Supplier Chain Musical Chairs

Our supply chain manufacturing system reminds me of this musical chairs game. OEMs and Tier 1 companies control the music in our version of the game. Instead of finding a chair when the music stops, however, the name of this game is “lower your prices.”

Most of us remember the childhood party game called musical chairs. In the center of a room, chairs are arranged in two rows, side by side and back to back. Music is played and the kids circle the chairs until the music stops. Everyone then must find a seat. Of course, there is one chair less than the number of players. After each cycle, someone is “out” and the next chair is removed. The game goes on until the last two kids must battle for one remaining chair.

Our supply chain manufacturing system reminds me of this musical chairs game. OEMs and Tier 1 companies control the music in our version of the game. Instead of finding a chair when the music stops, however, the name of this game is “lower your prices.” The Tier 1 company demands a price reduction from its Tier 2 supplier who, in turn, passes the demand to its Tier 3 supplier, and on down the chain it goes. Eventually, some poor supplier finds itself without a chair (or a job) because it can't respond quickly enough to the music.

Vendor/supplier relationships are a critical aspect of manufacturing in our country. The relationship is all too often contentious. I submit this is not necessary and actually is bad for business, regardless of the tier it occupies.

A goal for any vendor/supplier relationship is to work to the mutual benefit of both. Too often, this becomes a lopsided deal with the vendor holding the cards. For example, unless there is some sense of security for the supplier shop to feel that its relationship with a given customer is strong, little incentive exists for the supplier to invest in more productive products or processes for fear of losing the work.

This scenario, and many variations of it, acts as an impediment to manufacturing advancement in general and specifically our segment of the business. Moreover, the demands from the vendor side of the equation consistently raise the performance bar that suppliers must meet. Tighter deliveries, tighter tolerances, lower lot volumes, zpm and JIT schedules must be factored into the quotation. Yet, so often the production cost that these demands cause the supplier are unacknowledged by the vendor.

To respond to the needs of the customer while being cost competitive requires investment in products and processes that will add flexibility to accommodate more frequent change-over for JIT and tight deliveries. Moreover, automated processes that reduce or eliminate machining errors to help achieve zpm consistency, along with better production equipment and machining practice that produce a Cpk that is in tolerance, require manufacturers to upgrade capital equipment and shop processes.

Successful manufacturers bite the bullet and trust that good faith on their side, as demonstrated by such investment, will strengthen and secure the relationship with the customer. Such investment will also enable them to lower costs sufficiently in order to absorb some price pressure from a customer.

Good faith, however, is a rather thin thread on which to hang a business. In much the same way that shops educate themselves about efficient means of production to operate as lean as possible, it is incumbent on the supplier to understand that the vendor/supplier relationship needs to be a two-way street.

There are smart shops and smart customers. Smart money is on a stable, long-term and mutually beneficial relationship in which both the vendor and supplier succeed. Such a relationship is grounded in trust and good will, but also built on understanding each party's needs and expectations and creating a company culture that can respond to changes in those needs and expectations.

Pulling the chair out from under a well-founded relationship purely in a search for a few cents is not a good way to do business. Likewise, waiting for the music to stop before you figure out why you can't find a chair is not a way to stay in business.