As supply chain leaders, we often spend a lot of time focusing on downstream optimization efforts to reduce cost, time, and risk. Strategic initiatives like spend analyses, e-sourcing exercises, and supply chain visibility of our supply bases are often high ROI activities. The theory is that the decisions on the front end of a supply chain make the greatest impact on cost, so why are we still focusing on reactive decisions instead of proactive ones?
Does our focus on Tier Is result in smaller cost reduction results? Many Tier I producers of large complex modules buy 50 to 80 percent of their cost of goods sold from Tier II suppliers, who in turn can source just as high of a percentage of their cost of goods sold to Tier IIIs. Thus, we likely don’t have visibility or the ability to focus on 25 to 40 percent of our product cost that’s controlled by Tier IIIs.
There’s an opportunity for us as supply chain professionals to unlock greater cost savings by gaining visibility of our sub-tier supply base – Tier III supplies and beyond. The ROI from sub-tier supplier visibility can far exceed proven traditional front-end supply chain initiative results.
How to Unlock Cost Savings by Mapping Sub-Tier Suppliers
Customer Certification Requirements are Changing the Landscape
“To date, the concepts ‘sub tier management’, ‘supply base visibility,’ and ‘supply chain risk management’ have traditionally focused more on ‘nice to have’ academic theory lacking practical industry adoption due to costs of implementation, lack of clear return on investment, and a host of additional challenges,” says Sime Curkovic, Valluzzo & Lee Honors College Faculty Fellow, and Professor of Supply Chain Management, at Western Michigan University.
The landscape is shifting rapidly of late with OEMs now requiring visibility of sub-tier suppliers through industry certifications, i.e., IATF 16949, an automotive standard. Industries, from defense, to medical device, to consumer products are also now requiring visibility through end source raw materials, via RoSH and ITAR standards, for a host of reasons from environmental impact, to labor rights, to marketing, to national security.
Why This Matters
Forward thinking supply chain executives are moving beyond customer or certification audit compliance, using “end-to-end supply chain visibility” as a weapon to reduce product launch and ongoing supply chain management cost, time, and risk. The following are some of the top cost reduction optimization areas to focus on:
- Non-Value-Add Cost Reductions
- Gaining Tier II+ supplier visibility to reduce waste in the supply chain is arguably the greatest unexplored cost optimization frontier for supply chain professionals today, offering an exponential ROI.
- Lead Time
- Similar to the reduced lead time, inbound logistics costs, and inventory results that’ve been realized by including your Tier Is as part of your lean extended enterprise, multiple ROIs are possible by involving your Tier IIs, IIIs, and IVs, due to the substantial value add concentrated at many sub tiers.
- Supply Risk
- Ongoing supply chain disruption risk reduction can prevent costly downtime. New product launches offer further potential with the idea of “launching new products the right way, every time” to avoid issues later on.
- Customer/Industry/Audit Compliance
- Knowing your Tier II+ suppliers is now a requirement in several industries; however, OEMs and accounting auditors have been overlooking compliance due to the practicality and time it takes for suppliers to become compliant. This practice has rapidly shifted with recent advancements in sub-tier supplier mapping software capabilities.
Most research, thought leaders, consultants, and industry professionals have focused on supply chain risk, which is important, but the pain proves difficult to “sell” internally for project approval. Focus on the cost reduction ROI potential to expedite team buy in and to earn CEO approval for supply base mapping.
Where to Generate the Most Cost Savings
In many cases, you choose Tier IIs during strategic sourcing initiatives because they stood out after thorough analysis of cost, service, technical expertise, and manufacturing capabilities. Tier IIIs, on the other hand, generally have fewer capabilities, people, and resources. This isn’t a critique on these organizations, but by default they tend to have less of a strategic sourcing focus for their spend, which represents substantial missed cost avoidance and reduction opportunities.
Below are several of the top cost reduction areas to focus on with your Tier IIs and IIIs, but let the data you acquire through sub-tier supplier mapping guide you, as starting with a bias will cloud your results. Analyze your sub-tier supplier Plan for Every Part (PFEP) data thoroughly, then identify and rank opportunities by cost impact, difficultly, and timing to prioritize the quickest-win, lowest-risk results.
- Cost Reduction Through Tier II+ Supplier Development
- The information, best practices, and relationships you and your team have at your disposal could make a significant short-term cost savings impact at Tier IIIs. Recommend areas Tier III suppliers can improve, alternative lower-cost suppliers, and how to implement cost savings.
- Raw Material/Component Buying Leverage
- The buy that your organization controls as a Tier I will likely dwarf Tier IIs and IIIs, so pooling together common raw material, component, and services can generate savings. Once sources are determined, assume a lead or advisor negotiation role to help Tiers realize cost savings.
- Logistics Route Optimization
- Mapping your supply base network at the part level will be eye opening in many cases and will point out inefficiencies. Specifically, less truckload and backhaul opportunities for part processing lend themselves to quick cost reductions.
- Sourcing Value-Add Realignment
- Many Tier II and III manufacturers have grown through company acquisitions or business transfers. As such, a thorough review of your supplier’s suppliers should highlight suboptimal purchases and allow you to recommend adjustments to consolidate value-add-reducing secondary processing costs.
- Supply Base Pinch Point Reduction
- Diversify sole source and “node” suppliers to reduce supply risk, which can be costly if supply disruption occurs. As Rich Weissman, Supply Chain Professor at Endicott College points out in the SupplyChainDrive article Tiers, Not Tears: Avoiding Surprises in the Downstream Supply Chain, “Working with critical suppliers to map out their co-dependent supply chains and determine areas of risk is both a risk-mitigation strategy and a relationship building exercise.”
Notice how none of the above optimization areas require suppliers to give up profits? In fact, the opposite is happening: you’re improving their competitiveness, which can help them grow with you and other customers. Highlight these benefits in your executive communication to suppliers to gain quicker supply base support.
Ok, so you decided to map your Tier II+ suppliers. Below is a top-10 list of supply chain visibility challenges that organizations face when initially mapping their supply bases. The good news is that all of these are addressable by acknowledging and planning for them at the onset:
- Supply Disruption (Risk)
- Time Delays
- Cost (people intense effort to map supply base)
- CEO Buy-in to Support Project
- What Information to Track
- Home for the Data
- Customer / Certification / Audit Compliance Requirement
- Accuracy / Format of Data (electronic/PDF/paper)
- Supplier Willingness to Share Their Suppliers
- Ongoing Management of Data
Options to Map Your Supply Base
Heads of supply chain at Tier Is have options to map their supply bases, ranging from in house to outsourced. Five options include:
- Internal Resources
- Consulting Firms
- Software Firms
- Business Process Outsourcing (BPO) firms
- Hybrid Approach
BPOs have likely invested in hardware technologies – i.e., paper scanners and supporting data processes – that can quickly digitize 1,000s of records. These investments can be substantial, upwards of $50K to $500K. Thus, if you have a large supply base (100+ Tier Is), deeply consider this investment, as it could influence your “make vs. buy” decision toward the “buy” side.
What to Track
What data you track by Tier will depend on your specific business, industry, and the method you employ to map your sub-tier supply base. It’s important to define ideal data inputs most critical to new program launches and ongoing supply chain management success with your cross-functional team in the beginning.
Mapping the 15 data points below facilitates future cost reductions:
- Part Number
- Part Description
- Supplier Name
- Supplier Plant Address
- Manufacturing Process
- Quantity Per Build
- Piece Price
- Inbound Logistics Costs
- Lead Time
- Planned Maximum Inventory Units
- Shipment Size
- Standard Pack
There are additional data inputs that can add value and lead to greater insights and cost reductions. When rolling out a strategic initiative as complex as Sub-Tier Supplier Mapping though, start small with 10 to 15 and map your complete supply base first. Then, as cost reduction opportunities present themselves through the data, focus on partnering with your Tier II and III suppliers to gain additional data inputs and subsequent visibility. The result will be a mapping of the sub-tier data that matters most and generates the highest ROI.
Supply chain disruption risk is important; however, it’s the cost reduction opportunities in front of us that are possible through visibility and partnering with our sub-tier supply base. The biggest cost reduction rewards will go to those supply chain leaders who move beyond industry certification requirements and partner with their sub-tier suppliers to develop and improve their operations.