How to Mitigate Risk in a Changing Market Environment

Design engineers, cost engineers, manufacturers, and suppliers struggle with a high-risk market that makes predicting profitability difficult.

We are in the most unstable product material market in 30 years. With inflation, labor shortages, geopolitical disruption, and more, how can you improve risk mitigation in the supply chain and utilize your cash flow smarter?

This session will identify the insights and strategies to improve your supply chain resiliency.



How to Improve Supply Chain Risk Management in Manufacturing

Abe Chaves: Hello, I’m Abe Chaves, and I wanna start by thanking you for taking the time to view this presentation. We are going to be talking about some practical ways in which aPriori can help you mitigate some of the external risk factors we are seeing in today’s market. And we’re gonna ground ourselves as to which risk I’m speaking about. But first, let me properly introduce myself. For those of you who don’t know me, I’m Abe Chaves, one of the principal consultants here at aPriori. I started my professional life many, many, many years ago, in the mid-’80s working for General Electric. I worked for GE for about 14 years, starting in engineering. And then I moved into a procurement role, where my team bought essentially machine castings, machine forgings, and fairly good-sized wall nets, basically.

And then, after I left GE, I had a couple of product management roles. And the last role that I had before I came back to aPriori was a sales manager role for a very small boutique, five access machine shop basically. So, I’ve been on both sides. I’ve been on the buying side and on the selling side. And hopefully, I will bring a level of practicality that takes both sides into account. Okay? So, the agenda for today. The agenda for today is pretty simple, we’re gonna just ground ourselves as to which risk events I am talking about, and then we’re gonna get into the meat of the presentation, which is what you came here to listen to, which is what practical things can we do with aPriori’s automation-driven solution to help us deal with the risk of material prices fluctuating and skilled labor shortages. And we’ll spend a brief time discussing delivery risks, basically, right? Risks in critical supply chain workflows.

Supply Chain Disruptions and Potential Risks

All right. So, what risk am I talking about? Well, I think we have all been watching the news and experiencing the news. Inflation is going on; it will probably be about 8% by the time we get over and done with the year. That is bringing the cost of energy, the cost of labor, and the cost of overheads up quite a bit on the hidden company’s bottom lines. Not only are we seeing the cost of labor go up, but there is a shortage of skilled labor—things like certified welders, certified C&C machinists, things like that. And there are also a lot of supply chain risks out there. A lot of supply chain issues and getting the raw materials that are rare basically, and shipping concerns. Although some of those are beginning to subside, they’re still present out there. It doesn’t cost you $25,000 to bring a container from China to the US anymore. That’s down to a 10th of that now.

But you’re still seeing A, higher prices than usual and B, some material shortages. All right, but besides there being material shortages, one of the things that we have experienced like never before in this incredible fluctuation in the cost of materials. We have seen materials go from… If you look at the end of 2020, two years ago, basically, the price of carbon steel was around $600 a ton. And then, by the time April of 2021 hit, that was already way up to $1,500, more than double. And then, by the time we hit April of 2022, that was up to $2,100, $2,200 a ton. And then it came crashing down, and then back up again, and then crashing down again.

Build a Resilient Supply Chain Risk Management Strategy With aPriori

So, it’s like an aerobatic airplane going up and down, and up and down. And just being on those kinda planes can make you sick. It can actually make you sick just thinking about the fact that it’s very hard to forecast your profitability when your raw materials are fluctuating that fast and by that much. And so, we are going to begin by showing you a couple of ways that you can use aPriori to mitigate some of those material risks. Okay? So, what can you do about reducing your risk exposure to the material? Well, there are only a few things you can do. You can either use less material in a part, use a less expensive material, or buy in a region where the material is less expensive. So, we’re showing this chart here that the cost of material in China, for example, is almost half the cost of material in the US.

And so, if you can deliver … start all over again from that point. So, if you can have the part made in China, and buy the material in China without adding a lot of delivery risks, then that’s one way to do it. Or if the part is going in that region of the world, if you’re going to deliver that product, or assemble it in that region of the world, then maybe you make the parts that go in that region of the world in that part of the world. But that’s not always the option. And in fact, we’re gonna discuss the fact that people are repatriating more and more parts because of the delivery risks because of supply chain risks. So how aPriori is going to help you, and we’re gonna show this in detail, is it’s gonna help you by helping you understand what the adjustment that your suppliers are giving you for the material increases should actually be.

And so, we’re gonna give you a way to verify that basically. We’re going to show you how aPriori can sometimes be used to find suitable substitutes that cost much less and therefore reduce collateral high-risk exposure. And we’re even going to show you how you can use aPriori to figure out where and when can you actually reduce the amount of material that you use in a part. But first and foremost, we want to start by narrowing down which parts you’re going to be looking at, you don’t have time to go look at every part you buy. So, what you want to do is you want to use a tool like aPriori, where if you have costed the parts in aPriori, you can group them in different ways. So, I can, for example, say, okay, let me group the parts that I buy from this new supplier or provider, and then you let aPriori narrow that down to the different processes and material types. So, I can say, all right, looking at the parts that I buy from the supplier, aPriori showed me all the parts that are sheet metal and that are made of carbon steel.

And then we can run a report against that, that essentially gives you the amount of material spend in those parts. So we know how much you’re spending in material for each part, we calculate that, and we multiply it by the annual volume, and that gives you the material spent per part, and that helps you narrow down the parts to the ones that you really want to look at, you don’t wanna spend your time on the ones you’re hardly spending any money on material, the ones that are giving you the high exposure are the spikes here, so that’s the first way that we help you, is by helping you narrow down what you’re gonna focus on.

So, you narrow down what you’re gonna focus on, you got a couple parts that you think you need to take a look at, you know that your supplier has been asking for a cost increase, and rightly so, you can’t expect them to eat those huge increases in raw material. And so now we’re gonna take a look at how you can audit what price increase the supplier is giving you because guess what? I’ve been on the supplier side, and maybe a few suppliers are gonna look at each part and give you the appropriate cost increase for each part, but my sense is that a lot of the suppliers don’t have time to look at each part.

So they’re gonna do things like, hey, you know, I make a lot of sheet metal parts, I know that carbon steel has gone up by 80% for every 100 pounds of metal that come in the door, about 75 pounds go out the door in finished products, so that’s an average utilization of maybe 75% if I’m being a little bit conservative and so when I multiply those two, the average increase should be 60%. So, if they make sheet metal parts for you, they’re probably gonna send you a note that says, Hey, we’re gonna increase the cost of all the sheet metal parts by 60%. Because, again, they probably don’t have time to go look at every part, so you don’t wanna push back on everything. You want your supplier right now specifically, especially focused on delivering your parts or making sure you get your parts on time.

So, you don’t want to make ’em go look at each one of your parts, but you can look at the highest plan parts and say, okay, let me check that out with aPriori. And the thing is, with aPriori, you can simply recost the part using the new material cost. So, if my cost went from $1.20 a kilogram to $2 a kilogram, for example, I simply tell aPriori to recost that part, and aPriori will recost the material cost, the cost to make the part the margin and all of that, and then you might get something that says, okay, the part used to cost 9.6, it is now, my estimate is 15.8. Even if you’re paying $10 for this part right now, the exactness is not important, it’s the relative difference that is important.

And so that is a 63% increase; that’s pretty close. In fact, you’re gaining a little bit on this one. And so, you let that one go, then you move to the next one, and you do exactly the same thing, you ask aPriori to recost the part using the $2 a kilo, and in this case, after aPriori has done recost, then it says, okay, that part would’ve moved from 16.8 to $23, that’s a 37% increase, that’s quite a big difference. And so now you can go back to the supplier, and you can give them 40% if you want. You took 3% here, you can… It doesn’t have to be exactly 30%, but you can have a rational conversation with that supplier and say, “Hey, I understand what you’re doing, and I don’t want to give you a hard time on all the parts, but in this particular part, I think the 60% is a little too much of an increase, could we make it 40%, for example.” And I think a lot of suppliers will be more amenable to doing that, they know you’re not pushing back on all the parts. You’re only asking them to take a look at this one part, and you’ll be a lot more successful and have a lot more meaningful impact on your business if you just pick and choose which parts you’re going to discuss with the supplier.

aPriori Demo: Evaluate Different Raw Materials for Key Components

So that’s one way to do that. The next way that aPriori can help you is in trying to help you evaluate different alternatives. And for this, I have recorded a demo simply because it’s probably shorter that way, I don’t get off on tangents. Okay, so here we go. Let’s say my boss has asked me to take a look at this part because it consumes a lot of material. You can see here that most of the cost of the part it’s in material. In fact, about $65 out of the $72 in variable costs goes to material. And at 3,000 parts a year, that means that we’re spending nearly $200,000 a year in material alone for this part. So, with the recent fluctuations in material, if the material happens to double, that’s an extra $200,000 worth of expense for the company.

So, my boss has asked me to take a look at it, keeping in mind that I can’t really change much of the geometry because not only it’s a part that currently goes on the boats that we make, but it’s at all parts that go in many other older designs, and it’s a replaceable part. So, it’s part of the maintenance items that we sell. So, I really can’t change much of the geometry, and yet I have to see if I could reduce the amount of spend that we have in material. So, one of the things that I have going for me is that I know it’s an old design. And in the old days, they had more safety factors than they do today. So, I’m gonna take a look at the material that we are using here. It is stainless because you are out at sea and this is exposed, and it needs to be stainless.

But with aPriori, you can very quickly see here what other choices I have in the stainless family. And I can very quickly see that if I chose 304 stainless instead of 316, which is what this part is made of, I would be significantly reducing my cost per kilogram in material. And so, I wanna also take another quick look because I wanna see what I will be losing by going to 304 before I even spend time doing any stress analysis or any corrosion analysis. I want to see if it’s even feasible, right? And the great thing about aPriori is that you can not only take a look at the cost difference between the two materials, but you can quickly glance at how they compare to each other with respect to properties.

And I can look at the strength of these two materials, and I can see that yield strength and ultimate strength and sheer strength. Yes, the 304 is not as strong as the 316, but it’s not that much of a difference either, taking into account that in the old days, like I said, the safety factors were greater than two. So, my next step is to see how much of a difference it’s going to make, to go through 304 to again see if it’s even worth my time changing the material and doing a stress analysis based on the 304. So, I am going to choose 304, and I’m gonna let aPriori run here, and in less than a minute, you have your answer, right? It’s a $20 difference, $20 difference in material cost alone, which means that at 3,000 parts a year, it’s $60,000 worth of cost savings. Not only now, but it’s a $60,000 worth of less risk exposure when those materials do fluctuate.

Reduce Labor and Material for a Competitive Advantage With aPriori

I hope I gave you a good sense of how aPriori can be used to perhaps explore different material alternatives. So now let’s move to the next topic. All right, so now we’re going to essentially show you how aPriori can be used to reduce both labor or, and by labor, I mean all labor, but specifically skilled labor and material at the same time. And the idea of using this concept actually started pre-COVID pandemic when one of you, one of my customers, essentially gave me a call and said, look, we’re getting late shipments from companies that made heavy weldments for us because there is a shortage of certified welders. So, is there a way that we can use aPriori to figure out which of our weldments use the most amount of welding so that we can then go back to our engineering team and say, “Hey, can you look at this weldments and see if some of this welding can be reduced to reduce the amount of skilled labor that is necessary?” Right?

They couldn’t go to engineering and say, look at all the weldments, nobody has time for that. It’s all about figuring out which ones to focus your resources on, and so we said, yeah, of course, we can do that. And it occurred to us that we could actually do a lot more than that. So, I’m going to use a part example and an assembly example of how this works, okay? So, if we start with aP Analytics, which for you, that have been with us for a while, customers for a while will recognize that as cost insight reporting, we can essentially run a report that will do something like this. So, let’s say that these are all the machine parts that go into a particular product line, and you wanna look at this and say, okay, which ones of these parts could I have an opportunity to make from a different process?

Maybe instead of machining it from a block, it’s started with a near-net shape. And so again, what we want to do is focus on looking at just the ones that have opportunity, or just the ones that have a possibility of being successful rather than all the parts. So, you run this report, and right away, you see here, one of the columns that we have a report on is utilization. And so, you see that on this first part, you’re throwing away nine out of 10 pounds of material, right? It’s only 10% utilization on the next one you’re throwing away, 10 out of 10. I’m sorry, eight out of 10 pounds. And on the last one is eight out of 10 pounds. On the first one, you can see how much material cost there is. And so even if I just doubled that utilization, which going from a near-net shape, it should be pretty easy to do I could save right away.

I could save $60, $65 dollars, plus I won’t have to machine as much. So, some of this cost of making the part would actually come down. So maybe I can save at least $100, and I can look at how much volume I’m making and say it’s $18,000. That might pay for some tooling, right? So maybe that’s an interesting one to explore. And by the way, I’m using very modest volumes here, which is why perhaps a part may have been assigned to machining to start with, but obviously, as the volumes go up, for those of you who are making more volume, they will make the decision a lot easier, right? The next part here, you’re throwing eight out of 10 pounds away, but really, you’re not really gonna be saving a lot of money on these volumes. And so that doesn’t look like an opportunity because you’re not gonna save enough to pay for tooling, basically.

And the last one obviously is a very expensive part. You would have plenty of opportunity just as you did on the first one. So that’s the first report we’re gonna look at. The second one is a labor report or a cycle time metrics report. But it really is machining hours, right? So, with aPriori, we can run a report that says every time you make a batch, so every time your supplier is making one order, right? One batch, he or she is spending this many hours to make that batch of parts. So, when you order one batch of this part, you’re essentially spending a shift, a shift and a half, basically 12 hours or so, which is not insignificant, but compared to the next one, right? They’re spending three weeks to make one batch of these parts. And on this one here, they’re spending essentially 76 it’s almost 80 hours. It’s almost two weeks, right?

Of labor, of a person’s labor to make one batch of this part. So, if you want to reduce again, if you want to reduce material and labor, that wants to go for either this Aero Mill part or this Pocket part, so we’re gonna take a look at one of these two. We’re gonna take a look at this one just as an example. And this is the original part. And you can see the cost of material and the cost of making the part. You can see the part is costing around $500 right now. We have the volume. You can see that you are, again, the utilization, you’re wasting nine out of 10 pounds of material, and you are consuming almost 35 kilograms, basically 35 kilograms of material. We can investigate a little further with aPriori, and we can see that this part takes about four and a half hours to make the right machining time.

And out of those four and a half, nearly two hours are spent in roughing operations, which is basically bringing this part to near net shape. So, of the four and a half hours, almost two hours are spent in bringing it to near net shape. So, hey, it looks like we’re gonna have a good opportunity to save a lot of money in the make portion of this part as well. So, what I want to do is I wanna tell aPriori. Okay, let’s go try this as a casting, right? And so, you, yes, this is not a cast. This is not the casting drawing, right? But the whole point is you let aPriori tell you whether it’s even worth it to go and make the casting drawing, right? So, let me see if this is really gonna save me money, and how much is that gonna be?

Is it peanuts, or is it significant? And so, you tell aPriori that this part is a casting and that it, that there is some machining on it, and you can let it know what surfaces are machines so that you can get an apples-to-apples comparison. And pretty soon you can see that it’s a lot cheaper. Not only it’s a lot cheaper, but you are gonna consume a lot less material, right? This is seven and a half kilograms. And yes, it won’t be this small because some of these surfaces will not go down to the bottom, right? But when you calculate your casting, even if it’s 10-12 kilograms, right, that’s a lot better. That’s a lot better than 35. And again, your exposure to the custom material going up goes down significantly. So, the cost of this part will not be as sensitive to a spike in material cost as it was before.

And as far as labor is concerned, well, now we are consuming between the machining and the casting. You’re gonna be consuming essentially less than one-half the hours that you were consuming before. It’s still significant, but not nearly as much as before. So, you have less exposure to inflation and less exposure to at storage of skilled labor. So, as I said before, this works with assemblies as well. And so, in this case, basically, we have a collection of assemblies here. Again, it could be assemblies that go into a particular product line, and you want to look at which ones are taking you the most time to weld, just like my customer wanted to do. And pretty quickly, you can see here, this sub-assembly goes inside this big assembly, and so I have to add them together basically. But here you can see that this assembly takes almost two shifts, basically. And this one takes a little over one shift. So, these are the two assemblies that are consuming the most certified welding time. And then the other thing that we can see if we look at another report that you would be able to run with aP Analytics, is the cost of assembling it itself.

So, what is the cost of welding to me, and you can see that for this assembly here is $178. That would obviously go completely away if you had a casting. And for this one, it is about $140 out of the 322. Now there is also some material cost savings when you do that because the utilization will probably go up. And so, what we also show in this report is your effective utilization is essentially all of the finished mass of all the parts that go into the assembly, divided by the total of the gross mass of those same parts. And so, you can see here that for this part, it’s about 70%, which is not bad, but it is a certainly you should be able to do better with the casting.

And for these last two sub-assemblies here, once you blend them together, you will be around 70% as well. So, you might have some opportunity in this assembly. There is HITCH_UO also and has a law utilization, but it didn’t have a lot of opportunity to save a lot of the welding. So, we’re not gonna even look at that. So, let’s look at a couple of these. The first one here, you can see, is the weldment cost. You’re only making 60 a year, which is probably what you never even consider casting. You can see the cost right now is… It’s a little over $300, about $320. You can tell aPriori to actually assume that this is a casting. Once you have, what we call shrink wrap the part, you essentially take the casting, and you tell your cast system to wrap it and make it look like a part.

And then you tell aPriori, “Hey, go cost this as a casting.” Again, it’s not the casting drawing, but when you want to, or the casting model. So, it’s not exact, but what you want is an indication. Whether it is even worth it to go make that casting model. And you can pretty quickly see here that it’s not worth it. They cost about the same. So, I’m not taking this… The absolute value of this number is not perfect because this is not our casting model, but it’s an indication that if there are savings that are small, they might even cost you a little more. So, I don’t worry about this one. Gone. Next one. You can see this; this is actually a customer example. So, I can’t really show you all the details. But it’s a true story.

So basically, what happened here is you can see what the cost of the weldment was. They’re making 72 of these actually a year. And you can see how much material is being consumed. About 198 kilograms, say 200 kilograms. And as it turns out, there was opportunity. So, they did take the time to do a casting model. And once you cost the casting, you can see that it is about $400 worth of savings. You are consuming less mass. And this is more of an accurate mass, reduction, or estimation because it is a casting model. And so, you can see that you are gonna be experiencing less exposure to the increased cost of material. And when you do an apples-to-apples comparison of the amount of skilled labor, meaning well-reducing welding on one side and adding casting on the other, you are getting some reduction in exposure for skilled labor as well.

Collaborate With Key Suppliers for Better Global Supply Chain Risk Mitigation

Finally, here, we want to talk about the risk assessment of deliveries, essentially your supply chain network risks. And we are going to just go quickly through this. We could show some examples, but we don’t have time in the allotted time for this presentation, but it’s definitely important to discuss. One of the most impactful ways that you can reduce your risk is really to collaborate with your suppliers or prioritize supplier risk mitigation strategies. So let me give you a couple of examples. There will be parts where just in time is just killing you, and you’re just buying maybe some batches that are good for your … essentially, your just-in-time program. But the supplier has to continually, basically, reset up the machines and reset up the machines, and that is consuming some capacity for them at a time when capacity is at a premium. And it would probably behoove you if you order a little more.

And not force the supplier to set up so many times. This would please your supplier, and you’ll probably see some cost savings associated with that. And with aPriori, you can actually run a report that will give you that optimum batch size where you might not be ordering right now. All other examples are, for example, plastic parts. If you can group them by the type of material that they’re made of, perhaps color if you use color on the plastics, and the size of the machine, then your supplier can actually make all of those parts in a row on the same machine without having to flush the system. Which, again, increases capacity for them. They have to reset up the molds, yes, different parts, but they won’t have to flush the system. And so, it will actually make an impact in the amount of capacity that your supplier gains, and you might see some cost savings again, and you will help your case when it comes to deliveries. And then repatriation. So, a lot of companies, and GE was included when I was there, obviously, where we started going to low-cost countries, and we made blanket moves. At some point, we may have said all these types of castings, they all go to China, for example, right?

All of these weldments, or all these cheap metal parts, go to Mexico. And in fact, there are parts where they may not have been such a big gain by going away. And so aPriori can help you identify which parts would be good to just repatriate because the cost of making them elsewhere is not really all that great. And if you have to deal with all the logistics issues and the tariffs and things like that, then it’s probably just not worth it. And so you can tell aPriori, hey, cost me this part in this region, cost me this part in this region, and then compare the two. And you’d be surprised how many times you find parts for which the difference is not as much as you thought there was, right, on the same mixture of parts. So, in conclusion, please keep in mind that aPriori can help you reduce and manage the real-time vulnerabilities of the supply chain that you’re seeing today, right? We know that the best results are gonna come from collaborating with both your engineering team because if you need to change a part from being in a machine part to being an extrusion or a casting or a forging. So, you start in your net shape you’re gonna have to work with them and your supplier, right?

Make Supply Chain Risk Mitigation Easy

In material cost, look for which parts have the most material span. Check and see among those if the increases that are being asked for by your suppliers are adequate or not. Check for possible substitutions. In material and labor, again, not to belabor it, but can you make it differently, right? aPriori allows you to. We just gave you a couple of examples, but there are many other ways that aPriori can help you see, hey, if I make this part this way, can I make this part that way? aPriori can very quickly show you those what-ifs. And then, once again, collaborate, collaborate, collaborate with critical stakeholders. If you have any questions and you’re watching this recording, my door is always open. You can contact your expert services consultant or your customer success manager, and they can put you in touch with me, and I’ll be happy to answer any questions. Thank you very much and have a great afternoon.

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