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2022 saw a lot of challenges for sourcing and procurement professionals. From chip shortages, to materials price fluctuations, to global conflict, supply chain management in 2022 was unpredictable to say the least.
What lessons from 2022 can we parlay into success in 2023?
Today on the podcast, I want to revisit some of the best advice I heard from the Supply Chain experts I interviewed in 2022. We’ve got a Fortune 100 Chief Procurement Officer, an Aerospace CEO, a specialist in electric vehicles and an energy industry veteran, all of whom delivered nuggets of insight amidst the chaos of the last year.
As we revisit some of these conversations, I’m encouraged that no matter what 2023 brings us – and it will bring us unpredictability – the tools for digital transformation are giving us the advantage we need to turn supply chain disruption into competitive opportunity.
Let’s start off with an excerpt from my conversation with Rob Lidster, former Chief Procurement Officer for GE Appliances. When I asked Rob how GE faced supply chain disruptions in 2022, he told me – surprisingly – that the challenges of the past year actually gave GE a unique opportunity to distinguish themselves from their competition.
How To Prevent Supply Chain Shortages Through Better Contract Negotiations
Rob Lidster: We try to set ourselves aside from our competitors by one, having product available. We are getting smarter through better contracts and better negotiations with our supply base, not only at the tier one level of our supply base, but through the entire supply chain. We’ve had to go down to tier four, tier five and sometimes tier six levels just to ensure continuity of supply that we’ll be able to get the assemblies that will ultimately go into our final product.
Leah Archibald: Tell me a little bit more why you need to do that. I imagine that it has something to do with the shortage of the components for these smart objects, especially microchips.
Rob Lidster: Yes. In medium and high-volume manufacturing, we need to keep these lines running. We don’t have the luxury of partially building something and then going back and retrofitting after the fact, especially where there’s stack up conditions where you need a wiring harness in order to put the backsplash on or even to put a door on. So, we need to make sure that for our engineers as they design, all the way to our hands that are assembling these appliances, that parts and assemblies are readily available for them, and they’re there to be put into the appliance as it’s coming down the line.
Leah Archibald: And how do you do that?
Rob Lidster: We’ve been making it a part of our requirement to ask our tier one suppliers to share with us: What is their value chain? What is the country that they’re going to be getting purchased parts from? Where are they going to make it? Where is their ship location? What port is it leaving from?
Leah Archibald: I bet they love that. [laughter]
Rob Lidster: Yeah, we’re all getting used to this new relationship, I can tell you. [laughter] It’s evolved over the last 24 to 28 months, for sure.
Leah Archibald: I make a joke of it because it sounds like you’re making them take a driving test with the amount of paperwork they’re filling out. But tell me really what it takes to get a supplier to give you all that information. Does it take being the size of GE? Or are other manufacturers able to renegotiate their supplier relationships in this fashion?
Rob Lidster: I think that’s a great question because sometimes it does require leverage. It does require a level of transparency that suppliers haven’t really been giving before. They’re having to tweak their processes internally because it was something that didn’t hit their radar screen. But at the end of the day, if the supplier wants the business bad enough in their revenue stream, they will partner with you, they’ll be transparent with you, and they’ll provide the information.
How To Generate Value Through Supply Chain Management
Leah Archibald: I bet it’s a process that’s painful at first, but then brings them a lot of value once it’s completed. Because perhaps they weren’t thinking about having visibility all the way down to the ends of their supply chain. And once they do, then they’re able to fulfill on their contracts. So it’s good for both of you.
Rob Lidster: Yeah, and I like how you used the term “value” because we do believe it is going to bring value. There are hidden costs in all of our processes. There’s hidden costs at GE Appliances. There’s hidden costs at our suppliers. And at the end of the day, if they have to expedite a component over the course of four or five, or six months, then that’s eating into their margin, that’s eating into their profits, and those are some hidden costs that can’t be absorbed anymore during this tough times that we’re in. So the value that I believe it brings to them is they will know at what point in time they may be losing money versus making money on a given part or an assembly. And we can check and adjust together versus having the difficult conversation asking for price relief.
Leah Archibald: You’re all getting a higher visibility into your data and the data that drives the bottom line.
Rob Lidster: That’s right.
Leah Archibald: I want to talk a bit about build-versus-buy decisions. You started out in the automotive industry where this has been a discussion for many decades. Do we build it in-house or do we buy it offshore? That’s challenging enough. But as we move into the internet of things, it’s not only the component supply chain that you’re worrying about, now there’s this supply chain of data. Fundamentally, has it made build versus buy decisions more complicated? Or is it the same decisions, but with greater stakes?
Rob Lidster: I would say it’s the latter. It’s greater stakes now. We’ve always dealt with disruptions. Trucks break down drivers or have flat tires. So there’s been delays and disruption in delivery of parts or services for a long time. But what we haven’t experienced is a hurricane followed by the Texas freeze followed by not only did the first truck break down, the second truck broke down. And by the way, it’s going to be eight or ten hours before we can find another driver because of the labor shortage.
And then you talked about data and internet of things. Now with the cyber security threats, you really have to pay attention to what is being put into the cloud. What’s being kept inside of your C drives on your computers and your systems, because there’s a lot of extremely valuable information being passed around to multiple hands. So I would say that it is larger stakes now. And doing risk analysis and predictive risk modeling has really caught the attention of the CPOs and Chief Supply Chain Officers over the last three to five years more than it did in the first 5 or 10 years of my career.
How to Prepare for Supply Chain Disruptions
Leah Archibald: My conversation with Rob Lidster brought up the concept of modeling. I want to dive deeper into the nitty gritty of what that looks like in practice. How can sourcing professionals actually do comparative modeling?
To answer this question, I turned to Craig McLeod, former Director of Advance Planning for GM. Craig helps automotive clients streamline their design and sourcing processes, and I asked him what his most successful customers were doing amidst the crises of 2022?
Craig McLeod: The most successful are the ones that are incorporating their engineering groups using tools like aPriori early in the design phase to make sure that they understand how they’re going to manufacture parts, who the suppliers are going to be, and what the cost is going to be.
Leah Archibald: And how do they do that, technically speaking? How do I leverage this technology to be able to plan for supply chain disruptions earlier in the engineering process?
Craig McLeod: The big part of that is being able to use tools like aPriori to collaborate between sourcing and engineering. So the sourcing guy can very quickly say: Hey, what if we change this material? Or: What if I’m able to bring this newer supplier on board?
All those different options can be evaluated directly in aPriori, so engineering and sourcing can make sure that a new material or a new supplier can be swapped out in a much faster manner.
Tools like aPriori help drive the collaboration, drive the knowledge, and drive the expertise right into the design of the product so that teams can make strategic changes much more quickly than they would otherwise.
Leah Archibald: Give me a one-minute explanation of how the aPriori tool helps folks do this better than the old way of doing this – which might be sourcing just emailing the design team?
Craig McLeod: Let’s say if you’re the sourcing person and I’m the engineer. We’re in different parts of the country or even the globe, and we need to be able to collaborate and understand exactly what our options are. You can do all of that directly in aPriori at the same time. So if you say: Hey, I want to consider changing this material, I can look at the change in that material immediately and say: Okay, that’s going to pass FEA, that’s going to pass your requirements from a pricing standpoint, and it’s going to pass my requirements from a product engineering standpoint.
To be able to make that evaluation very quickly, on time, and to be able to collaborate in a much more rapid basis by looking at the same models. When you want to make a change, the first thing I do is change that material in the CAD model. With aPriori’s ability to directly read the CAD model, we can instantly see what implications changes to that model are going to have on manufacturing and sourcing. Maybe that new material is going to make the cycle time longer – like from 40 seconds to 50 seconds. With my digital factory models, I can understand that means I’ve got to run the equipment roughly 25% more to make the same number of parts. Do I have the capacity to do that? Does that mean I’ve got to start running it on the weekends? Does it mean three shifts a day? I can do that evaluation very quickly. So I am able to make that decision for you very quickly to say: Yes, let’s go change this material – if it’s abundant and we can get it, and it’s going to cost about the same, let’s do it.
There’s an EV manufacturer that’s got an office in Michigan, and then they’ve got a manufacturing facility in another mid-west state. They recently had an issue with getting supply of a particular plastic material. They were able to get the cost engineer who was using aPriori in a collaborative session with the manufacturing engineer and the buyer. Together they evaluated a replacement material. The material was a little bit thicker, so it took a little bit longer to process. This created a longer cycle time – from like 35 seconds to 40 seconds. They okayed that with the supplier. They were also able to see that the change in material was not going to affect the design of the part – it didn’t change fit, form or function. With those insights from aPriori, they were able to make a decision and start replacing the old material within 24 hours to the plant.
Leah Archibald: Wow. Talk about quick turnaround time.
Craig McLeod: Exactly. It was a matter of them getting in a collaborative session, making the changes in aPriori, running the new part in aPriori, getting the verification on the cycle time, and then moving forward. And that was just one quick example. It’s happening every day.
How to Automate Supply Chain Management
Leah Archibald: Craig McLeod gave us one example of a digital solution for supply chain woes, but how can a company do this to scale? With thousand of parts? That could be sourced from dozens of geographic areas around the world? To answer that question, let’s go to my conversation with Lily Thomas, former Sourcing Systems Leader for Baker Hughes, who talked about reducing risk and human error by automating supply chain decisions.
Lily Thomas: What companies are trying to do is automate tasks that are more repeatable. We could talk about automating purchase orders for spend that’s very consistent. Can you have the ERP system issue the purchase order instead of the buyer sitting down and issuing the purchase order each time. For quoting, can we have some sort of automated quoting process where you’ve agreed with the supplier on what their cost structure is, and you can basically predict what their cost would be for a part so you don’t have to do a laborious RFQ process.
I think companies are working on automating the repeatable tasks to free up resources to be more strategic. For example, material rates are going up. Could we free up some time for a buyer or a Commodity Manager by writing a contract with a critical supplier that ties their price to a material index. So they’re not having to constantly renegotiate pricing every time rates change.
If you have intimate knowledge of the supplier, then you can explain to product management or to sales: Look, this is going to be difficult for us for these reasons, because the supplier has this structure; they’ve got these orders and they have this many machines. It saves you this step of having to call up the supplier and get all the information from them. If you know their factory like you know your own factory, it can help you assess how big of an issue some of those fluctuations will be more quickly.
How to Invest in Supply Chain in 2023
Leah Archibald: My take-away from these conversations is that agility in supply chain demands an abundance of data about your suppliers, their factories, and their cost structure. But you also need more than data. You need insight – a model that pulls all that data together and gives you insight to move forward. That’s what we speak of as digital transformation.
But with the cash crisis of 2022, will companies be willing to invest in digital transformation in 2023? This is the objection I put to my last guest, former CEO of Boeing Shanghai Bernard Hensey, and he was quick to correct me.
Bernard Hensey: Look at the other key shift that’s happening: this big shift to Cloud infrastructure and Cloud solutions. What we see with those changes is the economics of IT investment fundamentally shifting, where it is becoming more viable to make bigger bets on IT transformation. So, the digitization of your supply chain – the ability to map out and understand how your business looks digitally. It gives you choices and options. It tells you where your cash is going. It tells you where cash generation activities may be.
Leah Archibald: You said before, “Never waste a good crisis”. Do you think manufacturers moving towards digital transformation would be a good use of this particular crisis?
Bernard Hensey: Digital transformation itself is not the end. It’s the data – it’s the information and the agility that gives your business what we’re looking for. So, as you look at your integrated supply chain and your own manufacturing operations, how can you model – how can you understand the choices that you can make in this environment? Can you switch particular product lines from in-sourced to out-sourced? Can you look at reevaluating vendors within the supply chain? Can you look at your own engineering resource? All those decisions need data, and they need an ability to model and understand your supply chain. And that’s where I think companies like aPriori come in, because if you have a digital thread, a digital view of your overall integrated supply chain, that’s where the basis of these decisions can come from.
Leah Archibald: So, what I’m hearing is that companies that take good advantage of a crisis are the companies that innovate the fastest.
Bernard Hensey: And the way you do that is by having the data and an integrated, agreed model of how and where the business should be going. Then you need to keep cash available for investment in new products and new infrastructure.
Leah Archibald: And what percentage of manufacturing companies are doing this? Can you make a prediction about who’s going to stay afloat after this crisis?
Bernard Hensey: I’m not going to give a figure of that sort.
Leah Archibald: I can’t pin you down on that. [laughter]
Bernard Hensey: No, but one thing I’ll tell you is that in manufacturing if you’re not up to your game, you’re not going to be there. Because unlike other businesses – service-type businesses – manufacturing faces the full brunt of the wind all the time. And if you’re not on your game, you’re not going to be around. So, putting in the right infrastructure and technology to give you the right way forward is an awesome opportunity.
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