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A Real Business Coach
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Author: Cam Forbes
Article:
Kennametal Inc. prides itself on quality products, competitive
prices, and on-time delivery. So when a European supplier missed
a shipment by weeks and customers bought materials elsewhere,
the metalworking manufacturer's procurement chief took action.
Jim Cebula, director of Kennametal's global purchasing and
travel, negotiated a consigned inventory contract with the
supplier, which, within four months, was able to stock enough
products to deliver them on time again. Thanks to its supplier
remedial efforts, Kennametal also recovered the business it had
lost due to the provider's poor execution
"Since we're in a competitive market, it's very easy for our
customers to call our competitor when we don't have inventory
available," says Cebula, with $2 billion Kennametal in Latrobe,
Pa. "Any time we don't have inventory, it has a direct impact on
sales."
Kennametal's supplier produces high-quality products at
competitive prices. But trying to manufacture small lots had
instead caused "unplanned surprises" in its shipping process,
which resulted in untimely deliveries, Cebula notes. "We're a
make-to-stock business, so we have to anticipate our customers'
demands. Delivery is critical to us."
Kennametal customers include automotive and aerospace
manufacturers and construction equipment companies.
Costs of Supply Problems
Examples of suppliers wreaking havoc on manufacturers'
operations are rampant. Poor supplier performance accounts for
billions of dollars in product recalls and even consumer deaths.
In an especially notorious example, Ford Motor Co. lost $3
billion after it recalled more than 13 million defective
Bridgestone/Firestone tires running on its vehicles. Experts
estimated the faulty tires may have caused as many as 250
deaths.
Such problems, combined with today's dynamic, global business
environment, require buyers to evaluate and manage supply
partners' efficiencies. Suppliers that fail to meet performance
standards can cost manufacturers a bundle in actual expenditure,
customer satisfaction, and lost business.
"A supplier could provide the lowest price, give you the right
price, and ship on time," says Tim Minahan, senior vice
president of supply chain research with Aberdeen Group Inc., a
market research firm in Boston, Mass. "But maybe they ship
damaged goods, short ship you, or don't have access to
automation, so you're processing paper purchase orders and
invoices, which adds cost and time to the system."
If suppliers don't meet delivery schedules, manufacturers might
have to shut down or reschedule lines, notes Deb Lynch, sourcing
and supply management director with The Toro Co., a $1.7
billion, outdoor maintenance products maker in Bloomington,
Minn. "That results in sending employees home or having to
expedite other parts to build other products. If they're far
enough away, you might have to air freight product in and either
the supplier or we incur air freight costs."
The costs to recover from supply chain disruptions can run into
"several hundreds of thousands of dollars," adds Lynch.
Global Supply Chain
Purchasers can't afford to buy from suppliers that ship
substandard products, miss delivery dates, or charge too much
because their businesses rely on sourced materials. External
suppliers deliver about half of all goods and services to
companies, according to an Aberdeen report.
In addition, many large corporations find low-cost supply
sources offshore, particularly in Southeast Asia, says Jim
Lawton, marketing vice president with Open Ratings Inc., a
supply-management software vendor in Waltham, Mass. Purchasing
officers increasingly seek to squeeze as many costs of materials
out of their budgets as they can, Lawton notes.
To Mike Calder, manager of operational excellence, energy, and
materials with $7.4 billion Air Products and Chemicals Inc.,
increased global sourcing poses risks he must mitigate.
"As we advance into the Far East, our supply chain has become
longer, the criticality of materials becomes greater," Calder
says. "Choosing the right suppliers is critical to our overall
supply chain security." Essential to Operations
With manufacturers increasingly relying on external suppliers,
it's hardly surprising that some 70% of the companies responding
to an Aberdeen survey view measuring supplier performance as
critical to their operations.
Many manufacturers have established strict supplier performance
measurement processes and procedures to ensure external
suppliers meet stringent operational requirements.
Allentown, Pa.-based Air Products, which provides gases and
chemical products to a variety of industries in 30 countries,
spends some 65% of total corporate revenues to purchase raw
materials such as energy, natural gas, and chemicals.
With the costs of hydrocarbons increasing, Calder works actively
with some 200 strategic
Associated Websites
suppliers to drive continuous
improvements in delivery, quality, price, and overall
performance.
"Two of our measurements in the delivery area--on-time delivery
and fill rates--have a direct impact on inventory and planning
downstream," Calder notes. "If you're not getting your material
and what you ordered, that sets up a huge buffering in inventory
that will impact your business."
Air Products suppliers undergo monthly measurement reports,
while some 35 corporate buyers conduct annual reviews with them.
Air Products evaluates suppliers on the level of communications
between supplier and manufacturer, progress in continuous
improvements, level of account penetration, responsiveness, and
overall risk the suppliers pose to the supply chain.
Employing the supplier evaluation module in SAP AG's R/3
enterprise business software and a customized continuous
improvement tool, Air Products helps failing suppliers determine
reasons for falling short and often implements corrective
actions. In one such instance, after a supplier missed several
delivery dates, Air Products discovered that an internal order
receipt and processing process caused the problems. The company
helped the vendor fix the problem in less than two months, says
Calder. Key Competitive Advantage
As companies move beyond trying to squeeze costs out of their
supply chains, the performances of their suppliers become
critical.
"As firms manage their supply chains for integration and
competitive advantage," says CAPS Research, a Tempe, Ariz.-based
research firm, "supplier development becomes a key tool in
driving superior supply chain performance."
Kennametal, which established formal supplier performance
assessment procedures in 2001, recognizes the need for quality
providers. "We add value to the product we buy so [our customers
know] we have a value-added process," says Cebula. "But without
the relationships we have with our suppliers, we would not be
able to service our customers."
The company, which spends 35% of revenues to purchase
metallurgical raw materials, steel products, and indirect goods,
distributes some 400 supplier report cards monthly to strategic
suppliers.
The scorecards measure such factors as product quality, which
represents 35% of total score; on-time delivery 30%; total cost
management 25%; and payment terms 10%. (see below)
Suppliers that fall below target scores for two consecutive
months must submit corrective action plans, which Cebula
reviews. Those that improve continue to work with Kennametal,
which starts looking for alternative sourcing for vendors that
keep failing.
Like most companies, Kennametal and Air Products don't expend
the same resources on indirect and second-tier providers.
"They're not very strategic, so we don't go through the rigor of
monthly measurements for those," Cebula notes.
Calder agrees. "We don't want to spend time on low-level
suppliers [that have little] impact on the organization," he
says.
But Open Rating's Lawton questions that lack of scrutiny of
lower-tier suppliers. For 10 years, Lawton managed procurement
efforts for a large electronics company for a commodity that
required 1,000 sourced parts and components. Concentrating on
only those parts that were critical to the unit's performance,
Lawton one day ran out of nonstrategic materials.
"You can focus your attention on what's most important, but if
you don't have screws, you can't ship the product," says Lawton.
"The last thing someone running a materials organization needs
is not being able to ship a product because they don't have
screws."
Lawton's group expended "a lot of human capital" seeking
alternate sources. After much scrambling, "fire fighting," and
additional costs, they shipped on time.
Afterward, his group immediately established short-term and
long-term supplier performance measurement strategies--which
included a focus on its lower-level suppliers.
"If you don't have a part from a supplier...you're not paying
attention to," Lawton says, "you're just as unable to ship that
product as if it's from a strategic supplier."
Manufacturers and Suppliers Benefit
Manufacturers can attain multiple benefits by measuring supplier
performance. Companies that fail to measure most of their
suppliers risk "large-scale quality mishaps, service
deficiencies, and cost overruns that can eat into bottom-line
profits and damage competitive positioning in the market," notes
Aberdeen in its research report.
About the author:
About The Author
Cam Forbes, founder and Managing Partner of Opus One Ventures has
been speaking, training and coaching business owners,
entrepreneurs, and sales people around the world. For more
information about Forbes' "Consulting Solution Toolkit" and
how to get started in Consulting, visit
http://www.consultingstartupkit.com.
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