Line Pulls and Associated Failures. If an internal failure occurs, the line is stopped and the problem is resolved. This causes downtime and asso- ciated problems with getting the correct parts or correcting the problems that have been encountered.
Warranty Costs. These costs can be a major expense and in many cases they are not really monitored. The cost systems that exist in many organi- zations do not have the capability to tie warranty costs back to the parts, the supplier, and the buyer. In the automobile industry this cost becomes very large as the warranties get extended.
Rework/Scrap Costs. Scrap and rework can consume significant amounts of labor in trying to recover the material. Scrap recovery savings are always less than the cost of the original material. This is a good candidate for con- tinuous improvement, and I have seen a lot of low-hanging fruit to be picked in the area of scrap reduction.
Impositions on Bottleneck Operations. If a process is a bottleneck, it will cause capacity problems as well as scheduling issues. The concept of synchronous manufacturing needs to be implemented along with work on reducing inventories. Bottlenecks need to be removed so that processes can run smoothly.
As you consider changes to your organization and its supply base, the first area that needs to be looked at is the decision whether you will make a product or whether you will buy that product. This is the first decision that is involved in the supply chain management process. Chapter 4 will deal with this topic in detail.
The ultimate driver in supply chain management is the consumer. This is the person who sees enough value in the product to be willing to spend
Understanding Your Supply Chain 29
some of his or her hard-earned money to purchase it. As part of supply chain management we need to be constantly aware of the changing needs of the consumer.
How do we discover these changing needs? Part of this is done by market research firms. Surveys and testing give indications of the changes that are happening and what product changes may or may not be accepted in the market. Supply chain management strategy will be discussed in detail in Chapter 3.
This process is a little different in the automobile industry. New features are developed by engineers that add to the features of existing automobiles, and then a concept car is made and displayed at various auto shows around the world. Interest and reactions are measured at these shows to determine which features should be added and which ones should be dropped.
In the marketplace today, one of the critical pieces in the supply chain is flexibility. Consumers’ needs change based on global economic sit- uations. An example of this is how difficulties in the Middle East have caused the price of gasoline to rise. Many consumers are now looking for vehicles that are multi-fuel or have higher miles-per-gallon ratings. Unfor- tunately, the U.S. Big Three (General Motors, Ford, and Chrysler) auto- makers designed and built many plants to manufacture one type of vehicle only. The equipment has no flexibility other than to produce one type of vehicle.
The transplant companies on the other hand have designed flexibility into their facilities. One assembly plant is capable of assembling the com- pany’s entire product line on-site. Operating in this manner requires a very strong supply chain management process to make sure all the parts are at the right place at the right time. This also allows the plant to do their fore- casting and production closer to the actual consumers’ demand. This type of operation reduces the amount of inventory required as well as all the working capital that is usually tied up in inventories.
One of the newer positions that has been created is the supplier qual- ity engineer. These “engineers” are given the responsibility of working with the suppliers to get the products that are required. In many cases I have seen individuals in these positions go on an ego trip and try to show how power- ful they are. Many of them do not understand the impact that their actions can have on the overall business. To illustrate this let me use an example:
A large company gets a new vice president of purchasing who wants to make a name for himself quickly. His predecessor had been squeezing the suppliers to reduce costs for five years. The new vice president wants all existing contracts torn up and rebid to get lower prices. The contracts are
30 Chapter Two
all awarded to the suppliers based on the lowest price alone. As a result, in the short term the new vice president saves the company a tremendous amount of money and he really impresses the board of directors.
Now let’s analyze the supply chain impacts of this move.
Many of the contracts were moved to different suppliers so there was a lot of shifting of business in the supply chain. This shifting created negative responses in many organizations in the supply chain.
What might happen at the end of these contracts? If I were one of the suppliers that had been replaced, would I bother to bid for the business again? If I did I would make sure I made good money. If one of the selected suppliers had financial problems, would I help the customer out? Maybe.
How bad did the business get hurt in the long run by these price decisions?
As a result of situations like this, I have seen suppliers change focus and move on without this business.
The real issue when dealing with the supply chain in this manner is that it is very easy to end up with unhealthy suppliers in the financial sense.
What do you do if a supplier files for Chapter 11 bankruptcy? How does this impact your business? What happens if the supplier gets closed down or files for Chapter 7 bankruptcy?
I saw a situation where the bank closed down a business because they ran out of credit. Part of this was caused by members in the supply chain not pay- ing their bills in a timely manner. The company was toward the beginning of the supply chain so many downstream organizations suffered as a result of this move. This is hard to predict, so each company needs to be aware of the status of their supplier’s financial health.
All of this said, the need exists for supply chain managers in any and all businesses. The real questions become “How are we as a company going to do it?” and “What kind of relationships are we going to have with our suppliers?” Both of these questions have multiple ways of being answered but the best for each situation has to be developed. One of the difficulties that exists is that this process of supply chain management is different for every part of the supply chain. Each part needs to be evaluated and deci- sions made as to what should be done.
Many companies think that long-term contracts are what drive sup- plier relationships. As a result they make sure that there is lots of legal- ese in the contracts to protect them as the customer. Does this work? Not eally! I have seen steel manufacturers and distributors that had contracts ith suppliers to get materials. These should be met, but with the global steel shortage in the first part of 2006 many distributors were unable to get any steel. The customers of the distributors sued in some cases for breach of contract but it only caused the destruction of the distributor and got them
Understanding Your Supply Chain 31
no steel. We have to understand the supply chain on a global basis so that the correct decisions are made and our business can obtain the material that we need to continue to operate.