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Supply Chain: Are You The Weak Link

Author(s):

James Limperis
James Limperis, Strategic Sourcing Manager, Motorola, ING Mansfield, MA 02048, 508-261-4438, James.Limperis@Motorola.com

85th Annual International Conference Proceedings - 2000 

What improvements can be made by the customer's organization to strengthen the supply chain link? There has been tremendous emphasis on initiatives that need to be implemented in the supplier's organization to meet customer satisfaction. Significant improvements can only be made with a balanced focus. Traditionally, primary emphasis has been downstream to improve flexibility to meet changing customer demands. Often, the customer's organization is not held to stringent expectations by suppliers and the result is missed opportunities for improvement. The supply chain link can be strengthened through several initiatives including supplier feedback, paradigm changes and Activity Based Costing.

Let's define a supply chain. A supply chain is a network of linked organizations and corporations, extending from supplier's suppliers to customer's customers. Supply chain management integrates and manages the flow of material and information across these organizations to meet customer needs. These linkages go beyond traditional customer-supplier relationships to encompass shared planning, inventory, human resources, information technology systems and even corporate cultures. Recently, Motorola's Internet and Networking Group (ING) in Mansfield, MA. embarked on an aggressive outsourcing effort of its modems and network routers built at Motorola. Motorola worked closely with the qualified Electronic Manufacturing Service (EMS) provider to assure that the customer would not be impacted by production interruptions while the products were being outsourced. The EMS provider was viewed as an extension to our internal factory.

In order to assure a smooth transition, we could not afford any weak links across any of the functions that interact with the supply chain, or in this case, the EMS provider.

This includes several of the aforementioned linkages noted above:

Shared Planning. EMS provider and Motorola worked closely with Information Technology to assure that the respective Enterprise Resource Planning (ERP) systems electronically communicated sales order needs in a real time basis. Since the systems were not compatible at the outset, a weak link quickly developed. Manual monitoring of forecasted demands and sales orders ensued until the Information Technology modifications were implemented to keep the chain unbroken.

Inventory. Supply orders with Motorola's suppliers were canceled and re-entered between the EMS provider and suppliers so that supply lines were not impacted. Component inventory was sold by Motorola to EMS provider on a quarter-by-quarter basis.

Human Resources. Since many direct employees were affected by this outsourcing effort, both human resource organizations worked synergistically to allow displaced employees an opportunity to work directly for the EMS provider. This resulted in a win-win situation for the employee (who continued to work in his field of expertise on the same product), the EMS provider (who gained instant access to an experienced operator with no training required and no recruiting expenses incurred) and Motorola (who earned goodwill by assuring continued employment of displaced employee, smooth transition of product to EMS provider without interruptions to customer and reduced cost of operation by eliminating fixed cost component of cost of goods sold).

Corporate Culture. Although difficult to quantify, it is important that the flexibility and responsiveness required by Motorola in responding to customer needs be communicated clearly to EMS provider. Equally important, EMS provider must assimilate the Motorola corporate culture so that performance remains unchanged and the physical outsourcing of the product is transparent to customer.

It is naïve to assume that the supply chain will always be running on all cylinders. In fact, at any time, there will always be some functional links in the supply chain that will be weaker than most. The key is to identify those links quickly and develop action plans to shore up these weak links. Like the "emperor with no clothes", it is not always easy to see ourselves as we really are. It is important to encourage supplier feedback in an open and non-threatening manner. If this is not done, weak links within our functional organizations are not exposed.

Motorola constantly solicits feedback, both formally and informally, to assure two-way flow of feedback. The formal method comprises a one-page checklist of 20 plus traits. The supplier rates Motorola on a six-point scale against each of these traits. We also ask the supplier to rate its best customer (whose identity is not revealed) other than Motorola. This provides a worthwhile benchmark by trait. Our functional peers in marketing research pay dearly for this kind of information on how the company is perceived by customers. Supplier feedback allows the supplier to grade the customer on dozens of attributes such as early supplier involvement, response to cost reduction ideas, purchasing professionalism, schedule stability and communications, ethics, partnership performance, technical support, forecast accuracy, etc. This tool has been quite beneficial to Motorola and ultimately to the customer as the supply chain is enhanced each time one of the weak links is strengthened.

There have been specific areas that were noted as opportunities for improvement by the supply base. One example was 'response to cost reduction ideas'. Overall, the scoring was poor for this trait. Upon follow-up discussions with key suppliers, it became obvious that there was some frustration on the suppliers' part. For the most part, the suppliers had held up their end of the bargain by submitting ample proposals to reduce costs. The bottleneck occurred further upstream where development engineering within Motorola was focusing its value analysis efforts on new product launches. With this quantifiable, external input from suppliers, it became easier to convince development engineering to focus increased effort on cost reduction analysis for existing products.

Activity-based costing (ABC) is an excellent tool that can be used to identify weak links in the process. ABC costing can provide the proper discipline to the customer's organization to identify cost drivers inherent in the process and to eliminate them. The challenge is to identify cost drivers that are impacting the supply chain. For example, we identify each component within a bill of material as a cost object. Based on assorted quantifiable supply management and component/quality engineering criteria, a two-letter rating is assigned to each part number. The four ratings are Preferred (P), Acceptable (A), Restricted (R) and Unacceptable (U). Supply Management and Engineering each assess a rating to the part. Some of the criteria utilized to establish the overall ratings include leadtime, cost, current supplier, sole vs. single source, custom vs. standard component, etc. If a single ASIC has extended leadtimes due to allocation issues, is expensive, requires adding a new supplier to the database who needs to be qualified, will result in a sole source supplier and is a custom component, then this part will probably be classified as Restricted or Unacceptable. We, as the customer, may be the weak link in many of these criteria because we have been inflexible in specifying strict specifications that prevent the component from being a standard, single source, readily available component. There may be applications, which dictate high performance chips that force our hand. However, there are numerous opportunities via ABC management to identify and eliminate cost drivers that impact supply chain value.

At times, the weak link is perceived to be the supplier. Upon closer investigation, it is often the "power" imbalance in the relationship that causes the supplier to bear responsibility for this weak linkage. For example, at quarter's end, the EMS provider, seeking financial relief, prepares a spreadsheet depicting, by part number, obsolete and excess inventory exposure. Functional disciplines, within the customer's organization, may not empathize with the supplier's plight; production planning may question why the EMS provider procured so many raw components; manufacturing management may insist that the EMS provider needs to exert more effort in training its supply chain to develop just-in-time processes; cost accounting may balk because there are no reserves established for this write-off.

And so the problem remains unresolved and another quarter goes by. No apparent impact to the ultimate customer... or is there? How willing will the EMS provider be to make a purchase of Non-Cancelable, Non-Returnable(NCNR) components if no relief is offered for existing obsolete/excess inventory? Paradigms must be altered so that all supply chain partners are focused on customer needs.

There needs to be a supply chain ombudsman to anticipate these relationship-impeding developments and take a proactive role in making internal customers more accountable for actions. In the example above, perhaps we caused much of the problem due to the erratic nature of our forecasts. Maybe the components that we specified by out development engineers were with suppliers who we have classified as Restricted(R) or Unacceptable(U) due to their sole source/custom attributes. Regardless of the reason, there are usually three sides to every story: the customer's story, the supplier's story and somewhere in-between. Most times, it is the latter. Unless there is a diplomatic but forceful ombudsman assessing the degree of 'over-the-wall-let-the-supplier-figure-it-out' activity that exists, these weak links can cause rapid oxidation to the supply chain.

An astute supply chain ombudsman or manager will find opportunities to expose weak links in the supply chain and drive timely resolution to strengthen them. An example is a supplier review. Many organizations differ in their degree of formality in conducting internal supplier reviews. Motorola has used the Supplier Satisfaction Scoresheet to measure suppliers' performance on a weekly basis for key EMS providers. The Supplier Satisfaction Scoresheet assesses the supplier's quality, delivery, communication, service and technical performance. A grade score (A to D) is assigned for each parameter. Guidelines accompany the report so that the latter scores equate to a 'quasi-quantifiable' metric.

Any scores below a 'B' warrant a supplier corrective action by the supplier. The advantage of this scoring methodology is that it can be done fairly easily with minimal data tabulation. The disadvantage is the potential subjectivity in scoring particularly with communication and service. The supply chain manager can use this tool to both drive improved performance with the supplier as well as internally. If there are lingering action items that functional disciplines, such as planning, engineering or accounting, have not completed and are impacting a supplier's 'well-being', this review is an opportune time to bring those issues to the attention of management to drive speedy resolution. For example, inability to provide relief for obsolete material may be delaying the supplier from procuring long-leadtime material, which may be impacting customer deliveries.

In conclusion, there are numerous examples of mismanagement of the supply chain due, to a great extent, to the customer's myopic paradigm of partner responsibility. The supply chain manager must assume the role of ombudsman to change the paradigm of internal customers so that responsibilities become joint opportunities to correct problems that impact the supply chain and ultimately, the customer. If the ombudsman is successful, he or she can assure that these weak links do not become broken chains.


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