As technology OEMs (Original Equipment Manufacturers) continue to benefit from a healthy and growing economy, many are coming to the realization that some of their suppliers cannot scale to meet their projected growth. While these OEMs generally have a good handle on their large, strategic suppliers, they are in a fog when it comes to smaller, yet vital, suppliers. These suppliers are often more financially vulnerable, more dependent on key personnel, less process-centric, and often possess capabilities that make switching to a new supplier challenging.
To cover this comprehensively would take more than a newsletter but here we will cover some common, macro-level factors that have the biggest impact based on our experience:
- Are they making proactive investments?
The key here is “proactive”, which implies that they can scale at the right time to meet your needs. The problem is that it is hard for these suppliers to hit the targets they cannot see. We have noticed that smaller suppliers are more likely to react to purchase orders from their customers rather than to a longer-term forecast. Sometimes, this does not give them enough time to be proactive in making investments. For instance, if the purchase orders suddenly reflect a significant increase in volume relative to historical consumption levels, the supplier may need six months to a year to make investments in new buildings, tooling, personnel, or materials to meet the increased business demand. To avoid this problem, suppliers need to know what the future holds. At a minimum, you should share forecasts to help them plan capacity and materials. It would be even better to discuss your new product introduction plans, your longer-term product roadmaps, and the capabilities that you need to be successful.
- How dependent are they on specific individuals?
In some risk assessment activity that we conducted for one of our clients recently, we encountered several suppliers that were performing special operations that are very difficult to duplicate. In one instance, the entire company was dependent on the company owner. He had the technical process knowledge required to carry out the special operation and there was not enough documentation or a planned back-up should something happen to the owner. In another case, there was a supplier that required special precision machining skills that could not easily scale due to the limited number of trained resources in the region. In both cases, our assessment triggered discussions about how the supplier could become less susceptible to a single point of failure. By addressing these problems before they became critical, we helped our client avoid a potentially catastrophic situation.
- How much mindshare do you have?
With the economy running on all cylinders, it’s important to realize that others – including your competitors – are also growing and demanding more of the suppliers that you share. This begs the question of how important are you to your suppliers? Sometimes this is based on revenue/profit, but can also be based on access to new industries, prestige, technology, attention, etc. In a dynamic business environment, this can be a moving target and change significantly quarter over quarter. One supplier that we assessed recently stated that while our client represented a large portion of their business, they were about to secure business from a much larger OEM with larger, more stable volumes. They were clearly hinting that if they acquire this new business, it would be a game changer for them and they would undoubtedly prioritize the new customer’s volumes over that of our clients. By staying engaged with your suppliers, you can avoid surprises.
- Can their systems and processes scale?
While most suppliers would welcome fast growing revenues, the ramp can cause problems and expose weaknesses in the company’s processes, systems, and infrastructure. One supplier told us that due to our client’s expanding volumes, they had increased their employment from 30 employees to 160 employees in only nine months. While they appreciated the new level of business, they were the first to admit that they did not have the systems and business processes to keep up with these new levels and were nervous about the implications of this unexpected increase in volume. For instance, in the past, their purchasing group could get everything they needed at their distributors with a one-week lead-time. With the new higher volumes, they quickly consumed the distributor’s inventory and were caught off guard by the component manufacturer’s 16-week lead-time. They did not know that they had artificially low lead-times in their systems which lead to a gap in supply. They also realized they could no longer run their business on a small-scale ERP system and spreadsheets and that they now needed a more comprehensive ERP system that required a significant investment for which they did not plan.
- Do they need help?
Sometimes, smaller suppliers just don’t know what to do in response to their larger customer’s requirements. Asking a small to medium size supplier to implement VMI, postponement manufacturing, and complex flexibility and lead-time reduction programs may be difficult and beyond the capabilities of their staff. In our assessment of a mid-sized supplier for our client, we were impressed with their internal capabilities such as production planning, quality control, and capacity management. However, their supply chain organization was unfamiliar with programs that could provide flexibility in their extended supply chain. They had a strong purchasing function for ordering components and managing supplier deliveries but when it came to strategic management of their suppliers, they simply did not have the right skillset. This small supplier did not know where to start and needed help in initiating those conversations with their suppliers.
Conclusion
As we imagine the supply chain, it is easy to see that the weakest link can cause the whole system to break. OEMs are generally good about managing their biggest and most important suppliers. While focusing on your top spend areas makes sense, there are inherent risks in your smaller suppliers that you may be overlooking. This becomes apparent when there is some stress to your supply chain during a big ramp or when you are introducing critical new products. Assessing and mapping these risks early is the key to mitigating the issues before they hit your bottom-line.
Supplier risk assessment and development is one of the core capabilities of Symphony Consulting. If you think we can be of help, please do not hesitate to contact us.