Stick or carrot?

I confess to personal prejudice here. After some rough experiences working for a manufacturer on the receiving end of a customer's supply chain initiatives, my secret sympathies have always been with the chap in the middle. Until now. The stories below prove that, handled with both sense and sensitivity, the advantages are not one-sided. Indeed, the result can be a veritable carrot-fest for everyone up and down the chain. Let's look first, however, at the current state of play. Richard Holland of TBM Consulting says that, despite lean work done inside the factory, most UK manufacturers either miss major gains to be made outside their four walls or make improvements that often run contrary to true lean practice. For example, they may outsource stores to consolidate parts. "It doesn't show up in their accounts - all you see is that their purchase price has gone up because the consolidator is doing the work. But essentially they have actually hidden waste inside the supply chain." Similarly, the practice of pushing buffer stocks downwards: "The supplier doesn't really take the hit because he will make sure you pay for it one way or another." He seldom finds a company that looks at the chain, decides what makes sense and designs the processes accordingly. And to the victim, it often looks like customers are removing the things they are finding too difficult and pushing them into the supply base. Outside viewpoint What about balancing stick with carrot? An unbiased outsider can help. "If the customer is the one forcing the improvement, a relationship problem is bound to occur. You also need someone who can say to the customer 'Hang on, this isn't fair, you are overextending what should be happening here'." Customers must take a long-term view: "Companies like Toyota are in for the long haul. They become partners and Toyota often buys equity in the business. Other companies only try to hit this year's target for piece price cost reduction. Toyota does that too, but not at the expense of the relationship." He points out, however, that it can't all be carrot. TBM is currently working with Nike's Far East suppliers on a lean education programme. Such programmes sometimes attract as little as 10% sustained take-up; this one has achieved 80%. He says Nike has made an investment on the suppliers' behalf, and is not looking for immediate return. The work is being done through TBM, but Nike has made it clear that, although there is a lot of business in the offing, the supplier base will be reduced and this programme will play a key role in the selection. "They want to buy not just at a price but at a consistent quality from a company that is improving." Most companies do not have that leverage so it takes longer. Conservatory manufacturer Ultraframe, the winning engineering plant in this year's Best Factory Awards, is in the early stages of its lean supplier programme. Early in 2006 it introduced a programme of 12 lean, quick-win projects to run in parallel, some of which were interrelated with the supply chain. Operations director Mike Price (right) says the business has saved over $2 million in commercial, manufacturing and supply chain costs. Ultraframe then tasked three or four of its process improvement engineers to work with suppliers, initially the key ones in injection moulding and extrusions. "We did some value stream mapping (VSM) with them so they could understand how our streams combine," explains Price. "That way it's a lot easier to understand the waste in the interfaces." Rapid improvement came through asking key moulding suppliers to deliver in kanbans every other day. It's working well and other suppliers are now also delivering on an as-required basis. The extrusion suppliers were tougher to change. Their preference for wanting to set up and run in large batches accords ill with lean practice. Also Ultraframe is busiest in the summer, when many of the extruders are shut down. Previously it let them run their lines all year round, overproducing stock in the winter for summer use and absorbing most of the inventory penalty itself. Now, it's beginning to change. "It's quite a sales pitch to get them into this leaner frame of mind, producing when we need them to produce." He worked particularly closely with one, adopting an open book partnership. "It meant we could really focus on their process, educating them in the downstream issues associated with it. As a result they are now embarking on the lean journey themselves. They are looking at SMED and reduced batches." A supplier rationalisation programme from 12 to three also probably served to focus minds, although Price admits a recent backward step when operationally integrating another business into Ultraframe upped the numbers. Real benefit One simple outsourcing move has yielded dividends. Ultraframe used to cut its own polycarbonate sheet. It discovered it cost more in raw material costs than it would spend on finished product if it partnered with a specialist. It was also absorbing space needed for integrating the other business. It redeployed its own people while moving from three raw material suppliers to one for finished parts. "From receipt of order, we can now turn round a complete roof in three days," says Price. "Our partner gets the order at the same time and starts manufacturing in parallel and the whole thing comes together at an offsite distribution unit." Price admits to frustration that not everyone moves at the same pace. "We have had quite a rapid transformation at Ultraframe and there were expectations that they could do the same. But they are looking at things that will ultimately make a real difference." So are there victims? The conversation Price had with one of the extruders best refutes this. He pointed out that, historically, Ultraframe has borne the cost of an inadequate process that left him with a warehouse full of their stock. "They agreed to share the pain by holding some of the stock themselves. It is one step in the right direction, but I want them to go further by actually getting rid of the waste. If we put our feet up, someone will overtake us and that is a message for both our own people and our suppliers." He gets people on board by showing them what Ultraframe itself has achieved and helping them to do the same. "Traditionally, a customer will just beat up a supplier. We are saying we'd like 5% but we want to share the benefits with you and we'll help remove the waste. We have a policy where we will share process and commercial information and any savings we make we will also share." The programme underway at Rittal-CSM in Plymouth, which makes enclosures for electronics giants like HP and IBM, is at a more advanced stage. Supply chain manager Jim Rice explains that both he and his OEM customers are under constant cost-down pressures. "We can meet them by continually going out for new quotes to find cheaper suppliers. The more sensible way, however, is to work together so that you are not reducing their probably small margin but, instead, taking cost out for all parties. That is what started us on the lean route for a number of our suppliers." Rittal worked with lean consultant Tony Thomas, who is ex-Toyota. Initially it was to streamline its own processes and then, when 'we had gone through the pain and achieved a certain moral high ground', to work with its supplier base. With only limited resources to devote to supplier development, Rittal started by pinpointing its strategic suppliers. "We shared our vision and our future plans with them," Rice explains. "I believe we fired up their imagination with what was possible before asking if they would be prepared to commit to some lean initiatives working with us." Were they willing or pressed men? Rice admits it's hard to read but thinks around 80% signed on not just to safeguard Rittal business but because they could see the advantages for themselves. "We had formed good relationships over many years. We weren't expecting them to go down routes we hadn't gone down ourselves." There were sceptics, notably a global company which had been down this route before but who had never seen it get down to factory level. It was eventually among the strongest converts. Rittal was careful not to dictate the route to improvement. It provided information about agencies that suppliers could use, including South West Manufacturing Advisory Service. SWMAS subsequently worked with six members of the supplier base with good results. Rittal met with them regularly to see where they were going, and to give help where it was wanted. The only compulsion came through expanding the KPIs by which it rated suppliers with a matrix to measure lean progress. "If they don't start to make progress against that matrix, we will not think seriously about them for new work - and there is a lot of new work coming through," says Rice. "On the other hand, some have picked up a helluva lot of work because they have progressed well." Each supplier chose its own priorities within the lean mix, as well as the tools and techniques to address them. For example, after working with SWMAS to map out material movement and workflows, Teign Pre-pack focused on routing packing lines more directly while devolving responsibility downwards to cut effort and improve communications. Whereas Aldermans, which provides metalworking services, decided to focus on six sigma to reduce variation in its manufacturing operations. Several of its employees went on SWMAS's greenbelt programme, with workshops specifically tailored to reducing waste on one of Rittal's own products. The result from Rittal's side is a coterie of people within a key supplier who were well trained on process and problem solving and capable of acting as partner in the next cost-down. It's worth considering Rittal's own investment in this. "It's not a case of beating them up because we have never ever done that," says Rice. "We never passed on the cost of Tony's work with them - we were showing our commitment to them by bringing him in." Rittal also worked alongside SWMAS, paying the majority of the cost of installing flexible manpower cells into one supplier's plant. This supplier then closed down that plant just when the investment might be expected to bear fruit. So Rittal picked up one cell and moved it into Aldermans, and took the other in-house. Despite the early disappointment, it ultimately worked well for all concerned. Aldermans came up with some major ideas for improving it and Rittal itself is seeing huge financial benefits from not having to buy externally. Process of improvement Rice believes Rittal's strategy was clear from the outset. It didn't want to bully its way to improvement: "We didn't demand that they change the prices for current work. In fact, we promised there would be no reductions for a year. We just asked them to work with us to improve the processes. But we told them that when we introduced new parts and products, we expected them to use these new processes to give us a very keen price." I don't see any losers here. On the contrary, it looks like stronger relationships, and a shared commitment to continuous improvement. Richard Holland puts it into perspective: "The customer has to behave in such a way that the supplier trusts them. When that happens, all sorts of things can take place. Instead of the relationship being one between the salesman and the buyer, you start getting engineers talking to engineers and operators to operators, and the world starts to open up. Without trust, however, suppliers have to take short-term views because they don't know how long that customer will be with them."