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

I recently gave a workshop on supplier evaluation in a lean environment as part of the AME Lean Conference. Because the attendees of my workshop already had a working knowledge of lean principles and practices, they were quite different from many audiences I have presented to and interacted with on the subject of supplier evaluation and supplier performance improvement. They wanted to find ways to improve their suppliers performance AND they were already familiar with a proven continuous improvement methodology — Lean.  These folks have the means but needed to understand the how to.

Too often I have seen procurement people who want and need improved performance from suppliers but aren’t sure how to make it happen. They may use scorecards to diagnose problems and opportunities, but find the next steps challenging — how to get at the underlying causes of performance issues and how to help or lead suppliers to addressing them. High performance and continuous improvement systems such as lean can provide the tools and the path. Improving supplier performance is very challenging. It requires both hard skills (continuous improvement methodologies and skills) and soft skills (communications and relationship building skills).  But having capabilaities in a proven methodology can provide a huge advantage.

I am in Covington, Kentucky attending the AME International Lean Conference, Journey to Greatness. Attendance is excellent despite the economy and its adverse impact on other conferences this year.  This may be due to various lean journeys presented by practitioners and couldn’t be more relevant in a down economy.  AME (Association for Manufacturing Excellence) puts on a great lean conference, and this one seems to be continuing the trend.

I will be writing about some of the companies whose presentations and stories I’ve had a chance to hear. For example, today I attended session in which a huge retailer and a manufacturer recounted a story of their unparalleled collaboration together.

On Friday, October 23, I’ll be presenting a workshop, “Managing and Improving Supplier Performance in a Lean Environment”. AME allows people to go to the pre and post-conference workshops without signing up for the conference. The learning objectives for this interactive workshop include:

• Align supplier performance expectations and criteria with the needs of your business
• Develop a supplier evaluation process that fits your company
• Create an understanding of what a lean supplier is in your company’s environment
• Develop strategies for developing lean suppliers
• Manage critical suppleir relationships to maximize value to your company
• Get from strategy to evaluation to action to lean supplier development and performance improvement

This workshop can be delivered on-site, too.

If you are attending the conference, drop me a note at sgordon at valuechaingroup dot com.

-Sherry Gordon

The latest victims of the economic downturn seem to be suppliers in the electronics supply chain. As reported in the May 18th WSJ article “Clarity is Missing Link in Supply Chain“, as business began to contract, Best Buy dramatically cut back their forecasts to electronics companies such as Toshiba just before the holiday season last year, for fear of ending up with unsold inventory. The ripple effect throughout the supply chain was dramatic. As Toshiba reacted quickly and suddenly cut back its DVD player production, other suppliers were impacted far out of proportion to the actual event. This is also known as the whipsaw or bullwhip effect, with suppliers at the end of the chain feeling the harshest impact. The order cutbacks at Best Buy hit the semiconductor supply chain, including such companies as Applied Materials, a maker of the capital equipment used in semiconductor chip production, who had to lay off 2,000 workers and furlough thousands of others. The impact was felt through the supply chain, down to a small machine shop in California that makes aluminum parts for machines semiconductor plants and that had to lay off 75% of its workforce, far out of proportion to the initial glitch, and now is sitting on a year’s worth of inventory.

JIT, the practice that spared the top of the supply chain from being stuck with excess inventories, ending up hurting it. As sales failed to tank as much as predicted and customer demand was actually greater, there was no inventory to sell to consumers. Thus, the ugly side of just-in-time manufacturing was exposed.

What went wrong? First, there was a lack of visibility at the lower links of the supply chain. Could that be prevented? Yes. Communications with lower tier suppliers would help avoid some of the surprises. Supply chain visibility and optimization software would have helped some of the firms get visibility into what could happen upstream and downstream. But then these firms would need to inform and collaborate with their suppliers and help them prepare for the drop in business so that they would not be blindsided and left holding the inventory bag, so to speak, for their customers.

But is this the fault of JIT practices? Not really. The challenge is to optimize service to customers and minimize inventory. It is costly to hold too much just-in-case inventory and in the end, does not pay off in the electronics industry where idle inventory rapidly becomes obsolete.

However, that doesn’t stop the JIT-bashers from piling it on. See, JIT doesn’t work. Get rid of Six Sigma. Lean is useless. That’s the amazing commentary that comes out when supply chain failures occur. People blame the tools, not those who use the tools. As the saying goes, “A bad workman blames his tools.”  There seems to be a lot of pent-up anger over high-performance management systems and tools such as JIT, Lean and Six Sigma as well as a readiness to rush to judgment that it’s the tools that cause the problems. The toolheads like their tools and convince others that the tools are the silver bullet. Many businesses don’t like dealing with the messiness of leadership, culture, change, customer-supplier collaboration and continuous improvement. However, JIT, Lean and Six Sigma are worthless without them.

A colleague of mine, Sandra Gauvin, an expert in the quality field and writer of the Current Quality blog and newsletter, recently brought to my attention a new disturbing trend in supplier evaluation: suppliers who charge their customers to for the privilege of conducting an on-site audit. In this scenario, a customer contacts a supplier requesting an audit. The customer receives a reply something to the effect of:

“You can purchase our audit report.  The audit was conducted by Acme Audit Company (an independent consulting firm).  The report costs 4.000€ and the advantage is that you can receive it soon.   Or you can conduct an on-site audit of our facility but you will have to pay an audit fee of 10.000€ per day.  However, we have no available audit slots in 2009. 

We don’t have the availabilities yet for 2010, but we can place you on our waiting list. We would then propose an audit date, when we receive these availabilities.”

So if you’re the customer, what do you do? You’re between the proverbial rock and a hard place. There are consortia that negotiate with suppliers regarding audits and can prevail upon suppliers not to charge if enough members of the consortia use a particular supplier. An example of this is Rx-360, an international pharmaceutical supply chain consortium. Otherwise, depending on your industry and whether you have any leverage over the supplier, you may need to buy the independent audit report.

This particular situation is occurring in the pharmaceutical and biotech industry because of the requirement to conduct on-site audits of suppliers for compliance to FDA standards and GMP practices. Some suppliers, even small companies, have to host 50 or more customer site visits a year, despite their already maintaining ISO 9001:2000 or AS9100B registration. From the supplier’s point of view, such visits are costly and time-consuming. So why not charge? Suppliers would rather spend the time improving their processes than hosting customer audits. Some suppliers feel that some customers may not be auditing for valid reasons, but just to “check the boxes” or to get to spend a day out of the office. Charging can be a means of vetting out only the most serious customers.

Is charging customers for audits likely to spread beyond this industry? Also, what does charging customers for audits say about the customer-supplier relationship?  The value of audits that customers have to pay to conduct? For those industries where on-site audits are required, this is a means of capitalizing on that requirement and allowing the supplier to recoup its expenses for multiple site visits. Switching to other qualified suppliers is not so easy in pharma and biotech, given the rigorous industry standards. If companies are looking to develop mutually beneficial relationships with their suppliers, what does charging for an audit do to that relationship? I am interested to know if charging for audits conforms with  the ISM Principles and Standards of Ethical Supply Management Conduct.

Does requiring a payment for a customer audit constitute an attempt to influence the outcome of the audit or the outcome of relationship with the supplier? That is, if you have to pay to play, are you going to forgo auditing altogether, letting the supplier off the hook? Or will you be inclined toward a positive audit outcome because of the need to pay to learn the information to work with a supplier? Would paying over $13,000 to audit a supplier have any influence on your findings? Or how about the ethics of independent consultants charging you to view the supplier’s audit or else getting no audit information at all?

I’d be interested to hear readers’ reactions to this trend.

Back to Sherry’s website.

Robert Handfield’s recent article in the Wall Street Journal, “United They’ll Stand,” promotes the idea of working with financially-stressed key suppliers to avoid pushing them over the brink into insolvency. The author is not advocating bailing them out, as suggested by Debbie Wilson’s in her post, Vendor Vulnerability – Handfield’s Flawed Recommendation. But rather, Handfield advocates several measures to help them get through these difficult times — ways that are also favorable to the customer firm.

The Wall Street Journal article points out that should critical suppliers fail, the ripple effect can end up costing the buying company far more than it anticipates, potentially millions of dollars in service failures and bankruptcies that could adversely impact the customer company. To avoid these catastrophes, Handfield suggests, for example, giving suppliers shorter payment terms. In stretching out payments to help their own cash flow, customer firms appear to suppliers that they are using them as a bank. In return for quicker payment, the buying firm should ask for better pricing. Customers could give reputable suppliers longer-term, fixed contracts with more favorable pricing linked to agreed-upon market indices, suggests Handfield. This could give the supplier the opportunity to stabilize and get additional lines of credit. Suppliers may be willing to give on pricing in exchange for long-term stability.  Handfield makes a number of other suggestions, such as the buying firm not only having its own contingency plans in place and identifying alternate sources, but working with key suppliers to do the same (and of course, choosing the suppliers that you work with in this way very carefully).

Handfield is not suggesting that customers bankroll failing suppliers nor is he suggesting giveaways to suppliers. He is advocating that customers work as a team with key suppliers on creative ways to make it through tough economic times with both sides giving up to get something in return. Critical supplier failures are the outcome to be avoided. This requires communication, give and take, and creativity.  Working with key suppliers in this way is not done just out of the goodness of your heart. The commitment and loyalty engendered by working with suppliers during tough times will pay off financially.

I have personally seen and been the recipient of the philosophy of stretched out payment terms to support the customer’s financials. Those suppliers that can withstand this practice in the short-term will be gone (if not gone, as in bankrupt) as soon as they are able to find customers with reasonable payment terms and performance. I have also worked hard to “go the extra mile” for a customer who paid quickly and to win more contracts from them.  Companies that have reasonable payment terms engender supplier loyalty. T.J. Maxx, for example, has had a practice of paying suppliers quickly as a way to get the best fashion brands to sell them their excess inventory.

In a blog post, Ethical Payment Ethics: The Cost of Squeezing Suppliers, Rajesh Chhabara describes the situation further.  He quotes Tim Cummins, president and chief executive of the US-headquartered International Association for Contract and Commercial Management, a global body with 5,000 members from 1,600 companies: “Our members are under increasing pressure from their [senior] management to renegotiate and extend payment cycle times in view of the ongoing financial crisis.” But he says that smart managers should tell boards that doing so is a threat to the reputation of the company and it may also threaten the security of supply chains. “It is not smart to put your suppliers out of business.”

Using suppliers as bankers can get firms out of financial jams in the short term. But it is neither ethical nor sustainable as a long-term practice. Especially when there are many alternative win-win approaches.

I was reading the recent blog post at the Spendmatters:   Beyond Shedding the Deadweight in Procurement and Operations. Instead of just cutting headcount, particularly in procurement, Jason Busch suggests other ways to approach cost reduction. Among the suggestions are: driving better efficiency by fully using software solutions in the Procure-to-Pay cycle; using third parties to help you outsource and cut spend; and last, cutting inventory as much as possible and working with critical suppliers to help them reduce their cost structures.  I’d like to add lean to list, both as a continuous improvement toolset and as a way of thinking. Companies should be deploying lean thinking and lean enterprise practices to help remove waste in the entire company. Waste is defined as creating no value and as something that a customer would not want to pay for.

OK, so you’ve heard a lot about lean and maybe your company has a lean initiative going on. Many people still think lean something you do only on the factory floor and it doesn’t pertain to them if they work in an office. No, it’s not just for manufacturing wonks. Or else I hear, “Yeah, we’re lean. We’ve cut everything to the bone.”  That’s lean and mean or lean anorexic, not the real meaning of Lean Enterprise.  Lean and mean is a cost-cutting exercise and is not real Lean, which is a systematic elimination of non-value added activities (i.e., that do not add value to the customer or that the customer would not want to pay for). Cutting 10% across the company is a desperation mentality, value-add and customers be damned, like amputating your own limb. Desperate measure for desperate times.

So what about lean in relation to all things procurement and suppliers? Lean thinking, tools and culture afford the opportunity to reduce and eliminate the sources and causes of waste and cost that come from doing things the way they’ve always been done. It means not just helping suppliers improve their operations and cost structures, but also addressing one’s own internal process inefficiencies that often adversely impact suppliers’ ability to meet customer requirements.

Traditional procurement maintains a big supply base, a short-term focus and is internally driven. Lean procurement is system-oriented with a focus on total cost and internal and external customers. The traditional mentality is to get a better price (’cause that’s what we’re measured on), but potentially pay later in quality, delivery and service issues. Now is the time to look at the supply base and decide based on best value, including performance, which suppliers to focus precious resources on and whom to disengage. Procurement can adopt lean practices such as value stream mapping to identify non-value added activities. It can look at internal workflows and at those involving suppliers. Visual systems (5S) in the office can be used to improve the procurement and supply management work environment so that people don’t waste time looking for things or even waste space. Procurement can identify not only the problems, the root causes of the problems. It can uncover:  Where are the bottlenecks? How much do people have to wait for the next step in the process or for resources due to work imbalances and bottlenecks? And who manages the waiting, which is in itself only additional waste? Procurement should work in concert with other functions to expose and eliminate hidden cost drivers such as: customer complaints, long lead times, systems issues, quotation errors, incoming inspection, expediting, excessive paperwork, poor controls, poor communications, poor supplier quality, etc. Or, eliminate the extra steps and waste in what can be called the inter- and intra-company circle of waste – that is, the waste that occurs in the business processes pertaining to and between customers and suppliers or in the white spaces.

But most importantly, in addition to working on important supplier performance improvement and development projects, procurement can adopt a continuous improvement/lean mentality and culture within its own function both as a model to its suppliers and as an important step to do its part to help restore the entire company to financial health.

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.