Evaluating single-supplier sourcing

This article is part of an ongoing series. The introduction appeared in Machinery & Equipment MRO’s February 2005 issue and the series has run in every issue since. Previous instalments are archived online at www.mromagazine.com. This month, we pick up where we left off in the April 2011 edition, as maintenance manager Bob Edwards examines the mill’s supplier relationships.

We had developed a decision tree for the off-shifts to call in help if needed, and we had created a large whiteboard that showed a list of jobs that could be done in two, four or seven hours — The 24/7 Board.

John, our vibration consultant, was now discussing his reports with millwrights Pete and Ivan, and we had gone as far as enrolling both of them in vibration analysis training, with a view to have them to take over John’s role.

Next on my list was the reduction in inventory, but this was taking a while to make a reality. We had reduced our motor inventory and by reviewing our Automatic Purchase Generator, had been able to adjust our max and min stock levels based on usage of a number of items, but it was a slow process. I needed to speed things up, so I asked Carol, our reliability manager, if she could pull a report of usage by item category so I’d know where to focus.

When she came into my office with the report, she seemed upbeat.

“There’s nothing revolutionary here, Bob, given our equipment profile. We use bearings, seals, couplings and valves the most, so that’s pretty good.”

“OK, what do you mean by ‘pretty good’?”

“Well, they are really generic spares, as opposed to being OEM- or supplier-specific. That means we can shop around. In fact, I had a call last week from a supplier who wants to talk about a single-supplier agreement. He’s coming in this afternoon. Would you like to meet him?”

“I’m not too sure about this single-supplier deal, Carol. Won’t they have us over a barrel?”

“The fact of the matter is, we buy most things from them now, as they’ve given us great service, and there were only a couple of times I noticed their prices were higher than I could get elsewhere. We just don’t leverage our buying power. That’s what I’m hoping for this afternoon.”

“Give me a call when he arrives.”

I took a look at the usage report that Carol had left and found that even though the highest usage was in the ‘consumables’ area, the highest value was in the one-off OEM spares that we were never going to get rid of. I wondered what we could ever do about these and then a light went on in my head; we’d do whatever they did in at the mill we’d visited in Wisconsin.

I swear I could see Alan, the maintenance manager in Wisconsin, smiling down the phone as I explained our challenge.

“Ah, you really are making progress, Bob. It took us a while before we figured out this was a problem. Initially, we manually removed the OEM spares from our inventory turn calculations and just noted that we weren’t counting them because they were there based on consequence and lead time, and that we hoped they would be used.

“Then, we talked with some people who were in the inventory field and they suggested that we could actually set up a category in our CMMS for this type of item — they called them Insurance Spares. They said that even though this didn’t really change what we had in inventory, they should be discounted from all of the calculations, as there was no real option other than to keep them.

“We started to produce two sets of inventory reports — one with and one without Insurance inventory — though we were only measured against the ‘without’ numbers. Our latest move on this is to have these items classed as assets. Our finance department says they believe we can do that, even though we don’t depreciate them but get charged the full amount if they ever get used. This cleaned things up, but didn’t really change anything for us, as we’ve pretty much ignored these parts since we validated that those things we were calling Insurance Spares were, in fact, just that.”

“Thanks, Alan. That’s great advice, as usual. And yes we have been making progress.” I went on to tell him about what we had been doing in recent weeks.

“Hey, that 24/7 board seems like a good idea — maybe we’ll steal it from you.

“There’s one other thing we are doing with inventory that may interest you,” Alan added. “We’ve just signed a consignment agreement with our local supplier. They will put bearings, seals and so on onto our shelves, but won’t charge us for them until we use them. They have access to our purchase history, so they have set up the max and min levels based on that. They have a lot of parts in stock, so they just replenish ours when we get down to one. They do a weekly run to check and restock, but we can call them if we have an emergency and they’ll bring something over right away.”

“Hmm, that’s interesting. I might use that today when our supplier comes in to talk about a single-supplier deal. What you think about those?”

“We have them and they work fine. You just need to have a periodic review on any price increases. With our new agreement, we feel we have saved the company significant money. The inventory guys we talked with about Insurance Spares said the ball-park figure for maintaining inventory is 20% to 25% of the cost of the spares, including labour damage, obsolescence room, etc.”

“You’ve certainly given me something to think about, Alan. Talk to you again.”

I left a voice mail for Monte, our vice-president of finance, telling him about the Insurance Spares and assets, since I knew that any decision on this would be made at his level. As soon as I put the phone down, I realized I should have talked first with Joe, our plant manager, so I called him right away and explained it all one more time. I can’t tell you how relieved I was when he said it would be okay for me to get in touch with Monte!

I didn’t have a chance to talk with Carol before she called to let me know that Trevor, the sales rep from our local industrial distributor, had arrived, so I headed up to Carol’s office.

Trevor led us through his presentation on how, as a single supplier, his company could meet our needs on a wide range of items. He showed us those items that he had supplied to us in the past, and then those he also could supply to us.

When Carol and Trevor started to talk about the level of savings we could realize, I interrupted. “That was a good presentation, Trevor, but I’m looking for something a bit more beneficial for us.”

“Well, Bob, those discounts are really the best we can do.”

“I’m not looking for a bigger discount, Trevor, although if you have one, we’ll take it. What I’m looking for is a supplier who will truly partner with us.”

Trevor looked confused and Carol’s jaw dropped.

“I’m looking for someone who is prepared to work with us on a consignment basis — that’s where I see the value.”

Carol shook her head but said nothing. Trevor thought for a moment.

“Of course I can’t agree to that today, but I can agree to look at it with the rest of the team back at the office.”

“Hmm, I’m not sure you need to discuss much, as you’ve got all the numbers in your presentation. You just have to decide if the single-supplier agreement is worth it. You know that we’ve purchased the major roll bearings direct from the manufacturer until now. Well, I’d be prepared to include them in this deal — they’re worth around $40,000 each. I want to move very quickly on this, so go back and talk with whomever you need to, and let me know an answer by tomorrow.”

“I’m not sure that’s possible, Bob. We have to look at ho
w we’d set it up and what we’d do with the stock that’s already here.”

“The set-up we can do after we’ve agreed on the deal, and as for current stock, if we bought it from you, we’d expect a credit. If not, we’d start that as soon as we used one.”

After Trevor left, Carol got angry at first, but then got excited about what we were trying to do.

“You could have let me know that was coming! Where did you get the idea from?”

“Sorry. I talked with Alan in Wisconsin just before I came up here so I didn’t have time to tell you. That’s where the ideas came from — well except for the credit on the current stock; that came right off the top of my head.”

It had been another productive day. Later, as I told my wife about what had happened, she gave me a frown.

“A few weeks ago, you surprised Joe in a meeting with Corporate, then you surprised Fred in a meeting with Joe, and now this. I realize that you want to make progress and there’s nothing really wrong with what you do, but I think you need to do one more thing. Explain to everyone that this is what you’ll do, not because you don’t value their opinion or you don’t want to involve them. It’s just that you’ve been given goals, and in trying to meet them, this kind of thing is likely to happen.

“Remember what you said when you talked about giving the shift guys authority to call someone in? The only crime is not making a decision. I’m sure everyone will understand that.” MRO

Cliff Williams is the corporate maintenance manager at Erco Worldwide in Toronto, ON, and a consultant with TMS — Total Maintenance Solutions Inc., Markham, ON. He can be reached by e-mail at williamscliff@rogers.com.

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