Beyond Report Cards, Beyond Balance Sheets? When Evaluating Suppliers, Why It’s Your Gut That Counts
What’s the best way for supply management and manufacturing pros to evaluate current and potential suppliers? And is there only one “best way?” There are hundreds of supplier assessment tools, books and checklists, but there is no single standards committee that absolutely dead nuts certifies what’s out there, especially when your supplier is located two continents and three oceans and four hand-offs away!
Even when we bring manufacturing back to North America the question remains, what’s the best way to evaluate and assess a supplier’s business?
And what happens when the metrics all say “Go” but the risk factors scream “Stop!”
We asked executives from the technology, pharmaceutical, heavy equipment and automotive industries how they assess suppliers. We found a short list of the generally accepted metrics basics that they want to see:
Price
Finished goods quality
Cycle times
Scrap and rework dollars
On-time performance
Financial stability
But as the Honda WEK story, Toyota’s Aisin Seiki supplier, the tsunami, earthquakes and floods in Thailand showed us, it’s not enough.
Whenever supply management reaches out to locate and source key components with new partners, they put the health of their own company and their jobs, at risk. This is one area where something else – your gut, or maybe another customer’s shared experience, really counts. How do we quantify “gut” and “risk potential” as a measurable evaluation factor?
Nobu Morita (nobum@morita-associates.com) is a Japanese expert who has worked for more than twenty-five years with companies like Honda and Delphi to improve their supply chain capabilities. He has forty years in the global automotive industry including engagements in Japan, China, Indonesia, Malaysia, Thailand, U.S., Canada and Brazil. Morita specializes in establishing companies, plant operations, and providing technical support.
Although Morita starts with the usual metrics, a Financial Statement for three years or a Financial Statement/Annual Report for one financial year supported by a list of supplier problem issues, it’s not enough. The metrics should identify potential weak spots that Morita likes to see in gemba because he believes that only by going to the spot, by walking the actual production floor, can we really understand what is happening at a supplier site.
Morita’s team created their own supplier assessment tools, based on their experience in gemba, including the “Factory Tour”, “Evaluation Sheet”, and “Industry Check sheet.”
“I’ll think about the good points and the weak points,” he says, “and then we discuss.”
What happens if the president agrees with Morita’s assessment of weak spots? “We can ask them to go to their plant to review their actual situation. At the same time we ask what parts come from the outside.” Aha, in a global supply network where first tier suppliers may be sourcing parts from second and even third tier suppliers, this is critical because it is not safe to assume that what you see on the shop floor was sourced there!
Kaizen Lives
“When we visit the supplier’s actual site, we list up 100 items within one day that we think are its problems and points of improvement. Then we figure out specific solutions for improvement and implementation plans. We report the results to supplier top management who will then decide whether to go ahead with implementation, based on the prioritization.”
My Dad used to say you can tell within the first 15 seconds of stepping into a factory if it’s a good one. Call it gut, call it instinct, but there are sure-fire indicators – light bulbs, for instance, and brooms, that tell me what isn’t happening. And during the MRP crusades I learned to read material tags because of the ugly hidden stories they revealed. So I’m always curious about the cues that other consultants rely on for their own assessments.
As expected, Morita highlighted quality performance as key. In fact he’s looking for zero-defect operations. “First and foremost, it has to be making money. Once you confirm this prerequisite, quality is the highest priority - quality of finished products, quality of inventories, quality of products in process and quality of materials. Ultimately, a good supplier is the one who is aiming for zero-defects.”
Factory tours are the most fun I have every week, but they can also reveal more than the tour guide ever intended! At a plant visit to a Ford site I joined a small group of plant tourists as we walked a long assembly line. The plant was relatively noisy and we had to watch for passing fork trucks and other impediments. But the product was gorgeous, outselling competitor offerings two to one. The tour guide was wired up with a headpiece and microphone - she was oblivious to the signs showing me that this was a winning product plunked down in a losing operation. The giveaway came when she pointed to piles of cardboard extending the length of the assembly line, all of it headed to the local landfill! I could not help but think at that moment that had the president of Ford walked the same assembly line, he could not have missed the financial implications for his company. The best executives I have ever worked with knew the names and children’s names of their lead production personnel, they knew how to find their way out of the stockroom, and they had enough basic product knowledge to spot what was supposed to be out there on the floor, and what didn’t belong.
My first “real” job after college was in purchasing, but the first rule we were given was to never, ever step out on the shop floor! It was okay to talk with the freight forwarders and customs brokers, and occasionally we got into the business of finding new suppliers, but manufacturing was to remain a dark, greasy mystery! It was tempting, forbidden….
Walk the talk….
Morita, however, goes well beyond this old school limitation.
“Watch out for CEOs or presidents of small and medium-sized companies who are financial experts but do not show any interest in the actual site! The character of the CEO is very important,” he warns. “If they don’t know the actual production process, if they don’t go to the actual spot – when they say quality is important, if it really is important and they believe it, they will understand the quality in gemba. If they know the production process and go in gemba – well, these people are very good and they are the ones you want to work with.”
As Toyota, Honda and Johnson and Johnson (Tylenol poisoning crises) all know, even great metrics and a trusted executive team can be defeated by a tsunami or an earthquake. The threat has raised executive’s concern over supply management disruptions. They want to hear solutions, and more historical data isn’t the answer.
We’ve been talking with MIT systems experts about IT solutions that provide predictability and early warnings to vulnerable corporations. The solutions come from a variety of software and other big data applications. Think guidance systems that plot the course and adjust the real-time flight path of an autonomous airborne vehicle. I believe that the IT answers do not now currently reside of a piece in manufacturing where systems have been neglected and even the basic Bill of Material structures have been allowed to rust out and fall off. The IT answers that we need are coming from monster data collection and analysis machines that will, given human guidance and reasonable parameters, identify risks and trade-offs so that we can get on with the business of deliberate, non-accidental supply management.
Hopefully Morita might at some point agree. Speaking of what he calls “new countermeasures after earthquake/tsunami disasters in Japan,” he says, “Manufacturing companies in Japan are currently working on them - we are also gathering information. And due to the great floods in Thailand that disrupted production in the U.S., Japanese suppliers are already planning to move production plants to the U.S. In effect, we are seeing more and more Japanese expatriates in the Indianapolis area! Going forward, this tendency will expand further. That is, they will adopt strategies where auto parts intended for vehicles produced in the U.S. will be produced or purchased in the U.S.”
You can’t run a Global Supply Management network on kanban
For 25 years US companies have emulated Japanese methods, including kanban. But in the meantime we grew a stretched tight global supply network that became almost unmanageable. Morita’s comments on the over-simplified approach to supply chain management, are remarkable even considering their source, “… think about the Toyota system. Every Japanese company is thinking about the kanban system that is not so appropriate for the kinds of accidents they just experienced. It used to be that type of system was very good, but now…. “
It the companies recognized now for having the biggest and/or best automotive supply chains can figure out the IT solution, even as they actively transfer some production locally to the US, we will know that we have moved to the next step in information systems. I am betting that this solution will be as monumental a milestone as the discovery that taking a square root and programming for Bill of Material structures and explosions was in the pre-MRP era. It can’t come soon enough.
Nobu’s picks of the Best of the Best Strategic Sourcing operations?
In Japan: Denso, Toyoda Gosei (both of them are Toyota Group)
In Canada: Magna
In Europe: TRW, Continental, Bosch
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