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Supply Chain Strategy Starts with Information
Do you know what information you need to get the best price from your suppliers?
You can’t execute a winning supply chain strategy if you don’t know what it costs your suppliers to make your products.
According to today’s guest, the key to realizing cost savings from your supply chain is to leverage virtual factories to get the key information you need. Then you can start a conversation with your suppliers that ends with both of you reaping the financial benefits.
Abe Chaves is one of the top consultants offering applied services to aPriori’s customers. In this conversation, he leaned on his experience both as a consultant and as a supplier to convince me that insight-based collaboration is the real supply chain strategy to get the best price. Here’s my conversation with Abe Chaves.
Leah Archibald: Tell me the state of the market. What is the problem that many manufacturers face?
Abe Chaves: Oh, where do I begin? Right now, it’s a lot of supply chain issues. They either can’t get enough capacity or their suppliers can’t get their parts on time. Or if they have to bring them from far away places, they’re having logistics problems. And then the prices or materials are going up and down and up and down like an acrobatic aircraft, to the point where you can’t predict what your margins are going to be if most of your cost is in raw materials.
Leah Archibald: So it sounds like these issues would naturally pit OEMs against their suppliers. But you argue for increased collaboration in that relationship. Why? Why is collaboration the superior supply chain strategy to meet these challenges?
Abe Chaves: Collaboration is the solution to a lot of these challenges because unless you work together, you can’t get to the root cause of the problem. Maybe there is something you didn’t know about your part. Maybe there’s a requirement that shouldn’t be there but that the supplier thinks should be there. We had a situation where somebody was stamping a part in different stages and they were checking the part against a master at every stage. That was doubling the cycle time. But the requirement was meant to be there just for the first few months until they got the line stable. It had been a couple of years, and the supplier was still doing it because nobody told the supplier to stop. That’s why the part was more expensive. Unless you get down to the details and figure out the root cause of why there is a difference, you can’t actually work out the differences without having to fight with your supplier. So we advocate for customers to use aPriori to get down to the root causes of cost differences, and then do the discussions or negotiations in a fact-based manner.
Supply Chain Strategy for Changing Materials Costs
Abe Chaves: When materials are going up and down, the supplier has every right to say, “Hey, I can’t afford to sell you the part at the same price anymore.” What they’ll do is they’ll give you an average increase. They’ll say, “Okay, on average materials are going up 60%, so I’m raising my prices 60%.” But you might have a part where the material is a very little percentage of the cost. So you work with the supplier and you say, “Okay, I’ll tell you what, I’ll accept your average increase except for this part, because for this part here material is only 30% of the cost.” You can show them the manufacturing simulation in aPriori and say with confidence, “For this part, the material is only 30% of the cost. So even if the cost of material doubles, I shouldn’t be getting any more than a 30% increase, not a 60% increase.” In this case, suppliers are more likely to say, “You know what? You’re right. You’re not making me go and recalculate all the parts – you just want me to take a look at this one. I’ll do that for you.” That brings goodwill to the relationship with the supplier. The supplier understands that you’re not forcing them to do something that is egregious to them. That’s how we advocate that you work with suppliers.
Leah Archibald: It sounds like the increase in transparency in the relationship really brings value both to the manufacturer and the supplier. But at the same time, you need data to make that transparency work. You need real verifiable numbers and they can only come from accurate models.
Abe Chaves: Correct. And aPriori has invested a lot of time and money in developing very good cost models for most of the manufacturing processes out there. And then furthermore, if you want to invest in a little bit of customization, we can actually configure our models to fit your exact situation. Whether it is different processes that may work together differently for your parts, or whether it is your own material cost or overhead rates that you have negotiated with your suppliers or that you have internally in your factory. We create excellent models that are good averages, and then we can even go further and hone in on the reality of your particular situation.
Implementing a Supply Chain Strategy with aPriori
Leah Archibald: Now, if you’re a manufacturer and you’ve just adopted the aPriori solution, how do you implement this supply chain strategy? How do you go about really proving to your suppliers that these models are directionally accurate, that are based on good averages? Or how do you bring in your suppliers to customize those models?
Abe Chaves: You take a collection of parts that you buy from that supplier, you run the models, and you compare those numbers to what the supplier is charging you. There will be some outliers. Focus the discussion on the outliers themselves. Maybe you start with some of the parts where the model reflected a good cost – the same cost the supplier is charging you. Then go line by line through the list until you get to an outlier. “Now let me try to understand,” you say, “how is it that you are making this part? So that I can better predict the cost that I am going to pay in the future?” Explain that if you are designing parts in aPriori based on that supplier’s capabilities, that’s going to benefit them because you’re likely to send them more business. You might start discussing a part where you’re pretty close on the cost, and then another part that was pretty close. Then you say: “Okay, so if this is true for this part, let’s take this outlier here – help me understand why is it that this one has such a big gap.”
In many cases, they’re doing something that you didn’t think they were doing. We have found out that a part was being machined when it should have been just cut from a plate and had a hole drilled in the middle, but it was being machined completely. So sometimes suppliers are doing things differently than the way that you thought they were doing them. In verifying the process in the aPriori model versus what the supplier is doing, you’re bringing the confidence of the supplier up at the same time that you are building your relationship with them.
Leah Archibald: I imagine at the end of that process, once a manufacturer has a supplier’s digital factory set up within their system machine to machine, that’s a huge value add for that supplier. They don’t have to go back and forth with price quotes. They can really just speed that part into production.
Abe Chaves: They do. And in fact, we have some customers that simply run aPriori and because they have an understanding with the supplier, the aPriori estimate becomes the order.
Leah Archibald: I imagine this is only going to get more important in the year ahead. Given the number of supply chain disruptions that we saw in the past year, a good supply chain strategy is only going to become more critical in the year ahead.
Abe Chaves: Exactly right. If I am a supplier and I only have a limited amount of capacity, I have to choose at some point which part I’m going to be late on. I’ve been a supplier. I’ve been in those shoes, where one machine went down, I lost capacity, and I know I’m going to be late on some parts. If I have to choose which parts I’m going to be late on, the customers that I have the best relationship with are the ones that get the priority.
Leah Archibald: Does it feel better being on this side of the technology now?
Abe Chaves: It definitely does. It definitely does.
Leah Archibald: Abe, thank you for this conversation today.
Abe Chaves: Thank you.
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