Why taking care of your smallest suppliers is important

When I was running a manufacturing business and responsible for delivering final goods to an end user in the defence sector, our team had become very comfortable with our supply chain and since we didn’t have any issues for so many years, there never seemed to be a huge urgency to fix anything. After all why to fix it if it isn’t broken?

Our head of supply chain was incredibly talented and had fostered relationships with everyone, particularly the larger and critical suppliers, such as advanced coatings providers and other suppliers that made up a large percentage of our spend, such as raw materials providers.

We paid very little, if any, attention to the smaller suppliers, such as the nuts, bolts and tent stakes providers for instance. When our large U.S. Department of Defense contracts started to decrease, we needed to go to our suppliers to have them adjust delivery schedules, reduce their prices and work with us on slightly revised work scopes.

Nicole Verkindt with a plane

Nicole Verkindt

These changes were no problem and life continued as normal. That is until there was a near-colossal mess up with one of the minuscule components of the shelter system – tent stakes.

Small but not insignificant

At 17 cents a piece there was little to no margin available for that supplier for some kind of error. We missed the supplier on our radar and despite their seeming insignificance, one missing link caused a near miss delivery…and a missed delivery is a missed revenue hit, which can be for some SMEs running on the margin, a near payroll and expense miss too.

In other words, the tent stakes can take down an entire business. In our case, they didn’t, but served as an important lesson in how some of the suppliers that feel most critical have the most cushion and how sometimes the smaller and “insignificant” ones need to be watched closest.

We learned that, as buyers, we should be wary of squeezing these suppliers on cost or forcing them to change delivery schedules. But most of all, we learned how much the strength and success of our supply chain translated directly to our success.

Overall, when managing complex supply chains, aerospace, and defence (A&D) companies face challenges that can pose tremendous risks to their overall product delivery and profitability.

While my example above is more about timing, communications and taking care of the smallest of suppliers, there can be more extreme issues having to do with quality and reducing the risk of poor quality parts being delivered in supply chains.

For instance, the Takata airbag recall was a major setback in the automotive industry, both in reputation and cost to the industry. In total, a single point of failure that was found in the supply chain of 14 different automakers, specifically a metal cartridge in the inflator, affected an estimated 100 million vehicles worldwide.

Supply chain risks

As of March of 2016, the estimated costs to the industry were pegged at approximately $31.6 billion. These losses amounted to more than the $26 billion initial estimates for Canada’s Canadian Surface Combatant (CSC) program, which will be this country’s largest procurement to date. Takata itself is unlikely to survive the fallout and the reputations of some of the world’s best-known automotive brands have also taken big hits as a result. This example should serve as a cautionary tale about the importance of reliable supply chain partners across any industry, but especially ones where the safety and security of people lie at the core of every product, as is the case in aerospace and defence products.

Shifting back to aerospace and defence supply chains, KPMG released a report earlier this year highlighting concerns from executives in A&D firms about their own supply chains and where they felt most exposed to risk.

The findings of this report show that 87 per cent of the aerospace and defence companies that responded cited “supply chain risk” as the second largest risk facing their companies.

Additionally, only one in 10 of these companies stated that they have visibility into their tier two supply chain and unsurprisingly, only 50 per cent of companies said they have full visibility into their tier, one supplier.

Outside of purely focusing on supplier product delivery, OEMs are also subject to various global reputational risks such as corruption or other potential unethical issues that can negatively come from its supply chain. As stated in the Thomas Reuters Transparency Webinar Series, corruption in the supply chain can increase the total cost of doing business globally by up to 10 percent, furthering the need to ensure transparency when managing supply chain risk.

We have been in extensive discussions with the team at Isaac, a local Toronto consulting firm that works together with businesses to increase their performance and reduce sourcing risk. The company has extensive experience across all functional areas of a supply chain including subcontracting, procurement, supplier management, logistics, receiving, warehousing, kitting, and stores.

Isaac first works with a company to understand how a company’s supply chain fits into the overall business process, and where the primary risks lie within that process. They then work with the company to trace every factor down to the root cause of the risk, and identify opportunities to reduce the risk and methods to track performance. Nick Boragina of Isaac told me that, “Most commonly, the greatest risk and subsequently the greatest cost is around program schedule delays as a result of missing parts or materials – late delivery dates and/or incorrect parts can run additional costs into the millions through pushing out the finish date. The risk is most amplified in situations where there are aggressive and inflexible schedules and in these cases communication and alignment of schedules between functional areas are critical.” It reminded me all too much of my emotional tent stake drama nearly a decade earlier.

Isaac's team

Isaac’s team

Another Canadian company making headway in supply chain risk is Creation Technologies, located in Burnaby, British Columbia. This company specializes in medium-volume, complex electronic products. Creation Technologies has expanded its Value Analysis and Value Engineering (VAVE) services due to the increased supply chain risks associated with consolidation in the electronics industry. VAVE helps OEMs identify risk in design, prototyping, and production and the team at Creation Technologies can then suggest solutions.

Supply chain risks are further complicated globally by offset/industrial participation/localization requirements.

Where countries like Canada don’t tend to present a major challenge to quality, there is still the issue of finding and qualifying the appropriate suppliers.

Traditionally, this has proven to be a time-consuming and expensive process. At OMX, we have tried to make this process easier by providing supplier data that can be filtered by capability, size, official quality certifications, region and whether or not they have been validated by another supplier in the ecosystem. We will also be moving towards providing internal ratings of suppliers by other users, and feel that the more information is readily available on companies, the more risk will be mitigated. This process is much harder in some emerging economies that don’t have such a robust manufacturing sector for government contractors and OEMs to draw from, especially when online data tends to be less trustworthy. These are the economies where offset programs aren’t meant to sustain an existing industry, but are in place to fully kickstart a new industry or sub-sector of one. In these instances, it is often much harder for foreign OEMs to discover suppliers and significantly more difficult to assess their quality and ability to deliver without flying half-way around the world to see their facilities. This difficulty can add significant cost to the bid itself and increases the risk further.

I also asked Jon Hansen, the author behind the blog Procurement Insights and the host of the radio show PI Window on Business Blog Talk Radio, about his thoughts on supply chain risk and procurement technologies. Jon believes that “Technology becomes ineffective the more people become dependent on it. We must look beyond the technology to the people working behind the technology. Historically, 80 per cent of e-procurement initiatives in the public and private sector have failed to achieve the result because they pass off the role of the people to the software.” Jon explained further. “Technology has advanced and the determining factor of the success of these online platforms is in the end, users coming together and using them.

Jon Hansen

Jon Hansen

The collaboration is what makes it worthwhile.” Jon and I further discussed the importance of these technologies in the coming age where millennials begin to move ahead in the workforce. For this generation, technology is a natural extension of who they are, and it is ultimately the future of managing procurement and supply chain.

Procure-to-pay solutions

Cloud-based platforms such as Coupa and Ariba provide procure-to-pay solutions that streamline procurement management processes and allow for greater visibility as well as reducing costs and time. These supply chain management platforms are mainstream, do not accommodate for some of the specifics around “local regional investments” and other specific needs from the offset and defence/aerospace community. Further, at the end of the day, it all comes down to user adoption and needing good data to be entered in to extract good data out.

As I mentioned earlier, OMX has begun tackling the issue of supplier quality and risk by layering additional features that allow companies to “Verify” other organizations in the platform that they have worked with. This feature serves as a way for companies that are proven and trusted in the industry (those that have been verified themselves) to anonymously endorse the reliable suppliers that they have worked with.

A more robust ratings and rankings system, similar to what we have already seen with platforms such as Yelp, are another solution to this common supply chain problem. However, this is going to require a degree of openness from an industry that is notoriously guarded about revealing details about its suppliers.

Essentially, OEMs/Primes/Tier 1s are going to have to be open and honest about their experiences with suppliers – which ones worked and which ones didn’t. Here, the issue for OEMs is balancing the value and usefulness of the reviews between what is for the good of the industry and their own competitive advantage by not exposing their supply chain weaknesses. OEMs will have to consider the benefit of the industry as a whole when taking part in ratings that potential competitors will be able to see.

If successful, this type of system will ultimately help the entire industry separate out the great suppliers from the not so great.  From what I can see, it would have the potential to have two positive effects: 1. Encouraging greater effort on the part of suppliers to get into the ‘great’ rankings which will have a positive effect on overall quality and delivery, and 2. Reducing risk for the OEMs on supplier failure by allowing them to choose the best overall supplier for their need based on previously tested and proven recommendations.

OMX is tackling this challenge in 2016/2017 and is opening the door to software integrations with major players to help OEMs gain greater insight into the visibility of their supply chain. One way that we intend to achieve this goal is by introducing additional anonymous supplier rating and ranking features to help OEMs reduce risk. Linking with other apps like AirDesign and SAP will allow companies to have a true end-to-end visibility into their supply chains on programs. B2B networks will allow OEMs to map their entire supply chain through gaining visibility into their tier 1’s suppliers and all the way down the supply chain to the source of materials.

Any company is only as strong as the weakest link in its supply chain and thus companies need to recognize that developing and using better data on lower supply chain tiers can aid in reducing risk and developing a more productive supply chain.

Leading technologies, when fully adopted, will prove to be a determining factor in limiting these risks. It is the combination of user adoption and the right technology itself that it is the winning answer, and for me, it is this idea of bringing best in breed from other sectors to the specific needs of the defence and offset community to reduce supply chain risk. The risks are too high to be ignored and there is often too much at stake for it to ever be worth it.

 

Author: Nicole Verkindt

Nicole Verkindt is the technology editor of Vanguard Magazine and founder and president of OMX. She is a board member of the Canadian Commercial Corporation and was recently appointed to the board of the Peter Munk School of Global Affairs.

Nicole graduated from The University of Western Ontario, Richard Ivey School of Business. She founded OMX in December 2011, with the intent to assist Canadian companies in leveraging government procurements and secure contracts, growing their businesses into high tech and international supply chains – with maximum benefit to the economy.

She is passionate about reading, travel, international aid, skiing and running. She speaks English, French and Spanish.

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