Top Issues for Supply Chain Management – 2014 and Beyond

Last week I attended the ISM 2014 International Supply Chain Management Conference in Las Vegas. It was interesting to hear what the top issues are for supply chain managers in companies from very small to Fortune 500:

  • SRM – supplier relationship management – looks like CRM but looking up the supply chain
  • Supply Chain Risk Management – this was an issue I spoke on at the conference – many companies (including Fortune 500) are just now beginning to pay attention to this, but they are making it a high priority
  • Supply Chain Strategy – most companies and many speakers focused on this issue. Specifically, the need to tie supply chain strategy to the business strategy and go way beyond simple cost management was top of mind.
  • Reshoring – several key note speakers dealt with the fact that the United States is leading the world in unit labor output and costs. Unit labor cost includes factors of productivity, currency value and labor cost. The US has the highest productivity and lowest unit labor cost in the world. That is driving substantial reshoring activity and is making the US very competitive on the world stage.

All of these issues should be top of mind for supply chain managers. The basic outcome of the meeting was to develop an innovative supply chain strategy to help the company meets its business objectives.

© 2014 – Rick Pay – All Rights Reserved

Four Ways to Super-Charge Your Communication With Suppliers

Communication with suppliers is a vital element of forming a supplier partnership program, yet many (I would say most), companies don’t establish a solid foundation of communication. Here are four ways to super-charge your communication:

1.  Get together face-to-face. Phone calls and emails don’t establish the depth of relationship that you’ll need for your supplier partnerships to succeed. Face-to-face meetings to discuss expectations, status updates, changes to products, designs, materials, forecasts and other important issues are critical. Meetings should be on-site, alternating between the supplier’s location and yours, especially for your top ten suppliers. Going to the Gemba (point of work) can help clarify your perception of the supplier’s capabilities and help them understand exactly how their product is being used.

2. Organize a Supplier Day. Invite your top 20 – 25 suppliers to an all-day event where your sales leaders present company growth plans and forecasts, your CEO shares the company’s strategy, and the operations and supply chain people present expectations for the year. This gives suppliers a window into your company as well as the opportunity to network with other key suppliers and find opportunities for cooperation.

3. Connect executive sponsors in your organization to their counterparts at the supplier. Establishing these connections adds depth to the relationship, and also allows the executives to contact their counterpart for support in solving any problems that arise.

4. Set metrics to clarify expectations and provide feedback to the supplier on their performance.

All of these tools can help you super-charge your supplier partnerships and get the most out of these important relationships.

© 2014 – Rick Pay – All Rights Reserved

Looking for Cuts In All The Wrong Places

A recent article in the Wall Street Journal says, “US companies have had one route to push profits higher: cut costs and squeeze suppliers. That strategy is running out of steam.”

There never was much steam in that strategy, because cost cutting and supplier squeezing are not sustainable. For one thing there is only so much you can cut. For another, that strategy typically damages relationships both internally (with employees) and externally (with suppliers). Cost cutting in any area creates a one-sided, win/lose relationship. It’s like a drug: when it wears off, the pain returns.

A Better Approach

Is there a better route to sustained profit improvement? Yes, and it involves partnerships with employees and suppliers. Partnerships focus on long-term relationships that are a win for both parties. They get everyone focusing on improvements that can be sustained far into the future.

Partnerships tend to encourage innovative approaches that continuously improve profitability. This happens by not only reducing Total Cost of Ownership (not just part costs), but also by providing a competitive advantage to help increase revenues.

It’s always easier to improve profitability while growing, and the leaders of industry continue to grow even in hard times. Partnerships are a vital element to that growth.

© 2013 – Rick Pay – All Rights Reserved.

Planning for Sales Growth; Avoiding Growing Pains

What good is sales growth if the supply chain can’t execute? In a recent article in The Globe and Mail, the authors share the great difficulties that smartphone companies are experiencing as they introduce new, very advanced technologies in their phones.

Demand is high, and contract suppliers can’t keep up. It seems that capacity and technical capability have not caught up with the needs to produce and ship product. Many raw materials and parts aren’t available in the volumes needed and much of the technology is stressing production capabilities to meet quality requirements.

How Are These Companies Responding?

Quite typically, they are ramping up capital expenditures, buying new equipment and investing in more R&D. Some companies have decided to bring production in-house, believing they can control production better than companies whose total focus is on that sort of production. Such is the way large companies with lots of money often try to solve problems.

How to Avoid Growing Pains

What could these companies have done to prepare their supply chains to meet the demand they anticipated? A little pre-planning and communication could potentially have avoided this issue in the first place. There are three things companies can do to help support execution:

First, start communicating with suppliers early in the design phases. Many of these companies carefully protect their technology R&D, often cloaking it even from their “trusted” suppliers. If you can’t trust your suppliers, you need new ones. If you do trust them, bring them into the design process so they can prepare their capabilities early on to produce what is needed.

Second, look at several levels of the supply chain. Talk to the supplier’s suppliers, especially of materials that might be hard to get or are on allocation. If design changes are needed to help accommodate demand, early knowledge provides more time to make such changes.

Third, have a rigorous communication and planning process with the suppliers. Sales and Operations Planning (S&OP) should extend beyond the four walls of the company into the supply chain.

They say smart people learn from their mistakes, but really smart people learn from the mistakes of others. Smart supply chain management requires communication and planning to help avoid the kinds of supply problems the smartphone companies are experiencing. If you plan ahead and communicate, you can enjoy sales growth without the growing pains.

© 2013 – Rick Pay – All Rights Reserved.

Supplier Partnerships – No Fuss, No Muss

An attorney once told me that you don’t really need a contract unless you plan to sue someone. That doesn’t sound like the basis for a good relationship to me.

In my prior life as VP, Operations for a rapidly growing manufacturer, we had an active supplier partner program with between 150 and 200 suppliers. We had a contract with only one supplier, and that was because their bank required it to help back up their line of credit. For the rest of our suppliers, we had terms and conditions on the purchase order as well as what we called a purchase accord.

Setting Expectations

The purchase accord was simply an agreement between the two of us (I suppose you could call it a contract) that spelled out our mutual expectations. We told the supplier that we would provide them with forecasts and purchase orders and how much of the forecast we would commit to. The supplier told us that they would ship to us in the quantities we requested with a specified lead-time. We also agreed on payment terms and quality and conformance standards. The document was typically two pages long.


When we first started talking to a new supplier and presented the purchase accord idea, their reactions were a combination of surprise and delight. Taking this approach was unusual for the suppliers and many often said they wished their other customers were as partnership-oriented as we were

Partnerships start with a foundation of trust and communication. Accountability for performance certainly needs to be maintained, but with close communication, issues can typically be resolved long before any legal action would need to take place. Starting on the right foot goes a long way in that direction. No fuss, No muss.

© 2013 – Rick Pay – All Rights Reserved

Is Outsourcing to Blame for Boeing’s Dreamliner Woes?

Last week the Seattle Times reported that due to two cases of battery malfunction, Boeing has indefinitely grounded the 787 Dreamliner. The Dreamliner has made the news many times before this, and not for the right reasons: its construction has been plagued by delays and technical challenges.

Some blame outsourcing as the cause of the battery issues, but doesn’t every manufacturer outsource at least some of its components, especially for a product as vast and complex as an airplane? What could Boeing have done differently?

While Boeing worked closely with its top 50 suppliers, those suppliers in turn outsourced to others, and Boeing lacked the capacity to oversee so many factories, or to even create detailed specifications for the outsourced products, according to the author of a paper presented to Boeing back in 2001. While Boeing beefed up supplier oversight in recent years, it may have already been too late.

While it costs time and money to work closely with suppliers, and overseeing their suppliers is often difficult, we can learn a great deal from Boeing’s very public experiences with the Dreamliner. Managing your entire supply chain including providing your suppliers with guidelines and expectations about managing their suppliers is critical for success. Is it worth the risk of long-term reputation damage to save money by outsourcing without proper oversight?

© Rick Pay 2013 – All rights reserved

Authors: Paige McKinney, Rick Pay

Show Me the Money

Companies can typically save at least 5% on materials costs within six months by using a descending supplier year-to-date payments report from accounts payable. Here is an example of one company’s report and the opportunities for consolidation and savings:

This particular company had 375 suppliers on their list, which is small. I have a client who has 1700 suppliers on their list, which is a bad sign. When the supplier base is formulated correctly, the top three to seven suppliers will comprise 50% of spending. In this case, the top supplier is 37%, and the top three suppliers combined account for 54%, which is good consolidation. They are probably getting large volume discounts and saving on freight costs.

The Next Opportunity 

80% of this company’s spending is with the top 10 suppliers. While this looks good overall, the fact that we see sealants appearing so many times on the list shows that there is opportunity for further consolidation and potential savings. We don’t want to sole-source the sealants because that would increase risk in the case of supplier disruption, but rather there should be two suppliers for that category. I call this dual-sourcing the technology and sole-sourcing the part.

© 2013 Rick Pay – All rights reserved.

Is Doing Business in China a High Risk?

A number of prognosticators are predicting that China could undergo serious social upheaval in the next five years. If that were to happen, would your supply chains be exposed? There are three things you can do today to prepare for such a disruption.

1)    Use materials that can be easily sourced. By working with your suppliers and your internal product designers or merchandisers, you can focus more on products that can be easily sourced in geographies outside China (or any other location exposed to potential disruption either man-made or natural). Using the concept of concurrent engineering, by first eliminating unnecessary parts, then simplifying the design, you can remove complexity from the supply chain, which helps reduce risk.

2)    Dual source technologies. Many companies will dual source parts, which unfortunately introduces natural variation in the quality and performance of parts and products. A better way to protect yourself is to dual source the underlying technologies (e.g., plastic injection molding) so your parts can be more easily moved to a new supplier: one with whom you have already been doing business and who has the capabilities to make the new parts.

3)    Prepare supply chain risk management plans in advance. Who would have predicted Hurricane Sandy just a few weeks earlier? Companies that had planned for such an eventuality simply executed their plans and recovered fairly quickly from the storm. Those that had no plans had to start from scratch, often not even having ways to communicate with employees and suppliers to begin recovery. Be prepared! Know what will be done and by whom. Prepare a risk management plan.

It is hard to say how likely major social upheaval in China would be. But if it were to happen, what would the impact be on your company? Are you prepared?

 © 2012 – Rick Pay – All Rights Reserved

Are Face-to-Face Meetings a Thing of the Past?

As I went through Canadian customs recently, I was questioned about my trip to Canada.

What was the purpose?

To meet with a client’s supplier.

How long would I be in Canada?

Three days.

Why didn’t I just call them?

I explained that sometimes face-to-face meetings are a much better way to communicate. The agent seemed to understand and stamped my card.

With the advent of email and social media, many people no longer make that phone call, or arrange that meeting to communicate with their target audience face-to-face. It is hard to create a deep relationship via electronic media. You cannot see expression or body language via email. Can you imagine dating your significant other via email? Relationships are founded on personal connection and the best way to do that is face-to-face.

© 2012 – Rick Pay – All Rights Reserved