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Lean Six Sigma Supply Chain Procurement Strategies for Smaller Businesses

Smaller Entities have the Same Supplier Development Issues as Large Companies

If it is true a chain is only as strong as its weakest link, then any company is ultimately only as good as its worst supplier.  Therefore, the objective should be to find and/or develop suppliers that are as good as you are (or better).  To be successful the way we operate must move toward Lean Six Sigma (LSS) in tandem with our efforts to develop our suppliers.

A firm must carefully work on developing their suppliers to be able to transition to the desired LSS future state.  Companies must develop a World Class level of operations in order to survive, and ultimately dominate chosen markets.  Developing a World Class supply base is absolutely critical

Smaller Entities Struggle with Developing “World Class Suppliers”

When starting on the LSS journey small firms often struggle with supplier development for various reasons:

  • The purchasing function is performed by people who typically wear multiple hats of functional responsibility – leaving little time for supplier development.
  • High-powered purchasing professionals are hard for smaller entities to hire and retain.
  • Smaller firms often believe they have no leverage with most of their suppliers, and they, therefore, feel that efforts to develop suppliers would be wasted.

Most smaller entities find their current supply base is characterized by the following conditions:

  • Many suppliers exist for each commodity or major material type.
  • Frequent bidding for the best price with multiple suppliers is the norm.
  • Smaller firms often need suppliers to finance inventories by way of payment terms > 45 days.
  • An adversarial relationship with most suppliers may be characterized by a low level of trust, perceived low levels of service and little or no exchange of ideas for product design and continuous improvement.
  • Small entities must perform up to 100% of incoming inspection (particularly for fabricated goods) on all incoming materials.
  • Visits to the suppliers seldom, if ever, occur.
  • Their suppliers do not have their performance tracked and reported back to them on a regular basis.
  • A physical paper purchase order must be issued for each purchase and received in writing before the suppliers will produce and ship products (creating a lot of wasted time and paperwork receiving, matching, processing and ultimately paying through Accounts Payable).

The upshot of the above translates into higher costs, lower overall quality and service, and a sense of helplessness on the part of the small entity’s procurement functions.  The perception is “We as a customer have very little leverage on our suppliers and have to live with sub-World Class performance.”

Strategies and Tactics for Smaller Entities to Develop World Class Suppliers

Companies of any size pursuing LSS should create a current state benchmark to measure improvements going forward.  A future state vision of how the business will operate in a reasonable time frame out into the future is very important as well.  You should similarly paint the picture of what your suppliers of the future must be to be in line with that vision.  Some suggested vision ideas:

  • Suppliers are partners instead of adversaries.
  • Transparent planning and sharing of information with suppliers.
  • Long-term commitments in exchange for freezes on economics.
  • The relationship features a bias toward continuous improvement and elimination of waste.
  • Continuous efforts to co-design better products and processes, economics and shared technologies.
  • A shared vision of LSS and a willingness to try new and different approaches and sharing of risk.
  • Requiring supplier personnel to come to your location periodically to work directly with the users of their materials.
  • Sending your people to visit suppliers (preferably the ones who use the materials).

How to Go About Developing World Class Suppliers – Tactics

  1. Set BHAGs (Big Hairy Audacious Goals) for supplier performance in the near term, like a 25% lead time reduction in one year, a 50% year over year improvement in quality, and moving to Kanbans (Pull systems) on all parts and materials that have suitable demand patterns in one year. Go from “0” returnable/recyclable packaging to 25% in one year.  Increase this requirement 25% year over year until 100% is achieved.  Other large improvements as is appropriate.  The message: these goals can not be achieved without big changes – or “doing things differently”.
  2. Suppliers are expected to help identify ways to reduce “direct costs” (say, by 5% per year) on materials purchased. Remember that “direct costs” are ALL costs that accrue to using a material.  Some candidates for consideration:
  • Working to reduce trim and off-fall when using the supplier’s materials.
  • Asking suppliers to investigate alternative materials and technologies to reduce costs.
  • Asking suppliers to help change your processes to maximize yields.
  • Asking suppliers to find creative ways to reduce disposal costs and find ways to recycle everything.
  • Require your suppliers to provide evidence that they are doing continuous improvement activities to eliminate waste in their facilities.
  • Require suppliers to participate in LSS continuous improvement events at your facilities.
  1. Consider a “supplier day” to identify those suppliers who share your vision.
  • Start with a group of materials of manageable risk (like packaging materials) and expand to more difficult commodities as your skills increase.
  • Target a group of suppliers, current and prospective, that might be interested in a long-term relationship with your company.
  • Send each a “bid packet” that represents a sampling of (for example, at least 10%) of the items you would source together with a preferred partner. Help them understand what your total buy is today and what you what to achieve in future buys as you improve your business.
  • Share with them your BHAGs.
  • Make it clear that the strategy is to partner with a few very good suppliers and that by helping you to succeed, they succeed.
  • Bring the suppliers to your facility and show them what you are doing to implement LSS and how you use the current materials supplied.
  • Ask the suppliers to decide if they really want to partner with you. Current suppliers may find this process very upsetting, so be prepared to do some damage control!
  1. Meet with the most senior official of the supplier’s organization you can get access to, and ask for help. Consider some of my personal experiences:
  • At one plant where our purchases totaled less than 20 million per year, we started with a strategy of asking our suppliers to help us find a 10% reduction in cost related to their materials. The interesting phenomena we experienced was the incredible response we received from unexpected quarters.  In one case, our supplier suggested we shift from newly-constructed pallets to re-conditioned pallets (actually recovered from our customer’s trash!).  Result: a 40% reduction in our pallet costs – amounting to about $10,000 per year in bottom line savings.  The cost and effort?  We asked.
  • Another supplier showed us how we could achieve a dramatic reduction in our trimmings on a textile – saving 5% of our total buy per finished unit almost overnight. One visit by our supplier and three hours of production time trials and testing their recommendations got it approved and running.
  • By cross-docking with one of our suppliers in State A and a different supplier in State B we achieved a 25% reduction in our freight costs on a major commodity. This took one visit, and two phone calls to accomplish.
  • A prospective supplier developed a textile replacement made with a different base material that was 25% cheaper AND improved our process yields by more than 10% – netting us over $100,000 per year in bottom line benefit.
  1. Refuse to accept that you have “no leverage” with a large supplier #1: Top officials with suppliers hate to get complaints from their customers – even their small ones.  It makes for bad press, especially if you are willing to escalate your valid and reasonable complaints up the food chain.  Make sure you have legitimate issues and allow normal contacts an opportunity to make it right after you explain how unhappy you are and what you plan to do about it.  Promise to escalate complaints, and avoid threatening to take away your business, as it may be an empty threat or not well advised.
  2. Refuse to accept you have “no leverage” with a large supplier #2:
  • Join and become active in your industry’s trade groups.
  • Find out who uses which suppliers, and why they use them.
  • Find out how the other members overcome their problems with the “big” suppliers you seem to have no leverage with.
  • Build a network of like-minded business people you can call on for ideas and alternatives if you are getting stuck.
  • Find out if there is an industry consortium or cooperative buying group you can join.
  • Research to see if there are third-party firms that specialize in buying and supplying commodities to smaller firms by consolidating buys.
  • Talk to your loyal (and local) suppliers about your problems – ask them for ideas on how to break through – you might get some pleasant surprises!
  • Investigate web auction services.
  1. Hedge: Before taking particularly risky moves, get approval to build up some buffer inventory or use a more expensive resource if things blow up.  If you are stuck with a particularly difficult supplier who is the only source, plan carefully.  Build a bank of inventory and find someone (hopefully an existing loyal supplier) who will develop the capability to supply your parts with the goal of taking over the “difficult” supplier’s other customers.  If the “difficult” supplier is treating you badly, chances are they are treating all of their other customers the same way.  Since they (for whatever reason) are unable or unwilling to change, they may end up going out of business when you pull your business away.  If a bad supplier is ultimately going out of business, it is better if this occurs at a time of your choosing . . .
  2. When moving to new suppliers, do your homework: Insist on references whom you will call and talk to.  Ask about volumes, on-time delivery, and competitiveness.  Visit the prospect supplier and verify they have the equipment and capabilities claimed.  Verify they have the capacity and financial wherewithal to take on your business in an orderly fashion.  Look for physical evidence that they share your vision of LSS.
  3. Research other strategies documented in trade magazines and in books. If you are not involved with organizations like APICS and NAPM, consider getting involved.
  4. Look into creative approaches with your suppliers to remove barriers to performance. Ask them to consider “Vendor Managed Inventories” of commodities they keep in your facility until you use them.  Consider a “pay as built” strategy where it makes sense.
  5. Consider setting up important suppliers inside your facility to complete value-add tasks. For example, if the final finish the supplier does is easily damaged in-transit, requiring expensive and time consuming protective packaging and the like, there may be big money and time to be saved if they do this in your backyard . . .
  6. Remember, the “low cost” supplier is not necessarily the “cheapest” in the long run. You may be better served to place your business with a stable and well-managed company at a temporary premium and work with them to drive down costs over time.  If you end up with a competitive partner who can grow with you, you will be much better off in the long run.
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