Material procurement can become a struggle for survival, especially in mechanical and plant engineering
Initial situation
Suddenly the supply of materials is massively slowing down
The problem is not really new, but it has rarely - or even never - been as pronounced as it was during the coronavirus crisis. Worldwide, delivery times for raw materials and primary material are lengthening and key components are no longer available. This is a development that was neither predicted nor planned for. Even the premature arrangement of alternative suppliers is of relatively little use here, as they are also exposed to the same situation. What is more, a company will not necessarily be at the top of alternative suppliers’ customer list.
It has to be said that companies do not currently have much leverage towards suppliers at the moment when it comes to their negotiating position for shorter or normal delivery times. And yet, as with the consideration about taking a BioNTech vaccine, "wait and endure" is the wrong strategy. It is crucial to be at the forefront when it comes to the supplier's "allocation" of the available materials or materials the supplier has received. But how can you do that?
Seek short-term solutions to problems
Contact the highest possible level within suppliers in the event of critical scheduling delays
A conversation between the supplier's field sales personnel and the purchasing administrator is usually not enough to resolve delivery issues. Communication at a higher or at the highest possible level is required in this case. And preferably face to face not via never-ending e-mail streams. As face-to-face meetings are not currently possible, video conferencing is the best way to discuss matters directly, not to mention the fact that it makes it easier to organize matters and saves time and money.
The following questions need to be addressed in a video conference, such as this, involving the administrators and management on both sides:
- What are the reasons for the delays?
- Does the supplier have supply problems with raw or primary materials?
- Are the supplier’s internal production capacities inadequate due to the coronavirus or are they order volume-related?
- What is the importance of the purchasing company to the supplier (prepare recent years’ sales levels for this)?
- What measures are or have been taken to meet delivery dates (again)?
- How can delayed open orders be brought forward?
- What technical or logistical alternative solutions are available?
Experience has shown that these conferences give the supplier and the supplier’s management team a much better appreciation of the customer’s company situation. The problems can be addressed by the company (emotionally as well), and reference can also be made to a good (long-standing) working relationship up to now. Experience has shown that the willingness on the part of the supplier (supplier’s management team) to develop solutions in a face-to-face meeting increases massively. It means that solutions can be discussed that were not previously on the agenda. This might involve the use of stock, preferred order handling, use of alternative products etc. If these online conferences at which the current status of the delivery capacity is discussed are even organized on specific days during a certain period, the chances of succeeding with an improved delivery continue to rise.
However, when focusing on solving current or short-term supply problems, it is also crucial to look into the near future. The situation on the world market will not return to normal within a few weeks.
Plan orders in the medium term
Order products with long lead times before releasing the complete bill of materials
Often Production Scheduling in manufacturing companies waits for the complete bill of materials to be completed by Design and released before triggering a purchase requisition to buy the goods. This can be too late even in "normal times". In addition, the delivery times listed in the system are not always up-to-date and can give rise to a somewhat risky laid-back attitude with regard to the required ordering time. However, priority processing in the Design department, the generation of a "preliminary bill of materials” and the resulting purchase requisition for the Purchasing department can save crucial time.
However, it is even better to include Purchasing in the project meetings even as early as the quotation phase for a customer order or at the latest when it comes to placement of an order. Purchasing can highlight long or extended delivery times for certain materials or primary products - so-called long lead time products - at an early stage, which may not yet even be listed in the system. Even if an order cannot (usually) be placed at such an early point in time, the supplier can at least be advised to reserve the relevant production capacity.
Secure the supply of recurring long lead time products with blanket orders or call-off orders
Call-offs by means of blanket orders are an option with recurring products with long lead times. Future annual demand can be estimated without taking a major risk of oversupply, depending on the demand figures from previous years and the planned sales figures. And even if too high an annual call-off volume has been agreed in the blanket agreement, this can generally be clarified with the supplier. It is also advantageous for suppliers to be able to plan in the long term.
Recognize delayed deliveries as a warning signal
Regular monitoring of all open orders and - possibly recurring - delays to deliveries is a prerequisite for recognizing potential supply problems at an early stage. It is not enough simply to enter changes to delivery schedules into the system. To a far greater extent, Purchasing needs to actively report these potential risks to the management so that measures can be put in place at an early stage.
Prioritize following up the delivery dates of "long lead time products”
Products with long lead times are generally non-standard products or drawing parts, for which alternative procurement is not simply possible. The use of simple tools can be used to call up particularly "critical" products and orders from the ERP system. This is about highlighting the delivery history relating to:
- Delivery date in the company's order
- Confirmed delivery date on the supplier’s order confirmation
- Documentation of (possibly multiple) delivery delays
But also:
- The latest possible date of receipt in Incoming Goods for handling in the company’s own Production/Assembly departments
- The company’s own delivery dates for customer orders and presentation of possible contractual penalties in the event of delay in delivery
Reorganize security of supply in the long term
Identify and evaluate supply risks
Analysis of all order items in the past years can highlight which product groups, products and, in particular, long lead time products are dependent on specific suppliers. A targeted start needs to be made to this. In addition to prioritizing the analysis (whether according to annual volumes or delivery times), it is important to list existing or known alternative suppliers for the top product groups.
As products groups are often recorded too generally in any procurement analysis, but products are too specific, it is often necessary to define additional product groups within the product groups and allocate procurement volumes to them. This improves the results of the analysis and also facilitates the subsequent sourcing of new suppliers.
Take seriously the supply risk with single source relationships
The supply risk with single source relationships is often underestimated. The failure of a supplier is not just painful for the purchasing company but can very quickly threaten its very existence. Short-term alternative procurement is not possible, or if it is, then also extremely expensive
Regular audits of "key suppliers" have to check technical, logistical or quality-related conditions as well as the supplier’s business development (sales, number of employees etc.) to counteract the failure of a single source of supply. The dependence of a supplier on a few customers can also be a risk factor. In addition to the information provided by the supplier, inquiries to independent credit-checking companies can also be cost-effective and extremely informative.
Be aware of price dependence in long-standing supplier relationships
A further result of procurement analysis can highlight the fact that high procurement volumes of certain key product(s) (groups) have been bought from a single supplier over many years – despite alternatives being available. Things always worked, the quality was OK and delivery times were met. So why take risks with a second supplier?
However, from a purchasing perspective, this means that annual negotiations with these suppliers are usually limited to their defense of price increases. There are no current comparative quotations. The mere presentation of better quotations in negotiations more often than not leads to price concessions of 5 – 10 percent, in some cases even more.
Identify technical dependencies in long-standing supplier relationships
Particularly when it comes to drawing parts, (regional) companies are often commissioned as sole suppliers for years on end. You know yourself, the quality is right, and the supplier knows exactly what to manufacture even without the latest technical details in the drawing (e.g. surface quality).
There is a lack of motivation to benchmark these product groups via new global tenders, particularly the qualification, auditing and creation of new suppliers. Purchasing often argues about the unquantifiable use of resources, as well as quality and supply risks. Design shuns the work involved to "complete" technical drawings and specifications for a Request For Quotation (RFQ) from new potential suppliers. Quality Assurance considers the increased inspection involved in Incoming Goods as not affordable.
However, experience has shown that considerable potential savings can be generated, say with the production of parts involving metalworking. As a rule of thumb, average manufacturing costs per kg by region are as follows:
- Germany: €7.00/kg
- Eastern Europe: €4.00/kg
- Asia: €3.00/kg
Strategically establish alternative suppliers
One of the most unpopular tasks in Purchasing is the identification, selection, qualification and creation of new suppliers. Nevertheless, the aim must be to establish alternative suppliers for procurement-critical parts and services where there is a (or at least some kind of) single source relationship with the suppliers, so that a "Plan B" is available when necessary.
The general procedure consists of the known steps:
- Identification of global potential suppliers for selected product groups
- Definition of the actual suitable suppliers via a request screening with inquiry about delivery capability and readiness, as well as the signing of a Non-Disclosure Agreement (NDA), if necessary
- The long list becomes a shortlist via qualified feedback
- Sending of a detailed inquiry to the suppliers from the shortlist
- Structured comparison of quotations (including consideration of freight costs, as goods are often quoted ex works (EXW))
- Initial negotiations with the best price providers
- Further limitation and selection of a suitable supplier
- Ordering of test products and checking of the quality and communication delivered in the supplier’s handling of the order
- Auditing of the supplier by internal teams or international service providers (especially in Asia)
- Onboarding of the new suppliers
Personnel resources in Purchasing are often inadequate to eliminate acute supply risks, or even strengthen the security of supply as a preventive measure. Unfortunately, these strategic and results-oriented projects often languish on the backburner. What is more, over and above their operational work, employees are often already working above capacity with cross-departmental projects (e.g. digitalization). A timely and effective solution can often only be realized through external support.
Conclusion
The current situation shows how important it is for companies to put their (primary) material supply on a sure footing. Reliable alternative suppliers must be found and tested for relevant articles and components. The path to appropriate fallback solutions is laborious, unpopular, yet unavoidable, to ensure uninterrupted value creation in one’s own company as far as possible.
In any case, the coronavirus situation should be viewed as an opportunity to scrutinize security of supply and optimize it from a strategic standpoint.
The following is therefore essential:
Reorganize security of supply - if not now, when?
The author:
Consultant, interim manager and author, partner of taskforce.
DDIM board member, certified project manager (PRINCE2 and CIM).
Optimization of procurement, supply chain and processes in mechanical engineering, plant engineering and manufacturing.
Tel: +49 8145 - 9966 40
Mail:
Web: www.taskforce.net
