Effective Supplier Development: The Groundhog Day Syndrome
By Dr. Denis Maier
Manufacturing supply chains, especially in the automotive industry, are characterized by a significant volume that is outsourced to suppliers. The added value inhouse can be as low as 20%. Sophisticated supplier selection and management systems combined with supplier development activities are essential tools to manage the inherent supply chain challenges. However, the enormous efforts for every new product launch are an indicator of the lack of sustainability. Manufacturing 4.0 will impose additional challenges on top of that and require a focus shift on supplier development.
Traditional Supplier Development. Typical efforts to improve supplier performance range from hands-off monitoring to extensive on-site support, depending on supplier stability and performance. Even external consultants are sent in on behalf of OEM’s. Over time sophisticated systems have been developed that cover all relevant areas to get the best possible overview and status of supplier performance. When new product launches are ahead, the efforts usually intensify significantly. Increasing product complexity and customization, combined with digitization efforts, add another layer of challenges to the supply chain. The repeated efforts to bring suppliers to a desired performance level are not effective enough to be on a sustainable path. More launch curves will be flatter due to suppliers not being able to keep up or even launch dates have to be postponed.
The Right Focus. A closer look at supplier development activities reveals two underlying tendencies. On one side, the list for supplier audit questions, addressing all possible issues and risks, becomes longer and longer. The other observation that can be made is that the on-site activities have exponentially increased with resources outside of suppliers. They all have the same goal to increase the supplier performance and to ensure their launch capability. However, all efforts still focus on results, more specific on fast results. Supplier performance might increase and the launch could be somehow managed, but it will not be sustainable and the efforts have to be repeated. The reason for this “Groundhog Day” syndrome is a lack of focus on the root causes that prevent suppliers from performing at a higher level and keep them struggling with every new launch.
Lack of Focus – Substandard Worker Skills. Producing innovative products with unskilled and low-trained workers are an impossible task. Even though the majority of work stations are designed and automated in a way that the necessary skill level is rather low on the surface, the daily operational challenges require additional competencies to achieve high quality and efficiency. As automation and connectivity of systems grow further, the level of simple operator tasks will be even more reduced with new responsibilities for direct workers. At the same time indirect workers will have to be more equipped with advanced analytical and soft skills to monitor and manage the higher complexity of processes. Both direct and indirect workers will need more capabilities that need to be actively managed and monitored. Skills inventory will become a fundamental tool for Manufacturing 4.0.
Lack of Focus – Weak Shop Floor Execution Capability. Effective leadership on the shop floor can make the difference between high performance and low performance. There are mainly two issues: a shop floor leadership structure that is too lean and leaders that lack the required abilities. Strong shop floor management requires enough leadership positions, saving here is the wrong place. Team leaders and supervisors often grow into these positions without having the adequate leadership and coaching skills. It has been sufficient in the past to keep operations going, but it is certainly not enough to operate on a world-class level, to master future launch challenges and to motivate and empower workers. Analyzing key performance indicators, communicating effectively and orchestrating the work force by being a role model, teacher and mentor is crucial to stabilize production and to master the implications of Manufacturing 4.0.
Lack of Focus – Excessive Workforce Turnover. The average annual employee turnover rate in the manufacturing industry in the United States is about 16%, however with a huge variance. Excellent companies have an employee turnover rate of less than 5%. Not only is the average more than 10% away from this international benchmark, turnover rates of 30+% are also very common. At these levels, there is no possibility of sustaining any gains in skills and knowledge. Employee turnover is one of the most underrated metrics and at the same time probably the most important metric in the future. There will be a significant invest in the workforce that cannot be constantly replicated. It is not all about wages, it is also about culture to feel appreciated and inspired, a sense of belonging and an outlook for the future with a path forward to grow.
Effective and Sustainable Supplier Development. Instead of repeating the same activities over and over again, a more forward-looking supplier development process is needed that reflects current and future challenges. The focus needs to be more on the enabler side and not so much on the performance side to ensure sustainability. And monitoring supplier development activities needs a set of additional metrics that will help to get suppliers to the desired level and remain there, not just temporary for one launch.
1. Reversed Approach. Supplier development activities have to be at the peak during series production to ensure that suppliers are ready for the launch. The ground work has to be done before a new launch so there is a better chance of suppliers succeeding. The additional efforts for a new launch can be significantly reduced as the supplier will be in a much better position to absorb the requirements and to be able to manage the new processes. The goal is to get out of the vicious cycle of iterated and ineffective supplier development activities.
2. Recalibrated Efforts. Work with suppliers has to focus on root causes for inferior performance. Otherwise it will be just a band aid and the next challenge will again throw off the supplier. Unless suppliers are enabled, all efforts will fade and are in vain. Employee turnover can be analyzed to see where the company is lacking. Creating a motivated and enabled workforce is a several phase process and the basis for stability. Employee turnover can be broken down: within the first month after hiring, between one and three months, between three month and a year and after more than a year of working for the company. It will allow to focus countermeasures on the appropriate onboarding, integration and development processes of new employees, but will also give a good indication about structural issues like wages and benefits.
A simple review of the structure on the shop floor provides a first good indication of the strength of the organization. Enough leadership is necessary so there is not only time for firefighting, but also to coach and develop people. Employee turnover is also a good reflection of shop floor leadership and culture. How well can leaders create a culture of trust and commitment and make employees a part of their organization and the company? How much do employees feel valued for their work and being motivated and inspired to do their best?
Similar to the approach with employee turnover rate, a classification of the skill set will help to develop an effective roadmap for workforce development. There is a fundamental set of skills that is essential for both direct and indirect workers beyond the basic work ethic and intrinsic motivation (most companies already experience a lack there): a high flexibility to do multiple tasks, a thorough understanding and mindset of Lean Thinking as well as substantial soft-skills like critical thinking team work and effective communication. This will take the workforce from a capable to an effective level. Workforce development is not a one-time effort that can be checked off, it has to be genuine, effective and ongoing to get workers to a level that matches future requirements.
3. Refocused Metrics. In order to see improvements on the enabler side, respective metrics need to be established and monitored. Metrics that close the gap in terms of employee turnover, vital job skills and shop floor leadership. Together with the supplier, goals and timelines can be defined and reviewed in common supplier management meetings. Improving these metrics will eventually allow suppliers to have a more stable production and being equipped to face new challenges instead of struggling with every new launch.
Dr. Denis Maier is a Professor for Operations at the Business School of Wake Forest University in Winston-Salem, NC. He has more than 20 years of international industry and management consulting experience in manufacturing operations and was a Group Vice President at BMW.