Posted By Everette Phillips, May 25, 2012 at 9:59 AM, in Category: Global Value Networks
Over the past weekend, I was a speaker at a UCLA Strategy and Operations Management Association (SOMA) event. One question came up regarding the risk for a small vendor dealing with a larger manufacturer. What if something goes wrong? How can a small vendor survive a problem, and how can the small vendor minimize risk?
It is an excellent question. The first step in avoiding unnecessary risk is understanding your agreement with your customer. As a smaller company, it is important to make sure the purchase order or sourcing agreement does not put extreme burdens on you. For example, it would be usual to accept a situation where you either have to replace or issue a refund for a non-compliant part you supplied. But it would be unusual to accept liability for value-added that is outside your control.
Let’s say a large manufacturer asks a plating company to anodize 100 parts that have been machined. The anodization cost may be $1 on parts that cost $23 each to make. If the plating house makes a mistake, it would either offer the large manufacturer a $100 refund, or agree to strip and anodize the parts again. If any parts are ruined, the large manufacturer loses $23 for each lost part. It is also possible that a well-machined part that is 100% conforming before plating will not be conforming after proper plating. The large manufacturer would lose $24 for each of those parts because the small plating company will claim it performed its task well.
There are two ways to manage this risk: 1) Qualify the plating shop and have high confidence, and 2) Make sure the part is made so that the impact of plating will not push it out of conformance. Of course, I also know of some plating houses that will offer a no-lost-parts guarantee; they will refund the complete $24 for each lost part. But this type of plater would charge $5 to do the same process for which others charge $1. Risks and costs go hand in hand.
Another step in avoiding unnecessary risk is to understand your value-added to the big customer. A small business can do some tasks with lower overhead and greater adaptability, and this is often valued by a larger company. Sometimes, if a large manufacturer needs to buy an expensive item like a gear, it may ask a small shop to modify it. The small shop will charge only for the value-added modification, allowing the large manufacturer to save money.
But the large manufacturer takes on risk if it buys the expensive part and consigns it. If the small vendor makes a mistake, the large customer loses a consigned part. If the large company forces the small shop to buy the expensive part and add the value, the company is asking the shop to take on costs outside the shop’s value-added -- purchasing costs, credit costs, inventory costs. The small supplier will have to charge for those costs and for its own risks.
The real risk as a small vendor doing business with a large firm is getting saddled with a poor vendor score for making mistakes. A small firm selling to a large customer needs to know if the larger firm has a vendor scoring system and how that system works. Every scoring system is different, but they are usually designed to measure a combination of three things: supplier cost, delivery, and quality. When a large company tries to reduce the number of vendors it has, the poorly scoring vendors go first.
Cost is usually related to your ability to manage pricing against your peers. If you raise your price and your peers are discounting, your score could suffer.
Delivery scores are usually based on a metric that allows so many days early and so many days later than the delivery date specified on the purchase order. For example, three days earlier than specified and one day later than specified would be a typical acceptable delivery range. A delivery outside that range results in a lowered score.
It is important to understand this range and how it is measured by your large customer. Sometimes a package received after 3 pm is entered into the customer system the next day. So, although you drove 30 minutes to get the package to the loading dock on what you thought was one day later than specified, you lose out because the system shows you two days later than specified. If you know a week or two in advance that the schedule is tight, you may be able to renegotiate the specified date and save your score. Some dates will be rigid, particularly in cases where the large customer has its own deadlines, but some dates are more flexible depending on lot size and usage rates.
Quality is a broad measurement. Accuracy of shipment is usually measured in addition to actual part conformance. Accuracy of the shipment means correct quantities of parts arriving against expectations as well as documentation, including quality documents, that is complete and accurate.
Scores are also sometimes impacted depending on where non-conformances are discovered. A non-conformance found on the loading dock may have a smaller impact than a non-conformance found on the customer's assembly line; an even bigger impact results if your non-conformance causes your large customer to have a problem with its customer.
Each large company has its own approach to quality metrics. Also, each company tries to use proxies to judge quality. For example, some companies use the number of non-conformance reports, and some use the quantity of parts impacted by a non-conformance report. Most companies look for proxies in the ERP systems, like returns, to judge quality. It is not always fair, and one can argue about validity. But gathering data is expensive and generating reports can be expensive, so most companies look for existing fields in their ERP to use as a proxy. I recommend that you understand the spirit of the metrics and actual data that is used. This will help you better communicate with your large customer and its management team.
If your large customer has a vendor score but tells you it does not use that score, I recommend that you follow it anyhow. One day, a new manager may arrive, and you may be judged by the score in the customer system. At that point, it will be too late. And a small business selling to a larger company cannot afford to be in that position.
Everette Phillips is CEO and president of Global Manufacturing Network, a provider of contract manufacturing, sourcing, and logistics services for products and components with a focus on items with special engineering requirements.
Written by Everette Phillips
Everette's experience includes robotics, advanced manufacturing, supply chain management and international manufacturing. After a career path as a robotics engineer helping automate plants in North America, he became a manager of European Operations for Factory Automation & Robotics in Europe for SEIKO living an expat in Brussels then returning to the US as GM for Advanced Mfg Technologies in North America. Currently, as President of Global Mfg Network, he is involved in coordinating production of highly engineered parts, assemblies and products across a wide range of industries in manufacturing facilities located in Asia and North America and Europe. Everette is a regular speaker and panelist on topics related to manufacturing, international business and technologies such as robotics and advanced manufacturing. He has a BS Bioengineering from Cornell and an MBA from the UCLA Anderson School. Everette serves on the board of Cornell Engineering Alumni Association as a Regional VP and on the Advisory Board for Entrepreneurship@Cornell.