The balanced supply base
Focus on strategic partners, but manage risk on critical parts
By Alex Anderson, contributing editor -- Manufacturing Business Technology, 5/1/2003 12:00:00 AM
Tony Tarantino knows all about procurement glitches. He's been fixing them for more than 25 years, and during that time has seen just about everything that can go wrong.
"When I was materials manager for a medical device manufacturer in South Carolina, it was brought to my attention that the same simple twist tie used to wrap electrical wiring was being stocked under four different part numbers, purchased from four suppliers, at four different prices," he recalls. "Because we didn't know about the redundancy, my purchasing folks were expediting the twist tie from one supplier, while the same item was in stock and being written off as obsolete in another."
Today, Tarantino is senior manager with McLean, Va.-based BearingPoint, a consulting and systems integration firm formerly known as KPMG Consulting. Tarantino makes his living helping companies avoid wasteful scenarios including redundant supply arrangements, which he says is a classic problem that's common across a broad range of industries.
The still struggling economy is driving further interest in reducing, or what some experts term "rationalizing," the number of suppliers in a supply base. "At this point you can't expect to generate a whole lot of new revenue," says Julie Fraser, a principal at Industry Directions, an industry analyst firm based in Newburyport, Mass. "People are looking to cut costs and all the money associated with maintaining a lot of extra suppliers is an obvious target."
But just how big should an efficient supply base be? Both Tarantino and Fraser agree that a general rule of thumb to follow is to avoid single sourcing for any critical-path part. By doing this, you reduce the chances that a shortage or failure will impact the smooth operation of your production line. This is, however, only a rule of thumb. Both experts point out that a number of variables must be taken into account before assigning a potentially arbitrary numerical goal to a supply base.
Rationalizing and managing a supply base can be aided by technology. Specifically, supplier relationship management (SRM) software, often working in conjunction with back-end enterprise systems, offers a foundation for achieving a balanced supply base.
No easy task
It's easy for a supply base to become bloated. Consider the merger and acquisition activity that has become common in the high-tech industry. Each time a company adds a factory or product line, it likely adds new suppliers. Merely maintaining a supplier on the list costs money, thus huge gains can be realized by simply cleaning up the master list and eliminating duplicate entries.
While this might sound simple, rationalizing a supply base isn't an easy project. Tarantino's case of the redundant twist ties illuminates the challenge. Tarantino says the production control group knew about the redundancy, but couldn't get engineering to make the necessary engineering change orders to fix it. "Because all the items were called out in multiple bills of material [BOMs] and often were referenced in various spares catalogs, the fix is not as easy," he says.
Spend analytics applications can play a role in reducing the supply chain to the optimum size by identifying items that can be combined or merged, says Tarantino. A number of SRM vendors and enterprise resources planning (ERP) system vendors with extended supply chain management applications offer tools for spend analysis.
However, as Tarantino points out, a lack of clean data also poses a barrier. "Most organizations struggle in discovering their actual spend due to a lack of standardized supplier naming conventions, lack of parent/child hierarchy in suppliers, lack of standardized commodity codes, and lack of standardized components," he says. "This syndrome of not having good data on who/what/where you are spending your money is a huge issue. [Some companies] tell us they can't even agree on what the categories are. How do you eliminate duplicate or unused suppliers if you can't agree on what they're supplying?"
When he was materials manager for a large lockset manufacturer, Tarantino used value analysis to combine three separate fasteners purchased from three suppliers into one item. "It turned out the longest screw could be used for the other two applications. This reduced three SKUs [stock-keeping units] into one and permitted us to negotiate volume discounts with one preferred supplier."
The Sun model
According to Joe McGrath, director of procurement strategy and supplier relationships for Sun Microsystems, the Santa Clara, Calif.-based manufacturer of servers and other computing solutions, running an efficient supply base is about maintaining a balance between having enough suppliers to maintain inbound materials continuity, but not so many that it is difficult to manage them all.
"In some cases we have too many [suppliers]; in others we don't have enough," McGrath says. The challenge is to steer the path that meets targeted goals of complexity reduction while maintaining business continuity.
To help meet these goals, Sun works closely with key suppliers. "Sun has traditionally been very structured in its approach to how it manages its supply chain. We have strategic relationships with about 40 suppliers of system-level components. We get more than 75 percent of our [outgoing] unit volume from our suppliers as finished goods," he says, adding that those first-tier suppliers may deal with hundreds or thousands of suppliers in the lower tiers.
McGrath says it makes no sense to drive a revolving-door policy into the supply base. While this may be viable with commodities, it's not as effective with direct materials that may be highly customized. "These are highly strategic relationships and we've maintained a significant investment in terms of technology and relationships," he says.
Sun owns just three manufacturing plants, but leverages the capabilities of its supply base to achieve more than 100 times its own capacity. The total value of outsourced products and services purchased by Sun in 2001 amounted to about $8 billion.
To support these operations, says McGrath, Sun has began an initiative called the Breakthrough Supply Chain. This program involves a portal-based system built on Sun's Open Net Architecture (ONE), which uses electronic data interchange and eXtensible markup language to collaborate with suppliers on planning, materials fulfillment, and sourcing.
According to McGrath, the supplier portal has replaced faxes and phone calls with real-time access to applications and systems that cut both time and cost out of the process.
What is SRM?
Supplier relationship management applications, as the name implies, aim at making companies more effective in managing their suppliers. The space can be confusing, since many types of vendors have offerings, and SRM suites often differ in function focus. Best-of-breed vendors in the SRM space include San Jose, Calif.-based Apexon; Westlake Village, Calif.-based RiverOne; and SupplyWorks, Bedford, Mass. The large supply chain management software vendors, including Dallas-based i2 Technologies and Rockville, Md.-based Manugistics, also offer SRM functionality, as do enterprise suite vendors including Herndon, Va.-based Baan, and Pleasanton, Calif.-based PeopleSoft.
"The surge of outsourcing means suppliers are actually driving revenue, so they have become an integral part of a company's success," says Patti Jefferies, director of product marketing for Baan's SRM solution.
The SRM category, viewed broadly, spans extensive functionality. For example, some suites include tools for reverse auctions and multi-attribute sourcing logic. Other systems focus on the operational aspects of procurement like automated replenishment. Analytical tools for tracking supplier performance, and for analyzing procurement spend, also are part of the SRM trend. However, some analysts point out that SRM, viewed narrowly, comprises supplier-facing functions, and "supply management" actually is the best term for the full range of functions outlined above.
SRM vendors agree that SRM is different from e-sourcing tools. "SRM encompasses everything between the manufacturer's requisition process and the suppliers,' says Jeff Herrmann, CEO of SupplyWorks. "It's about managing the relationship between the factory and the supplier over time."
Supplier performance monitoring solutions typically use a scorecard approach that measures key performance indicators (KPIs) such as cost, part quality, availability, technical capabilities, and how often a supplier is late. Such business intelligence is a critical component of establishing an effective supply base, says Mark Levy, senior director of product management, RiverOne. "You get what you measure," he says. "If you're not measuring and then feeding that back into the chain, then nothing [positive] is going to happen."
But as Levy points out, analytics often involve creating an understanding with suppliers regarding key metrics. For example, what exactly constitutes a late shipment? Is it two hours, two days, or two weeks? "By tracking metrics, you bring fact into the relationship," Levy says.
Outsourced SRM
While the Sun model is attractive, not everyone can push responsibility for relationships with lower-tier suppliers onto Tier 1 suppliers. On the other hand, it is still very difficult to manage relationships with hundreds of trading partners.
"Pretty much every manufacturer out there focuses on its top-tier suppliers, but it doesn't get down past that. It's the old 80/20 rule," says Bill Lindquist, business unit leader for Torrington, Conn.-based The 21st Supplier. "Even if you have a strategic supplier program, you will only work strategically with about the top 30 percent."
The 21st Supplier, a business unit of Ingersoll-Rand, offers outsourced supply management services, and uses an SRM package from SupplyWorks as the foundation of its offering. SupplyWorks MAX integrates with a client's ERP system to enable collaboration with the suppliers. To date, The 21st Supplier has been working exclusively with other Ingersoll-Rand companies, but Lindquist is optimistic about taking the service to the broader market—particularly the Fortune 1000—and says he is in the late stages of negotiating the first external customers.
Lindquist says units that have signed on with The 21st Supplier have cut lead times by 30 percent to 50 percent, lowered material costs by 5 percent, and lowered inventory levels by an average of 20 percent. For most companies, benefits on this scale would overshadow any debate on just how large the supply base should be.
| Who's inside | ||
| Apexon: www.apexon.com | Baan: www.baan.com | Manugistics: www.manugistics.com |
| PeopleSoft: www.peoplesoft.com | RiverOne: www.riverone.com | SupplyWorks: www.supplyworks.com |
