May 30, 2023
By: Art Thomas
Many manufacturers have had to make significant changes in suppliers in recent years because of various disruptions. Small and medium-sized manufacturers are often resource-challenged and do not have supply chain specialists to focus on vetting suppliers.
When it comes to suppliers, manufacturers often are more transactional than strategic, focusing on cost per unit as a default. Accounting and purchasing departments are often evaluated by their ability to reduce costs from the price while the operations department is measured on throughput, which means their total cost of ownership (TCO) for producing a part or product is higher than it needs to be.
Every manufacturer should have a framework for their supplier selection. Understanding your suppliers is essential for making good business decisions. Let’s take a look at ways even the smallest manufacturing company can improve its supplier selection process.
Learn about its capabilities and value-add opportunities
It’s valuable to know what your suppliers can do beyond the current state of your relationship. What are their value-add options? What can this company do for you besides supply material for what you are currently making?
For example, let’s say a supplier sends you extrusions in 10-foot sections, which you cut into smaller pieces. Could the supplier send you the extrusions in the size you actually need? If so, you probably will pay a higher price to that supplier, but you will save money in-house by not having to cut it. The higher-priced supplies might lower your TCO. Learning about the supplier’s capabilities could lead to opportunities.
Understanding its communications systems is also beneficial. Can the supplier accept digital purchase orders? Can your systems communicate with its so that purchase orders are automatically issued when you reach a certain inventory level?
Read up on its quality systems and product segregations
Suppliers are not likely to tell you about their issues. You probably will hear that they have more than a 90% success rate for parts. That’s why you should ask to see their quality systems documentation and improvement methods.
What a manufacturer needs to know about a supplier is not just, “Am I going to get a good part?” It’s not just quality, but also documentation related to production and inspections. You want to be sure the supplier knows it is sending good parts, and if you get a bad part, you want to be sure the supplier will be able to figure out why.
You also want to know how it handles deformities and rejections (especially if your operation might be in a supply chain that deals with product recalls). When the supplier fails, does it know who was involved in that production and what group of parts was included? Lot control is increasingly important as original equipment manufacturers seek more visibility into their supply chains.
Know where you will fit into its scale of business
You want to be a key account for any supplier. When looking for a supplier, focus on companies where you will make a difference in their business. This is important on the relationship side.
When working with small shops, they may have fewer people and lower overhead, which means they can offer lower prices. But having a small supplier can become a huge problem if you are a significant portion of its business. Does it have the cash flow to grow with you? Do you become dependent on its workforce and even individual pieces of equipment? If a key person leaves, or a machine breaks down, will that impact your business?
You need some sort of barrier so that a supplier’s problems do not become your problems. It may be hard to pay more for critical parts from a larger supplier, but it might lower your risk.
On the large company side, you want to be in the top third of a supplier’s business by volume so that you know you are going to get good service and not easily be dropped.
Ask about a supplier’s capacity
You should know where your suppliers are in terms of production capacity. And, if they are at 70% capacity, what does that really mean? Can they grow with you without a significant capital investment? What is the likelihood they will have to push your order back?
When selecting a new supplier, ideally it wouldn’t be at less than 60% capacity, as that might indicate other business issues. Likewise, if it is over 80% capacity, you could run into problems related to delays or the supplier running out of stock. Understand its capacity dynamic. You can’t always be in the supplier capacity sweet spot between 60-80%, but you should be aware of your suppliers’ statuses.
Visit local companies to audit their operations, workplace cultures
You should go beyond the salesperson and the technical side of an audit sheet when selecting a supplier. If possible, try to visit at least your top 10 suppliers every two years. When you see the operation, you will meet people who can tell you about the process. Here’s a great list of what to check out during your visit:
- Server closet. This may seem odd, but its network is critical for consistency. So, this is the first thing I ask to see, as our relationship is dependent on networks. The state of the server closet tells you a lot about an organization and how it cares for its investments. Is it covered in dust? Or tidy and neat?
- Safety signage. If it is not following safety signs, do you think it is following its inspection procedure?
- Common areas. The quality of break rooms and restrooms speaks to how a company cares for its employees.
- Shipping department. Many problems reveal themselves in the shipping departments of manufacturers. If people are happy in the shipping department, that’s a good sign.
Don’t hesitate to ask for photos of these areas from your distant suppliers. You may need to sign a nondisclosure agreement, but generally these would be nonproprietary images. A vendor might be more likely to supply you with these pictures than let you take them yourself.
Ask about the flexibility of its staff and equipment
This suggestion is geared toward small companies. If it has 15 employees, what happens to the business if it loses its only engineer or a veteran machine operator? Ask a potential new supplier how it ensures it always has the personnel it needs throughout its operation. Ask to see a training matrix for its key pieces of equipment. Its standard work documentation should be accounted for with the quality systems audit.
Pursue how it manages and maintains machines and custom tools
Do not be shy to ask for information on how a supplier maintains key equipment and custom tools. Total preventive maintenance is a big part of any business continuity plan and is essential for unique critical equipment with no manual back up. It’s fair to ask to see logs for preventive maintenance of key equipment and custom tools. You might inquire about alternate network capabilities and facility energy sources in the case of natural disasters.
Learn about their logistics
When vetting new suppliers, you should ask if they own their own freight company or trucks. If they work with logistics providers, how well do those vendors perform? The logistics could be a differentiation or a red flag. You may also find new options for your freight.
WMEP Manufacturing Solutions can help with supplier selection
ABOUT THE AUTHOR
Art Thomas is the Director of Business Development for the Purdue MEP (Indiana MEP Center), which is part of the MEP National Network™. He has more than 30 years of experience in manufacturing…