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NAI TECHNICAL REPORT |
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Management Topic: Lean Vendor Relationships
Lean means different things to different companies. To some, it means reducing inventory on the production floor; to others, it means getting by with fewer employees. To NAI, it is an operating philosophy centered on reducing costs by improving reliability and increasing speed across all processes and departments in the Company. In the Sales Department, it translates to a more complete, organized and timely information-gathering process so that orders are processed more quickly. In the Engineering Department, it translates to faster throughput of jobs because the engineers don’t start a project until they are sure they can complete it. And on the production floor, it translates to more available floor space, more reliable customer promise dates, faster throughput, more complete shipments and better product quality. NAI’s most recent Lean activities have been focused largely on its supply chain. To understand why, it is important to explain the role that the supply chain plays in its NAI’s Lean environment. As part of its Lean operating philosophy, NAI wants to produce cranes as close to the need date as possible. By doing so, it avoids the need for extra floor space for raw materials and finished goods storage, extra people to manage the inventory and extra working capital to finance the extra floor space, inventory and people. At the same time, it is critical to NAI that promise dates to customers are met, so late materials arrivals are not acceptable. Therefore, reliability is a critical factor in the performance of NAI’s supply chain. It allows jobs to move through the process with greater speed. Another element of NAI’s supply chain performance is quality. If defective materials arrive at NAI, it will shut a production line down because NAI does not carry spare inventory and it does not take delivery of materials before they are needed. Therefore, the reliability of materials quality is a critical factor in NAI’s vendor performance. NAI’s Lean supply chain initiative has centered on evaluating vendors and, in some cases, changing vendors, so as to optimize speed and reliability while maintaining very high levels of quality. For each materials category, an NAI team has gone through a methodical process of 1. Rationalizing the number of SKUs required; 2. Evaluating current and prospective vendors based on quality processes, willingness to stock materials, redundancy/backup capabilities, willingness/ability to provide frequent and reliable delivery service, track record with existing customers, technical support capabilities and financial stability; and, 3. Aggressive negotiating of agreements to ensure that both NAI and the vendor are committed to maintaining strict, high standards of performance. The reader may have noted that negotiating lower prices with vendors was not mentioned as a key priority. NAI’s Lean philosophy holds that more costs can be cut by improving reliability and increasing speed than by negotiating lower prices. That is because companies tend to waste more money through excess inventories, excess payroll, excess rent and excess rework than they do by paying a few extra pennies per material unit. NAI has found this to be true. However, NAI has been able to negotiate lower unit pricing by reducing the number of SKUs required for each materials category, thereby increasing the number of units per SKU, and by concentrating its procurement with a smaller number of high-performing vendors. So although it is not the main focus of its supply chain efforts, it is an important benefit that has allowed NAI to maintain very competitive pricing. The results have been impressive. In numerous categories, NAI has reduced the number of SKU’s it purchases by over 50%, cut the unit price, shortened lead times and reduced inventory while maintaining or improving quality. This is just a step – albeit an important one – in NAI’s process of implementing a Lean culture. It will allow further improvements in lead times, competitive pricing and product quality which will benefit all of NAI’s customers. |
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Second Quarter 2010 |