How to Drive Strategic Supplier Relationships

How to Drive Profitability with Strategic Supplier Relationships and Digital Factories

Today we’re going to be going through driving profitability with strategic supplier relationships, and this presentation is part of our overall profitability track at our Manufacturing Insights Conference this year. So the main topics we’re going to cover are; how you can collaborate together with suppliers so that you can together drive profitability, and how using a digital factory can help with that.

Lily: My name is Lily. I’m a principal consultant here at aPriori. I work with our customers to help them derive value from aPriori, and that could be in things we think about traditionally with aPriori, redesigning parts to find a cheaper design, analyzing parts where they might be being made with a suboptimal manufacturing routing, and it also means using digital factories to collaborate with suppliers, understand cost drivers, and come up with ideas together to reduce cost. So we’ll cover very briefly because many of you in the room are familiar with aPriori, but some of you may not be customers, may not have used it, so we’re going to cover what is a digital factory again briefly, and then we’ll talk about why collaborate using shared digital factories and how that can drive profitability for both buyers and suppliers. We’ll talk about how to make a shared digital factory, and I’ll discuss other examples of how our customers are using digital factories to drive profitability.

So traditionally, original equipment manufacturers have a 3D model to represent a part, and that enables them to do a lot of things, such as predict how that part is going to perform in the field. So if they have a tool like ANSYS, for example, they can take this 3D model and simulate the forces that the part are going to be exposed to, and they can predict how that part is going to perform in the field.

aPriori’s Digital Representations Offer a Competitive Advantage for Supply Chain Management Relationships

But oftentimes, that 3D model and its function in the field is as much as we’re simulating. aPriori has digital representations of manufacturing processes, so we’re able to leverage the 3D model and kind of extend the digital thread into manufacturing. And we can analyze the digital model with our digital representation of manufacturing. And we can analyze the digital model with our digital representation of manufacturing. Processes, and we can predict how is this part going to behave when it’s being manufactured? We can also predict how much material it’s gonna use. Are there going to be manufacturability issues? Are there going to be features that are difficult to manufacture? And how much energy is it going to take to manufacture the part?

So when we talk about a digital factory, the input to the digital factory is a 3D model. And we extract all the features that need to be manufactured. So we get all the physical information from the 3D model. And then we have in our digital factories, so in our digital representation of manufacturing processes, we have material libraries. So we have all the physical information about that material. So we can figure out how machinable is this part? And how much force am I going to have to apply on a bend break or a stamping press in order to process this material? We’ve done research on things like what… We’ve got kind of rules in our digital factories about what is feasible based on capabilities of machines. So what thickness of certain materials could I cut with a laser versus a water jet cutter? Based on the thickness of materials, material type, dimensions of features, what tonnage am I going to need on different machines?

And it’s not just sheet metal. We’ve done this research for a number of processes, machining, forging, injection molding. We also have logic around capabilities for tolerances. So depending on the tolerance of a feature, what are my options for different operations that are going to be capable of making that feature at that tolerance? So we provide a baseline for all of these. And from the 3D model, we can apply this logic and we can generate manufacturing insights, such as design guidance. So because we have logic and rules around machine capabilities, process capabilities of different tolerances, different materials, we can flag to engineers if there are going to be features that are difficult to manufacture. We can pick what we believe would be the optimal routing for a part and how long we think it would take, how much material it’s going to use. And then because we’ve got machines and cycle times, we can also come up with estimates of the energy that’s required to make the part. So the output of our digital factory are all these types of things. So we can use these insights to predict how a part is going to perform in the field.

And these insights enable customers, like I mentioned in my previous example where I talked about using ANSYS to predict how a part’s going to perform in the field. You can use these manufacturing insights to predict how a part is going to perform while it’s being manufactured. And you can actually catch quality defects in the digital factory before they become real defects in the real factory. And there’s actually, it’s funny. So the track that this presentation is the profitability. Because of course, reducing manufacturability issues, making things easier and quicker and more efficient to manufacture is going to drive profitability. But we also have a presentation on a similar topic in our risk mitigation track as well. Because you really are mitigating potential quality risks. So I’ve got an example here where kind of adapted from a real customer example where aPriori flagged that these slots. Were going to be difficult to machine because they required a high length to diameter ratio of the tool.

And the further away that that tool is from the bottom of this slot, you’re going to get chatter. And unfortunately, in this case, the feedback, this customer was very new to aPriori. So this part had already been designed and sent to the supplier to make prototypes. And then they were going back and reviewing it with aPriori to check what type of feedback it gave. And they had already asked the supplier to make the prototypes. And literally, while I was reviewing this part with the customer, they said, yeah, actually, the supplier emailed me and requested that we widen these slots due to the tool chatter. And the supplier had attached great photos showing the chatter. And so they were able to redesign with the widened slot based on the supplier performance. So in this case, it had progressed to a defect in a real factory because the customer was just brand new to aPriori, and they had sent this for prototype before they were even using aPriori. But it was a great case to show that if you analyze your design. And you can really catch some of these defects and improve your supplier relationship management.

How Do Digital Factories Affect Long Term Strategic Supplier Relationships?

Lily: So aPriori provides a great benchmark, a great starting point for a number of different processes. We’ve got process capability and routing rules, right? So we’ve got what thickness material can I laser cut versus water jet cut versus plasma cut? What length to diameter ratio? Can I make? What tolerances can I hold? And then we’ve also got a starting point for cost accounting data. So we’ve got labor rates for different regions, costs of different machines. So we provide an excellent benchmark for representing manufacturing processes. But what we also provide is an infrastructure for buyers and suppliers to together collaborate on this digital representation of the manufacturing process. So if you are a strategic supplier to an original equipment manufacturer, you can work with them and let’s say that you’re constantly receiving parts with features that are difficult for you to manufacture. aPriori provides the infrastructure to allow you and your customer to streamline by putting those features into the digital factory screens, checks for these types of features that you’re having difficulty manufacturing. So we have a lot of these checks in there already, but we also have the infrastructure to add. And so you can collaborate and optimize with your customers, say, look, we keep getting parts that have these same types of features, creating mutually beneficial relationships.

The conversation goes like this: They’re difficult for us to make. And here’s why. And you can put that feedback into the digital factory and then your customer can put that feedback in the hands of the engineers while they’re designing. Or if you’ve got specific machines, maybe they’re higher end and they’ve got capabilities that are beyond what is typical in the industry. We could add those capabilities as well. So then your customer is able to see. Identify parts where you’re going to be differentiated because you’ve got special capabilities. So we’ve not only provide a benchmark for digital representations of manufacturing processes, but we provide the infrastructure to be able to build on those. And as suppliers and buyers collaborate to understand capabilities together. They can find opportunities to improve profitability by screening for features that are difficult to manufacture. Having suppliers make parts that they’re well-suited for based on their capabilities, and that’s how you can start to really increase profitability and the bottom line.

I started a little bit on this topic already. Why collaborate using shared digital factories? So I’m going to make the case that I think it can improve profitability for both buyers and suppliers and improve partnerships. I just alluded to some of the ways before and we’ll go a little more in detail. So if you attended the panel discussion right before this session, in this profitability check, my colleague, Chris presented this slide. So if we think about price. Being fixed because the market will dictate what, what consumers or customers are willing to pay for a given product, right? So the OEM is somewhat is limited by what the market’s willing to pay for their product. And then if both. Me as a buyer and my supplier want to improve margin, improve profitability, impact cost savings. Then the variable that we need to work on together is cost, and both stakeholders, both buyers and suppliers want to increase the margin dollars they’re making, and so they’ve got to work together to reduce cost.

And really, at the end of the day, I think OEMs and suppliers have the same goals when it comes to cost. OEMs want to ensure that they’re not overpaying for a part that they’re sourcing. They want to make sure that the parts are being designed, that the parts that are being designed can feasibly be made for the price that the target. Price and margin that they want to sell it for. They want to know that the parts that they’re sending to suppliers, the suppliers are well suited for, and that helps minimize risk. So they want to reduce risk by not sending asking suppliers to make parts that have a lot of. Difficult to manufacture features and they want it. They don’t want to send suppliers parts that they’re not well suited for, because that’s going to create risk as well, either quality defects or having to outsource an operation. And finally, the OEMs also want to have shorter RFQ processes. That will that lowers their costs if they have less time spent during RFQ and they want to be able to launch products faster. And that can help improve their profitability and minimize disruptions.

Strategic Supplier Relationship Management

From a supplier perspective, suppliers want to ensure they’re not getting underpaid for the business. So they also want a fair price. Suppliers want consistency in revenue. So you’re not making a lot of profit on some parts and no profit, or maybe losing money on other parts, you want it to be consistent. And suppliers also want short RFQ processes. You don’t want to be spending so much time quoting that you barely have time to be actually making the parts. Suppliers would like being asked to quote a bunch of parts in a quick turn, which I think OEMs often put them in the position, because OEMs are trying to launch products faster and so they’re compressing the time that the suppliers have to quote. So from a management strategy, ensuring that relationship works both ways is critical.

Management Strategy: How Digital Factories Help Achieve a Win/Win for Both Sides

So I’m going to discuss how collaborating on a shared digital factory can help buyers and suppliers achieve these goals. So what happens today that prevents us from achieving these shared goals and outcomes? The things that are happening today are… From a buyer perspective. And I before joining aPriori, I was in supply chain and commodity management for a division of GE. So I was the buyer. So I’m intimately familiar with some of these challenges.

So, as a buyer, I’m getting quotes back from my providers that exceed my target cost and I don’t know why. I’m asking to be quoted items where we needed the part yesterday, so I’m having to get stuff very quick turn. I’m wondering, I’m trying to figure out which of my suppliers have the capacity to make these parts. I don’t want to get in a situation where we’re going to have a ramp up in volume or launch a new product and we run into capacity issues down the line. I’m fielding a lot of price increases as suppliers are emailing me saying that, Hey, labor rates have gone up or material rates have gone up and here’s your new price. And I’ve got annual savings KPIs I need to hit. And I want to try and figure out which suppliers are capable of making the parts I’m being asked to quote, and I might be in a position where I’m getting back a lot of no bids, because I’m not doing a great job of knowing which suppliers have the capability and capacity. So I’m getting no bids and I’m not sure why.

Now on the supplier side it can be just as frustrating, because you’re being asked to quote prices at a target that is not feasible, right? So some product manager at your customer is saying, “here’s how much I can sell this for, here’s the margin I need to make, and therefore here’s what it needs to cost.” And you’re being asked to quote it at that cost. And you’re saying, “look, it cannot be done for that cost.” You might be getting so many requests for quote that you can’t keep up with the volume. And you may not be winning a lot of those, or you might not be getting any feedback as to why you’re winning or not winning them. You may be being asked to quote parts that you don’t own the machines to make. You yourself are getting increases on inputs like material and labor. You’re being asked to quote stuff with a very quick turnaround. And so all of these things can really lower the profitability for both buyer and supplier, because it requires a lot of time investment by both buyer and supplier, and sometimes for little value, especially if the buyer is sending bid packages to multiple suppliers. Suppliers are spending a lot of time quoting it, buyers analyzing it, and then awarding the business without giving a lot of feedback.

You could be not having the win rate you want for a lot of time that you’re having to put in, and that’s really gonna hurt profitability. So all of these issues drive a very long RFQ cycle. And like I said, that impacts profitability for both buyer and supplier. It’s a lot of time investment. It impacts buyer’s abilities to launch products quickly like they want. Both buyers and suppliers are in positions where the parts are being designed with features that might be difficult to manufacture that can cause rework quality issues, which is also gonna impact profitability. And basically you end up in a process where every single RFQ is negotiated and the business may be awarded on the best price, but it also might be awarded on whoever responded first, or whoever quoted the shortest lead time.

So what I propose is when you put a digital factory up front in this process, you’re arming the engineers with the ability to evaluate design for manufacturability issues in a shared digital factory, or the example I gave before, if you’ve got some specialized… As a supplier, you have some specialized equipment, it enables the engineer to analyze the part with that equipment. And so now engineers can iterate on designs with manufacturing feedback in real time. And then engineers can pass that information to the sourcing and procurement team. So they have an idea of, okay, what equipment do I think would be made? How much time, how much capacity is gonna be needed? And I can ask supliers who have that equipment to quote it. And then as a supplier, if you’re receiving this type of data from aPriori, and you’ve kind of collaborated on digital factory capabilities, then you should be able to just review and accept the business. And you can get into a relationship between buyer and supplier where you’re… It’s very strategic. You’re modeling perhaps specific supplier capabilities. You’re saying to the supplier, I want you to make these parts. Here’s how I think they’ll be made.

And then as a supplier, you’re accepting or rejecting the business, and you’re not necessarily even bidding against others. And this can greatly compress the RFQ time. I’m gonna give an example in a minute where a customer said that it went from 10 week RFQ time to one week. And so right away, you’re reducing the amount of time invested on both sides to quote, a clear risk management option. As a supplier, you’re getting realistic target costs. And as a buyer, you’re, you’re setting realistic target costs. So when it comes to buyers who want to accelerate product launch times, you’re checking cost here during design and seeing if it meets your target price and margin goals, instead of checking cost here when your’re getting cost back from suppliers. You’re ensuring that the parts can fit the supplier capabilities, and this can improve improved profitability because it will prevent you from having suppliers who are not well suited to make the part, make it. So a supplier who just doesn’t have, own the machine required to make the part, and then they have to make it on a less efficient machine, or maybe outsource it, that’s going to be more expensive. And suppliers are getting a reliable, consistent margin percent, because when you use a digital factor the way aPriori does, we’re calculating all the costs and then we’re adding an agreed upon you know margin and overhead.

So maybe this sounds too good to be true, it’s not realistic. I’m going to give you an example of one of our customers who’s at who’s at the conference this year who presented at this conference last year. So some of you might have seen Woodward’s case study presentation from last year, Chris did an excellent job sharing about their supplier partnerships, they’ve implemented this with some of their suppliers, and they’ve reported to us that from a supplier perspective they’re having reduced quoting efforts, so reduced time spent quoting. And that enables folks who were literally pulled off the manufacturing floor to help keep up with the quoting volume, they’re able to go back to making parts. If the supplier is selected to go through this process then they win 100% of the business they’re presented with with purchase orders. And they’re negotiating strategically high level with suppliers, so remember I mentioned that you could suppliers can get a reliable margin percent, they’re negotiating what those percentages are and then they’re just applying that to all parts, so all parts should have the same margin percent.

And from Woodward’s perspective, they’re also getting the benefits of shorter quoting time, they feel comfortable and confident that they’re sending parts to suppliers who are well suited for them and then that makes them confident that they’re paying a fair price. And their collaboration effort is very strategic one-to-one versus a typical RFQ where it’s you know one to many and you’re having maybe four or five suppliers bid on something, and they feel comfortable that they’re getting fair and reasonable pricing.

Enable Close Collaboration with a Digital Thread: The Digital Factory

So let’s talk about how you would actually go about making a shared digital factory if you want to enable this close collaboration using the digital thread, the digital factory between buyer and supplier. So first, you would need to select suppliers or if you’re a supplier to let customers that you think this would work well with, and that would be… You wanna do it where there’s a high volume of quoting happening, it may not be worth your time to invest in this type of infrastructure, if you don’t do that many quote through the customer, if you’re a buyer and you don’t have the supplier quote that much stuff, you wanna look where there’s a high volume of quoting activity happening, so that a reduction in the time for quote is gonna improve profitability for you both. And then you wanna work to identify relationships where you wanna have a strategic relationship between between supplier and customer, it may be where you already have an LTA in place. We recommend that, but for example, if I’m a buyer and I want to collaborate in a supplier in this way, do a demo of aPriori, for the supplier to explain how it works.

Explain that configurations can be made to add special processes to edit the limitations of certain processes, to add machines and to add DFM checks. So demonstrate the DFM checks that are there and that they can be added based on what the supplier may be seeing from the design engineers. And then finally you need to both agree on how you’re gonna benefit, that will agree on margins, we wanna target reduction in quoting time, we wanna take our relationship to the next level. And then you… Once you’ve identified, if you’re a supplier, if you’ve identified customers that are a strategic partner that you think you both could benefit from having reduced quoting times and improve the DFM screening, or if you’re a customer and you’ve identified suppliers that you wanna build strategic relationships with, you can then align on the specific digital factory configuration.

So one of many possible initiatives: you can look at, okay, what materials do we commonly use, what are the rates that aPriori has for those materials, are we good with those, or maybe we already have a long-term agreement where we’ve got an index that we track that you could add any special materials that are used. You can find out from the supplier what typical stock sizes or stock forms do they have in stock (inventory management), do they keep on hand and make sure that those are in the factory and remove stock forms or stock sizes that they don’t typically have (shortages). You can also then go through the machine list and find out what machines the supplier has, and add or remove ones that aren’t applicable, you can find out the capacity on the machine, you can talk about the operating parameters of the machines, and you can go over you in source or outsource operations, you can go over inspection steps that might be mandatory for every part. And then you can talk about the accounting information, what are the overhead rates, the labor head rates, the target margin, and you may already have disagreed in a long-term agreement, or if you don’t, you can make a contract as well, so I’ve got another…

I have another customer who’s going through this exercise, and they decided to make a long-term relationship agreement with the supplier and document in a contract some of these things, but then they’ll just put into the digital factory, but they’ve got a contractual agreement. And part of that contractual agreement is you’d wanna agree an update cadence. So I think when you’re going from a tactical RFQ-based interaction where you’re negotiating every RFQ and every part, when you’re going to this type of higher level discussion and negotiation, having regular business reviews are really important to make sure that everything that you set up is still applicable and still working for everyone, and you could even agree, this is, I think one customer did this, agreed on a notice period, if inputs are changing, so if material rates are changing or labor rates are changing, what’s the notice period we need to have, so we can discuss that and give ourselves time to update the factory.

So once you’ve identified these updates to the digital factory, then you can test the factory, so you could agree on a part set, you probably pick out parts that the supplier is currently making or that you’re currently making for your customer, you would run the parts through the digital factory and verify the cycle time, cost, very importantly verify the DFM feedback and fine-tune where needed.

Now, it’s very likely that you’ll find that 100% of parts that you make for a supplier, or if you’re a customer that you’re buying from a supplier, when you’re testing the digital factory, you may find that there’s a subset of parts that the cycle time cost DFM Data as working exactly as you’d expect. There may be parts where it’s not working as you expect, what we’re really talking about here is providing a level of automation to the quoting process. And so you may not be able to automate a 100% of part types, but you probably will happen is you’ll identify part types or part families that are a very good fit, and then together, buyer and supplier can agree on the part types or part families that are gonna be fit for this process and continue to manually handle things that are maybe more complex and still require more in depth review.

So one customer handled this identification of parts that are a good fit by a signing classification codes to all the parts, so the parts could be automatically classified based on material type machine needed, and then they could match parts with certain codes to suppliers who were tagged as supporting those codes. Another example, customer example is a customer who identified a really high volume of new parts that they had to quote, so they were all new designs, but they were all simple brackets, and so they decided to apply this kind of automated quoting to that high volume, simple commodity so that freed up resources for both buyer and supplier to collaborate on the more complex parts. So you might not get coverage for 100% of products from the beginning, but the digital factor is dynamic, so you can continue to iterate it and edit it to try and expand the part types or part families that you’re covering.

Tips for Success for Strong Supplier Vendor Relationships

So tips for success in these types of relationships. So like I mentioned, you do want to on relationships between buyer and supplier with a very high volume of parts to quote, we’re talking about improving profitability by reducing… One of the ways is by reducing the quote time, you’re also getting consistent margin, but reducing the time and the resources spent to quote, so you’re gonna get the biggest bang for your buck if you work on relationships where you’ve got a lot of quoting happening. Definitely do visit the supplier factory to see where the parts are made and that will help inform when you’re trying to translate the real factory into the digital factory.

I mentioned that update cadences are very important, so meet quarterly to review the performance of the digital factory, are there new types of parts that you’re designing that are gonna need to be adjusted? Maybe the supplier has found some difficult to manufacture features that we weren’t originally screening for, that they wanna build a screen for, so regular updates are critical. And then agree together on a strategy for changes to inputs, so changes to rate, like labor rates or material rates, changes to DFM screen, like I mentioned, so you wanna agree on a strategy when you need to make changes. Don’t try to automate quoting of a 100% of part type. So I just talked about this on the last slide. I think one of our customers says: Don’t let Great be the enemy of good. If you are in a buyers-suppliers relationship where you’ve got a very high volume of quoting, try and find the stuff that you can put through a process like this, where the digital factory is giving the results that you would expect, and start the process with that stuff and then work on expanding the coverage to other commodities.

And then this isn’t important one, especially if there are suppliers in the room, buyers have to understand that they can’t expect a flat 5% cost reduction year over year, because what you’re doing now is you’re doing a bottoms-up model where you’re coming up with the true cost to manufacture all these parts, and then you’re adding in agreed upon margin and labor rate. So while you still can put into a contract like a continuous improvement clause, that year over year, we would expect reductions in cycle time, you can’t be expecting a reduction in margin percent or a magic reduction in labor rate, so you’ve got to… There’s not gonna be a blank 5% every year, but there can be continuous improvements on cycle time, so that… Remember we’re doing a bottoms-up, we’re coming up with the machines and the cycle time to make a part, and then we’re applying the rates and the margin. So buyers and suppliers, if they wanna get their year over year reduction, they’re gonna have to come up with ways to reduce the cycle times, to reduce the cost to make the part, and then apply that same margin and labor to it.

Reducing Quoting Time with Digital Factories

Okay, so let’s look at one other example, because some of the examples that I’ve talked about involved buyer and supplier collaborating closely, supplier maybe sharing specific machines that they have, providing a lot of information into coming into building out the digital representation of the manufacturing process. But we’ve got other examples from other customers, they’re able to use the digital manufacturing environment to reduce quoting time, even when it’s not necessarily supplier-specific, but you can still as both buyer and supplier get benefits.

So let me walk through an example. One of our customers, they vetted the digital factory, they did some operations in-house and they had a lot of subject matter experts in-house about various processes. So they were able to analyze a set of parts in aPriori, and do their own tweaking to the digital factory. What machines do we see that are typically available, what are the typical manufacturing capabilities, and they were able to do their own identification of what part sets it’s gonna be a good fit for. So they didn’t get information from a specific supplier, but they use their general knowledge of the supply base, to tweak the digital factory to make what I’ll call a digital factory that was generally representative of the supply base. So then when they would have parts to quote, they would run those parts through this general representative digital factory, and they would send to their key strategic suppliers, here is the part we need quoted, here’s how much we think it will cost from aPriori, here’s the routing details, the cost estimates, and they would ask the suppliers to basically accept or reject the quote.

So they were using this general digital factory that they had done their own vetting up and felt that it was a fair representation of what their suppliers can achieve. And when they would send that data to key suppliers with parts that they were asking them to quote, and then the supplier could accept or reject the quote. So the suppliers were getting reasonable target cost, with all of the routing details of how the customer thought the part would be made, the labor rates they were assuming, the overhead rates they were assuming, the margin percent they’re assuming. And the supplier is in a position to accept or reject that. So they were able to really reduce negotiation time even by just using a general representative digital factory and not a supplier-specific one, so both buyers and suppliers got a quicker RFQ turnaround time, and suppliers were able to get more consistent business ’cause they could accept or reject it.

So buyers and suppliers together can improve profitability, even if you don’t necessarily have a digital factory that is an exact representation of the supplier’s operations, you can come up with something that’s a general representation, that’s good fit for certain part sets and still get the benefits of reducing quoting time because the buyers are generating a reasonable target costs and not asking for things that are not possible. Hope that you’ve seen the way that collaborating with a digital factory can help both buyers and suppliers, OEMS and suppliers achieve their goals of fair prices, reduce risk, predictable profitability. Thank you for your attention and have a good rest of the day.