Let’s face it: supply chain disruption is now an everyday fact of life for manufacturing companies around the world. With recent events in the Ukraine and China, the massive wave of uncertainty and chaos surrounding COVID-19 isn’t isolated to the rare pandemic. Sociopolitical frictions, war, disease, acute weather events, and millions of other small and global events can quickly disrupt supply chains and impede procurement.
So how can supply chain leaders adjust? As lean manufacturing models bare the full weight of procurement headaches, savvy OEMs are changing their negotiation strategies and implementing best-in-class technologies. The result? A better understanding of supplier inventory, status, and capabilities and less dependence on fragile supply chain relationships.
Price and supply fluctuations are a threat OEMs can’t ignore
Many suppliers are increasing their prices because their own costs have gone up. In an article published in Industry Week, Eamon McKinney highlights how vulnerable OEMs are to such increases.
U.S. manufacturers have little leverage to resist these price increases since there is a worldwide shortage of commodities and parts, and … as a result, it will take significant time for current U.S.-based manufacturing customers to re-source to other suppliers.
Although McKinney was referring specifically to suppliers in China, his observation applies across the global supply chain.
And it’s not only prices that manufacturers must be concerned about. Even if an OEM manages to get (or force) its suppliers to hold the line on prices, it will do little good if needed parts simply aren’t available. If a company is blindsided by stock-out conditions it didn’t see coming, it may suddenly find, as automotive manufacturers recently did, that it has no option other than shutting down its production lines.
How can companies like yours protect themselves in this environment? Jim O’Donnell, writing at TechTarget, offers a simple assessment of what it will take:
Organizations will need to develop supply chain strategies that provide more resiliency and flexibility to adapt to such changes. (Emphasis added).
But what does that really mean in practice?
The danger of relying on annual supply chain negotiations alone
The key to building a procurement strategy marked by resiliency and flexibility is having insight into what’s going on across your supply chain, and being able to respond quickly and effectively. For manufacturers still employing traditional approaches to procurement, that can be difficult.
In the past, many OEMs left component negotiations entirely to their contract manufacturers, or CMs. Others would negotiate component prices with Tier 2 suppliers when they first released a product, but then revisit those negotiations as infrequently as once a year, once every two years, or in some cases, never. Although some larger OEMs conduct negotiations more frequently, the annual negotiation cycle has historically been standard practice for most manufacturers.
But now, with the supply chain in a continual state of flux, annual negotiations simply aren’t frequent enough to enable the resiliency and flexibility needed for survival in today’s chaotic environment.
Some years ago, when the supply chain was more stable than it is today, Mike Petro, then Senior Category Manager for Metals at Arriba, declared:
“The days of holding annual negotiations to set fixed price direct material contracts are over.”
If that was true then, it’s doubly so today. In the unstable and fast-changing conditions OEMs now face, companies that rely on annual negotiations alone make themselves vulnerable to losing control of their costs, their production schedules, and ultimately, their bottom lines.
OEMs should shoot for at least quarterly supply chain negotiations
When sourcing negotiations happen on an annual or even less frequent basis, it becomes very difficult for manufacturers to quickly pick up on PPV (Purchase Price Variance—the difference between the component prices they budgeted for and what they are actually paying). Ideally, an OEM would want to be able to identify and respond to any PPV issues in near real-time. And of course, it’s vital to be aware of any threats to the availability of critical parts as soon as they occur.
But is such an instant response really possible? There are, for most OEMs, practical limits on how quickly they can ready themselves to handle a new negotiation cycle.
For example, a prerequisite for determining parts pricing and availability for a finished product is having an updated sales forecast so that the component quantities required by the item’s BOM can be determined. Typically, updating the forecast and providing it to CMs takes about a month. CMs might then require at least another month to refresh their own internal data.
Put all that together, and a timeframe of two to three months for reevaluating component pricing and availability seems reasonable.
So, an OEM that wants to stay on top of conditions in its supply chain might aim for a quarterly supply chain negotiation schedule. And that, in fact, is exactly what many best-in-class OEMs are doing.
What it takes to implement quarterly supply chain negotiations
In Jim O’Donnell’s TechTarget article, Simon Ellis, Program Vice President at IDC, lists factors required for supply chain resilience:
- You have to see what’s happening.
- You must have the analytics capabilities to make those insights actionable.
- You must be able to do something about it.
What hinders most companies from adopting a more frequent negotiation cycle is that they are woefully lacking in all three of these necessities: they don’t have enough visibility into their supply chains to see what’s happening; they don’t have adequate analytic capabilities; and without the data and the analytics, there’s little they can do.
The problem is that more than two-thirds of manufacturers (67.4%) still depend on spreadsheets and emails to gather and analyze data from their supply chain. And in today’s environment, that basically manual process is wildly inadequate.
Take, for example, a large OEM like Emerson Electric, a Part Analytics client that has multiple business units buying parts from a large number of suppliers.
For Emerson to conduct quarterly supply chain negotiations across its product line, its CMs must gather data from suppliers to establish or validate BOM component costs. But each of those suppliers uses its own templates and formatting for the data files it provides, and each of those files might have tens of thousands of line items. Trying to rationalize and analyze that sea of disparate information every quarter using spreadsheets would be a complex and time-consuming task.
That’s why, if a company wants to adopt a more frequent, comprehensive, and detailed supply chain negotiation posture, digital transformation in its procurement processes is an absolute necessity.
The impact of procurement digitization
The only practical way to handle the mountain of information required for gaining visibility into a complex supply chain is to use a sophisticated data-gathering and analysis tool like the one supplied by Part Analytics.
Part Analytics is an AI-based end-to-end sourcing and supply management platform that automates the procurement and supplier negotiation processes. A good example of the potential of such a solution is the effect Part Analytics has had on the Emerson Electric negotiation process. When Emerson was still using spreadsheets to consolidate and analyze its supplier data, that process required approximately 720 hours per quarter. Since the Part Analytics solution replaced the spreadsheets, the process is normally completed in about 10 hours. Here is Emerson’s evaluation of how that automation impacted their procurement operations:
“Implementation of the Part Analytics platform has driven an efficiency gain of approximately 90 percent in our Quarterly Pricing Process by automating our manual process.”
—Eric Bremer, Emerson’s Director of Electronics and Electrical Products, Corporate Supply Chain
Digitization in procurement has already proved its value by enabling many leading OEMs to reach a new level of effectiveness in their annual and quarterly supply chain negotiations processes. As this era of increased supply chain volatility trends toward becoming the new normal, the companies that most quickly incorporate these new technologies into their procurement processes will enjoy a significant competitive advantage.
