Monitoring supplier health key to automotive parts maker
Takata Corp. outlines supplier risk management strategies
By William Atkinson -- Purchasing, 6/18/2009 2:00:00 AM
While it has always been important for procurement executives to remain vigilant about monitoring the financial health and viability of key suppliers, it is obviously critical in the current economic times. And perhaps no industry is under as much supply chain pressure as the automotive industry right now.
And that's why Takata Corp., an Auburn Hills, Mich.-based auto parts supplier with $1.5 billion in sales, is taking no chances when it comes to supplier monitoring. Takata, which has about 360 direct material suppliers, was already practicing some supplier risk management prior to the current recession, according to Frederick Heegan, vice president of purchasing.
"However, these days, [the automotive industry is] in a 'perfect storm' with production down, raw material prices up, credit tight and increasing global competition," he says. "With all that in mind, we at Takata realized we needed to have a really keen sense of the financial health of our suppliers."
There are several ways to assess supplier financial strength. In the past, it might have been common to use some of them on an occasional basis or during annual supplier reviews. These days, it is virtually required that procurement executives use all of them, and much more frequently than they ever did in the past.
The first step is to obtain financial information from suppliers. Since a lot of suppliers are not publicly-traded companies, they may hold their financial information close to the vest, especially if they have something they don't want buyers to know, Heegan points out. As a way to get around this reticence, Takata began asking its suppliers to submit their financial data to a third-party—Plante & Moran, a regional accounting and consulting group.
In turn, Plante & Moran would agree not to share all of the details of the financial statements, balance sheets, cash flow information with Takata. Rather, they would provide Takata with a scorecard for each supplier, based on the ratios. When Takata first asked suppliers to submit their financials to Plante & Moran, there was some reluctance, even with the guarantee of Takata only seeing a final score. As a result, Heegan's department held follow-ups with the suppliers to explain the importance of this and that new business awards would be contingent on their submitting the data. When Plante & Moran received the financial information, they created a ranking for all of the suppliers, which helped Takata identify those that might be in trouble or might be headed for trouble.
While a supplier's financial information is vital, it is not always sufficient to get a full picture of a supplier's health. For this reason, Takata uses a number of additional strategies to not only confirm the supplier's health, but to get additional information that the financials might not always show.
1. Make a visit
Supplier visits can be a double-edged sword. On one side, the most important time to do this is during tough economic times, because this is when suppliers may be the most vulnerable. On the other, supplier visits cost money, and in lean times, it can be difficult for a customer to free up the cash for such visits. "Our current budget allows us to make visits, but we choose carefully who we visit," Heegan says.
Takata addresses this challenge by applying a number of filters to select the suppliers that really require visits. In addition to Plante & Moran's rankings, the first filter is that not all of the company's 360 suppliers are key suppliers. "For suppliers providing a bulk raw material or other commodity, there is usually no reason for a visit," Heegan says. "If those suppliers filed Chapter 11, it would be very easy for us to switch that business." Takata instead focuses its visits on suppliers that have bundled processes (such as stamping, welding, plating, etc.) and that provide a lot of value-add to the company.
Also, since all of Takata's manufacturing plants are in Mexico, the company has a purchasing group in Monterrey, which covers its Mexico and south Texas suppliers. As a result, Heegan's team typically doesn't have to plan visits from Michigan all the way to Mexico. Lastly, rather than send two or three people for visits, the company might only need to send one.
2. Look internally
Another key strategy in evaluating a supplier's health is to talk with the company's own employees who have direct or even indirect contact with suppliers. "We are not a large company, so we don't need overly sophisticated systems to collect this information," he says. For example, Heegan asks for monthly feedback from the supplier quality group.
Salespeople can also be a useful source of information about suppliers. While salespeople may not call on suppliers, they may run into other salespeople who do. As a result, they can be a "fountain of information."
Heegan also talks with his company's accounts payable manager to gain insight into how suppliers are reacting to payments. For example, recently she told him about one supplier that, for the last three months, had been showing up to Takata's offices to pick up its checks, and then deposited them immediately in its bank. "This isn't necessarily a red flag, but it is something to keep an eye on," Heegan says.
The company's tooling engineers are also great resources for supplier information. "They call around to the supplier tooling shops, and the employees in those shops know exactly what is going on in their companies and often share it with our tooling engineers," he explains.
3. Get their metrics
Another useful strategy is to study suppliers' internal supply chain metrics, paying particular attention to their delivery and quality data, which don't show up on a financial run-down. "We have a monthly supplier scorecard where we look at delivery and quality trends," states Heegan. "If we see that any of the trends are headed in wrong direction, this is another flag that we need to investigate."
Once Takata identifies a supplier that seems to be struggling, it takes two steps. The first is to create a potential exit strategy, should that need ever arise. The second is to reach out to the supplier to offer assistance, as a way of reducing the need to implement the exit strategy.
Developing an exit strategy is never easy, but usually most successful when done early. Takata's comprehensive "red flag" process has helped it identify problems early. "The Plante & Moran scorecards showed us a handful of suppliers that popped up in the 'red' category, meaning a high likelihood of them going Chapter 11 in the next 12–24 months," he notes. "Based on the products they supply, we have been able to put strategies in place that include detailed written contingency plans. We have also had meetings with the suppliers to determine why they 'popped up red' on the survey."
Reaching out to suppliers is typically a good idea, as suppliers are usually quite open to this kind of help, according to Heegan. Takata uses the Honda model for this, which is Heegan's former employer. "They have a supplier development group and supplier development process," he explains. "Since Honda is also one of our largest customers, we brought our group up from Monterrey, and Honda provided us with training in supplier development."
This has allowed Takata to provide assistance to some of its targeted suppliers. This involves the Plan-Do-Check-Act model. "We identify the gaps, follow up, put measures in place with the suppliers, and then check on progress related to quality, delivery, and/or overhead," he states. There is no charge to suppliers for this assistance. The purpose is to keep them strong.
"For example, we had a supplier in Mexico that utilized a four-person work cell," recalls Heegan. "With our help, they were able to eliminate an operator from the cell." The supplier expanded this efficiency concept to their other cells that served their other customers. "The overall result is that they have become a much healthier supplier," he says. In addition, they have been able to reduce their costs. And a final benefit: "If a supplier like this ever gets in trouble, who are they going to remember to help?"
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