Companies always need to consider how changes in strategy require changes in business practices. What we see right now in too many companies is a strategy that relies more on outside suppliers to improve costs and profitability without a related change to shift resources to manage the increased complexity that arises from working with more suppliers and depending on their supply chains to ship your product. A failure to manage suppliers effectively results in higher inventory levels and greater supply chain risks, including quality problems and supply chain disruptions.
Many companies use Value Stream Analysis (VSA) internally to understand and prioritize operational performance problems and challenges better. We recommend that companies extend their VSA practices and make them a standard aspect of supplier collaboration.
OPS Rules specializes in Advanced Supplier Management and carries out client projects that span risk analysis to day to day management of supplier events utilizing control towers. We see many opportunities for improvement of this process. One of them is implementation of Value Stream Analysis (VSA) to supplier collaboration.
The ultimate goal of VSA is to produce products and provide services at the lowest total delivered cost and highest quality at the right time and right quantity for your customers. At the moment, most manufacturers limit value stream collaboration with suppliers to serious corrective action efforts that require rapid resolution. Here are six reasons why we believe that extended VSA focused on strategic suppliers is a practice worth implementing.
1. VSA provides important insights that traditional supplier surveys overlook.
Unfortunately, most supplier surveys still reflect a hands-off approach to supplier collaboration. Most suppliers have reduced costs by delegating an increasing share of their product costs to their suppliers and now operate far more complex, and potentially fragile, supply chains than ever before. Vendor surveys have limited focus aimed at primarily the supplier’s own organization, quality systems and practices. Most supplier surveys do not evaluate the capabilities of their suppliers or supplier agreements.This lack of insight increases supply chain risk.
2. VSA reveals bottlenecks, risky sourcing strategies and critical-to-quality (CTQ) dependencies.
A well-executed VSA will view the supplier’s manufacturing process and supply base as an extension to the Originial Equipment Manufacturer’s (OEM) manufacturing process. And as a result, many important subjects can now be considered, including these examples that were not previously visible:
- Where in the supplier’s value chain are the primary bottlenecks?
- How much volume flexibility does the supplier’s value chain enable?
- How do supplier process variability and quality problems affect the OEM manufacturing process?
- What sub-supplier relationships pose significant risk for your supplier and therefore for your business, as well?
3. VSA provides a blueprint for effective supplier collaboration.
Once the VSA is complete, the OEM has a much more complete understanding of the supplier’s business assumptions and dependencies and their potential interaction within the OEM’s own business model. One important area of collaboration is the exchange of business information. Given the insights of the VSA, it becomes clear what KPI’s should be reported to the OEM to provide a clear picture of the supplier’s readiness to meet current and planned orders.
Likewise, certain critical-to-quality (CTQ) operating parameters should be captured as part of the supplier’s commitment to provide defect-free materials to the OEM. In some cases, it may be necessary for the OEM to approve a change in the source of supply or processing steps for certain raw materials or finished produces that carry significant CTQ implications for the OEM.
4. Supplier performance management is most effective when metrics related to key drivers are shared routinely.
We all understand that you should “measure what matters”. The VSA makes it clear what matters to both the OEM and to the supplier. Ideally, agreed metrics align well with a set of standard supplier metrics but should also relate to an individual supplier’s specific bottlenecks, quality priorities and sourcing risks as well.
Leading companies publish a set of standard metrics for every supplier along with another set of customized metrics that are related to each individual supplier’s key performance drivers. For example, if outgoing quality is highly dependent on the consistency of key raw material, then a custom metric for that supplier could be the incoming quality of certain key raw material.
5. VSA provide mutual insights regarding process interactions that influence OEM customer quality levels.
While the goal of lean management is to eliminate process variability, we are not there yet. In many industries, OEM manufacturing processes can be adjusted to accommodate known fluctuations in an upstream supplier’s process. For CTQ parameters, leading companies develop an understanding of how to shift final processing parameters to accommodate for the fluctuation of incoming quality levels. Ideally, supplier metrics shared with the OEM should provide an early warning that process adjustments will be needed.
6. Continuous improvement efforts are most effective when supplier VSA is used to identify and prioritize Extended Value Stream improvement opportunities.
The scope of the Extended VSA includes the OEM, the supplier and some key sub-suppliers. Each performance improvement objective related to product cost, product quality or supply chain resiliency can be considered from a view of the entire value stream. For example,
- What changes are necessary in the extended value stream to improve OEM quality levels?
- Where should inventory be held within the overall supply chain to improve supply chain resiliency to minimize inventory levels?
Written by Mike Romeri, CEO of OPS Rules Management Consultants