Case Study

Using Simulated Manufacturing to Save in Supplier Negotiations

Introduction

How can cost management teams work with suppliers to bring down costs? The key is collaborative supplier relationships supported by granular data on how much components should cost if efficient manufacturing processes are followed.

In this case study, we look at how Solar Turbines uses aPriori to simulate manufacturing for parts, identify cost-saving opportunities, and ultimately conduct mutually beneficial supplier negotiations.

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Company Details

Industry

Energy Manufacturing

Number of Employees

8,000

Revenue

$2.17 Billion

aPriori Product

aP Pro; aP Analytics

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The Problem

Reduce Product Costs While Ensuring Successful Suppliers

The Solution

Use Data-Driven Insights from Digital Factories to Inform Fact-Based Supplier Negotiations

Who is Solar Turbines?

Based in San Diego, California, Solar Turbines is a wholly-owned subsidiary of Caterpillar Inc., which designs and manufactures industrial gas turbines, electric motor drives, gas compressors, energy storage, and digital solutions. Their offerings support applications including onshore and offshore electrical power generation, marine propulsion, natural gas/oil production, and heating/power generation for universities, hospitals, and industrial facilities.

Their 16,000+ solar units installed across 100+ countries have logged over a billion operating hours, supported by 8,000+ global employees.

Problem: Reduce Product Costs Without Threatening Fair Supplier Profit Margins

Solar Turbines’ costing team fields requests from across the company’s entire global supply chain. They needed a technology to generate robust should cost models and power a strategic move to fact-based supplier negotiations. Solar Turbines is committed to supporting successful suppliers through collaborative cost reduction, and the right technology would need to help pinpoint savings opportunities with suppliers, not seek to erode fair profit margins.

They selected aPriori as the technology that could not only model product costs with the use of digital factories, but provide the data management tools necessary to create an organizational repository for tracking and validating key cost data.

“The central pillar of our entire process is aPriori data manager. It’s the place where we centralize all of our cost requests and track all of the key inputs and parameters needed to ensure we can create, validate, and complete the cost models needed to fulfill these requests.”

Solution: Use Data-Driven Insights from Digital Factories to Inform Fact-Based Supplier Negotiations

Using aPriori’s digital factories, Solar Turbines can simulate manufacturing to generate should cost models for specific parts and components. Solar Turbines’ cost management team employs an extensive validation process to ensure that the inputs and parameters used to configure the digital factory reflect their experience with a part’s manufacturability and cost structure. Digital factories can be updated to reflect different parameters in a matter of minutes, enabling iterative reviews between the cost management, engineering, and supply teams which help ensure that simulated manufacturing outcomes are highly-accurate and ready to provide value-added insights for subsequent supplier negotiations. 

“Ensuring that all known costs are accounted for is the best way to ensure that unknown costs are properly highlighted, documented, discussed internally, and discussed with suppliers if possible.”

Once a model is validated and the cost management team is confident that it aligns with both product and supply chain strategy, it can be used to conduct fact-based negotiations with suppliers. The manufacturing cost models generated by the digital factory can be configured to reflect the specific capabilities of suppliers and make apples-to-apples cost comparisons. Solar Turbines also uses aPriori to generate optimal routings that reflect the most efficient manufacturing approach possible.

“An optimal manufacturing routing can provide valuable insight into how a given part or component can be manufactured in a cost-effective manner. This exploration is valuable regardless of a given supplier’s capabilities, because this optimal routing provides a benchmark for negotiations. If we want to stay with a supplier, this information helps us have more amicable conversations, and to know if we have more room for savings.”

Once negotiations are completed, any savings achieved as a result of the negotiation are saved to Windchill, Solar Turbines’ PLM (Product Lifecycle Management) tool. Lessons learned from the cost modeling effort and supplier meeting are recorded to guide future cost reduction efforts. 

aPriori is also used to conduct batch analyses and find quick wins for cost reduction. Batch pricing models generate price points for different batch sizes depending on production volume. This information allows Solar Turbines to compare tiered pricing (based on volume discounts) to operational requirements like desired inventory levels.

Results: Cost Reduction Through Collaborative Supplier Relationships

“aPriori helps shift supplier negotiations toward data-driven facts. Instead of just telling a supplier ‘you’re too high,’ we can tell them ‘you’re too high…and here’s why.’ We can show them material costs, material utilization, cycle times, labor rates, overhead, machine selection, and more. Doing this drives transparency and helps set the tone for collaborative negotiations.”

This approach helps bring down costs and reassure suppliers that the end goal is not eroding their margins, but finding mutually beneficial opportunities for cost reduction.

In one case, Solar Turbines used aPriori to model manufacturing for a component estimated to take 17.5 hours of welding time–but the supplier had been quoting 40 hours. A discussion with the supplier helped identify unnecessary weld grinds being performed for each cycle. This single negotiation ultimately resulted in savings of about $450 per part. 

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“One of the hurdles we run into with suppliers is they cost parts using a ‘shop rate’ which is averaged across the entire manufacturing facility for all customers. This practice creates winner and loser parts for margin; complex parts are less profitable for suppliers, and simple parts are more profitable. With aPriori, we have itemized cost reports that reflect part-specific routings, and that means no more winners and losers for suppliers.”

In another representative supplier negotiation, aPriori uncovered a key material cost reduction opportunity. Solar Turbines had access to a material internally 50% cheaper than was available to the supplier. By purchasing this material directly, Solar Turbines was able to reduce per-component costs by 15%.

In the following video, Solar Turbines specialists share this story:

“A lot of suppliers were really impressed by aPriori and what it could do. They trusted the data they were seeing because it spoke their language. And it identified issues in their own process that they may not have been aware of. In many cases, it answered questions they had been curious about for years. And curiosity always helps spark a collaborative, friendly conversation.”

Moving forward, Solar Turbines is already hard at work expanding its aPriori implementation from sourcing and cost management work to the design phase. In one case, aPriori helped recognize hard-to-machine design elements driving poor material utilization rates for a component. Exploration of the design alternatives boosted material utilization from 18% to 42%, driving savings of over $65 per part during the initial design stages. 

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