Rising steel prices are being felt. At the most recent Global Supply Alliance (GSA) meeting, supplier members reported seeing price increases of 6-7% on steel products and 10-15% on stainless. Of course, this was expected in light of China’s aggressive pursuit to slash 150 million tons of steel production by 2020 (~20% of its 2015 production levels). If there was any doubt about China’s commitment, in 2016 China cut 20 million tons of steel production more than its goal for the year.
For 2017 China plans to slash an additional 50 million tons of steel capacity, with reassurance that “strengthened efforts in cutting overcapacity will continue in 2018.” In line with China’s supply-side reforms Chinese demand for steel is expected to remain roughly the same or mildly increase.
While it can seem counter-intuitive, one of the most powerful ways to mitigate the effects of rising prices is establishing a pre-emptive strategic collaborative partnership with your vendors. In fact, a study on MRO purchasing conducted by 3M and Purchasing Magazine identified “collaboration with suppliers” as “one of the four best practices that separate the best purchasing organizations from the rest.”
What does such a collaborative vendor “partnership” look like?
A vendor partnership is a vendor relationship where your vendor collaborates with you to help protect and improve the supply chain and reduce the total cost of ownership for all it’s members.
This month’s Fab Fours case study showcases one of our own vendor partnerships. In the case study Mary Bruce, VP of Operations refers to Falcon Fastening as “an extension of our brand.”
The first step to protecting a supply chain against incidents is defining its threats. While there’s no shortage of articles, forecasts, and industry “leaders” available to help you generate an exhausting list of threats, vendor input . is invaluable. A preemptive strategy is to establish a regular open communication with your suppliers about industry outlooks, forecasts and areas of concern such as competitive or regulatory pressures.
Open communication is key to identifying risks. At a minimum, having open discussions with your vendors is a great way to determine which of your vendors are doing their due-diligence in identifying potential risks and mitigating their effects and which vendor relationships are threats themselves.
Once you have your list of potential threats, in our case, rising steel prices, it’s time for step 2: develop contingency plans. Here is were open communications with vendor-partners can really pay off. Simply discussing the rationale behind component specifications can sometimes help vendors uncover opportunities for savings far greater than forecasted price increases. We’ve helped many clients do exactly that simply by suggesting changes to the components’ manufacturing process, plating, or secondary processes.
For example, sharing with your supplier the rationale behind the decision to make a component out of stainless steel was solely to protect against corrosion, might lead you to the discovery that a less costly quality steel component with a high-corrosion resistant coating can be used instead. Sometimes, something as simple a eliminating one or two threads on a special component allows a far less expensive standard component to work just as well in the special’s place.
These are just two scenarios where, depending on the component, a very simple, and easily overlooked small change could significantly reduce the aggregate component cost far more than any increases in raw material costs.
It’s important to note that while these types of valuable discoveries are far from guaranteed, they also aren’t anomalies.
One study published in the The Harvard Business Review found that “the most innovative companies innovate at 10 times the rate of the average company, and 60% of their innovative ideas come from suppliers.” In other words, supply-side driven innovation is the rule not the exception. Those manufacturers failing to develop collaborative partnerships with their vendors are also failing to capture the value-added innovations that go hand-in-hand with those partnerships.
If you’re interested in mitigating the impact of forecasted price increases or supply chain incidentals or you’re just interested in discovering how to make your production process leaner [ACTION] today for a complementary line or product review.
Roth, J. (2008). The 20% Solution, Bloomington, IN: AuthorHouse