a supplier strategy session that I was involved in recently, the team drew teardrops next to the names of some of their big gorilla strategic suppliers because they hadn’t yet figured a way to get these companies to cooperate, were suffering from low levels of cooperation, yet saw the potential benefits of alignment. 

In the next few posts, I’d like to propose some ways to get larger suppliers to work with you and ways to make changes to the dynamics of the relationship. The first step in the process is segmenting your supply base and identifying who your key or strategic suppliers are. If you determine that your relationship with the big supplier companies is purely transactional but should be strategic and you’ve given up in advance on ever getting the situation to change, then it’s time to rethink your approach. You are creating potential risk and cost and forgoing the benefits.

In an effort to flow lean to suppliers, firms are often internally focused. They are concerned with how suppliers can support their needs and tend not to view the situation from a systems perspective. Often it is about what suppliers need to do to satisfy their customers — which is certainly an essential ingredient.  However, firms tend to focus on the invidual parts (sometimes quite literally) rather than on the whole. For example, in an effort to improve material flow in the supply chain, inventory becomes the customer’s sole focus. Meanwhile, customers may forget about the interactions among firms and the relationships that can either support or hinder progress in becoming lean throughout the extended enterprise.

Often it is the “white spaces” (I adapt this term from the classic book, Improving Performance: How to Manage the White Space in the Organization Chart) or intereactions and relationships between firms that are the least visible and least addressed, yet have great potential for harboring hidden cost drivers and for holding the keys to becoming lean. Without a functioning relationship, how can a customer begin to ask a supplier to embark on changes that may be disruptive to the supplier in the short term? On what basis would a supplier want to adopt lean practices without the promise of WIIFM (what’s in it for me)? Making substantive changes just to retain a customer’s business is not always sufficient motivation for a supplier. Without a reasonable relationship in place and a two-way flow of information between customer and supplier, the supplier’s response may be lip service without any real change. The relationship is the “soft stuff” and the inventory is the “hard stuff.” And as they say in change management and organizational development circles, the hard stuff is easy and the soft stuff is the hard stuff.

For those of you planning to attend the ISM 93rd Annual Supply Management Conference in St. Louis, MO next week (May 4-7), I will be presenting a session called: “Best Practices to Develop Supplier Scorecards and KPIs“.  My session is on Monday, May 5th from 10:40 to 11:40 am.  My book, Supplier Evaluation and Performance Excellence, will be available in the ISM Bookstore onsite at the conference.  If you would like to speak with me at the conference, please send me an email: sgordon at valuechaingroup.com. Looking forward to seeing you in St. Louis.

Some of the hidden cost drivers in the supply chain are relatively easy to uncover, measure and address by adopting classic lean approaches. However, many supply chain problems begin and end with the customer-supplier relationship. The extent to which critical issues, wastes and cost drivers can be identified and mutually addressed depends heavily on the strength of the customer-supplier relationship.

Developing good business relationships with key and critical suppliers can help in areas that are often weak, for example by:

• Developing common and simple communications
• Developing a common understanding of one another’s needs
• Sharing business strategies in order to develop in the same direction
• Understand and overcome differences in quality systems and IT systems
• Mutual involvement in innovation and product design
• Uncovering areas of risk through better knowledge of suppliers’ businesses

To identify hidden cost drivers and waste, you will need to apply lean thinking and lean principles and practices to your own firm and to work with key suppliers to adopt lean as well. Each firm needs to look at not only what it can do to add value to customers and eliminate wastes and cost drivers within its own organizations as well as its internal processes and practices that create waste and cost at its customers and suppliers. Often customers are unaware of the extent that their business processes and practices, while seemingly cost-effective within their own four walls, cause risks, create and multiply waste and cost at the supplier and come back to bite them in the form of higher costs, service failures, quality problems and customer complaints.

Many firms are realizing the importance of actively addressing these relationships and find that they do not have the internal organization to readily develop and manage suppliers. Supply management is often addressed from the sourcing and buying standpoint. Once the deal is done and suppliers are on board, they are often ignored unless there is a problem.