Facing a prolonged industry downturn and supplier instability, Goodrich Corporation's Aerostructures division proactively adopted a predictive supplier risk management strategy
[From Supply & Demand Chain Executive, August/September 2006] Flash back to the early years of the new millennium. Unhappy times for the aerospace industry, then going through one of its worst downturns ever. Air travel was down, costs were up and airlines were in dire straits. Meanwhile, the major aircraft OEMs and assembly manufacturers were getting hit from both sides of the supply and demand chain, with customers struggling against a tide of red ink and a supply base facing an uncertain future.
For the supply management team at Goodrich Corporation's Aerostructures division, the industry's prolonged, severe slump in the early 2000s raised the prospect that some of the company's key suppliers might not survive, according to Steve Carter, director of strategic sourcing for the Chula Vista, Calif.-based manufacturer. "A lot of suppliers were pretty stressed-out financially," Carter recalls, "and a number of suppliers were having problems that they hadn't traditionally faced, up to and including actually going out of business."
Carter, a 31-year veteran of Goodrich Aerostructures' team who began working in the company's procurement function in the late 1990s, says that as the industry downturn continued and suppliers began to fail in a number of cases, Goodrich Aerostructures recognized that it needed to become better at anticipating potential problems with suppliers. "We had all kinds of expertise and tools for fixing problems, but no capabilities for predicting or preventing them," Carter explains. To address this challenge, Goodrich Aerostructures resolved to adopt a "predictive supplier management" strategy and to back that strategy up with new processes and tools that would help the company, as Carter says, "prevent train wrecks rather than dealing with them after the fact."
While the industry downturn put many of Goodrich Aerostructures' suppliers at financial risk, other factors were pushing the company to pursue a predictive supplier management strategy. First, the company's successful supply base consolidation initiative was reducing the total number of its suppliers (like most large manufacturers, Goodrich Aerostructures follows the 80/20 rule of thumb — 80 percent of its spend goes to a select group of suppliers, with the remaining 20 percent spent across the rest). In addition, the company was moving toward buying more complete assemblies from its suppliers, putting a greater portion of the supply chain outside Goodrich Aerostructures' direct control. The confluence of these factors increased the potential disruption that Goodrich Aerostructures might incur should any of its suppliers encounter financial difficulties.
Finding the Right Tool
In 2004, around the time that Carter began looking for ways to address the company's supplier risk challenges, colleagues from Goodrich Aerostructures' supply chain quality team alerted him to a solution provider called Open Ratings. This enabler, which subsequently was purchased by Dun & Bradstreet in April 2006, offers a suite of software and service tools to help companies manage risk in their supply bases. The Open Ratings solution comprises a Web-based interface to a data management system. A data engine pulls in a variety of supplier-related information from a company's own financial and operational systems and aggregates it with quantitative and qualitative performance data that Open Ratings itself collects on some 100 million different companies around the globe. The data fuel an analytical engine that uses various algorithms and machine learning techniques to tease out trends and spot potential issues with any of the suppliers that a company is tracking through the system.
Upon investigating Open Ratings' offerings, Carter says that he was struck by the proactive nature of the tools. "It wasn't yet another tool to manage your purchase orders or figure out how to react to problems in the supply chain. It was predictive in nature, rather than reactive," he says. Carter and his team had reviewed other supplier management tools but had not found another solution that fit in with the predictive strategy that Goodrich Aerostructures was looking to adopt. Carter also noted that one of Goodrich Aerostructures' customers, a major aircraft engine manufacturer, already was using the solution, and that provided a level of comfort that the tools would be applicable in an aerospace context.
Within just a couple months of being introduced to the Open Ratings solution, Carter was ready to move forward with an implementation of the tools. In building the business case, Carter says that he justified the solution as a necessary tool for enabling the company's predictive supplier management strategy. To back up the business case, Carter's team took a number of known situations from the recent past and performed a "retroactive investigation" to see whether the solution would have alerted the company to an issue with a supplier. The team determined that the system produced enough "hits" to justify moving forward with a small-scale implementation with a core group of users within Goodrich Aerostructures.
This initial group of users included eight supply management staff. Once the company had experience with the system, the user group expanded to include, at present, about 40 staff members who use the system on an occasional basis, and about 20 that use it regularly. Procurement and sourcing staff can use the system in several ways. First, they can access information about suppliers as part of the normal assessment step in a sourcing decision-making process. Second, the system itself can be configured to generate alerts to the appropriate staff members when it appears that an issue might be on the horizon with a given supplier. And the supply management staff can turn to the system as part of a supplier performance review process, or simply to check up on a supplier should the staff come to suspect that the supplier might be experiencing some difficulties. In all, Carter estimates that the company is monitoring a couple hundred suppliers through the system.
In the three years that Goodrich Aerostructures has been using the system, Carter says that the company has probably seen a half-dozen instances in which the solution alerted supply management staff to a significant issue at a supplier and helped the company avoid some major cost. In another couple dozen cases, the supply management staff learned of a potential problem and was able to take steps early enough to head off an issue before it could become serious, either by working with the supplier to correct a problem or by identifying alternative sources of supply as a contingency.
Carter offers a couple examples: "We had one supplier that actually was doing OK and was a growing supplier with us, but there were some indicators that they were starting to get into trouble. We looked at the situation and started to get into the root cause, which the information from Open Ratings helped us to do. We quickly realized that this company had a very high likelihood of going bankrupt, and eventually they did. If we hadn't stepped in when we did and taken the appropriate countermeasures, we could have had a serious problem.
"With another supplier, we were having a quality problem that we had been chasing for some time when Open Ratings told us the supplier had a financial problem that we hadn't picked up on. Initially the supplier's approach was total denial, and it wasn't until the third meeting with them that we started to get down to the real issues. It turned out that their quality guy had quit and they hadn't bothered to hire an experienced quality person."
Overall, Carter says, having access to more detailed supplier information has allowed Goodrich Aerostructures to confirm what in the past might only have been hunches about a supplier's stability, allowing them to be more proactive in how they work with the supply base. "The Open Ratings tool gives them the documented confidence that they're not just having a bad dream, that there's a basis for why they feel the way they do, and it makes them more confident when they're drilling down with the supplier to find out what's going on. That has changed some of our supplier relationships, because when something happens, we don't hesitate now to bring [the problem] to the supplier's attention. Of course, suppliers will react in different ways. Some will just say, 'Yes, this is going on, and this is what we're doing about it.' Other suppliers will initially go through a denial phase. But when they're confronted with enough information, I haven't found one yet that didn't eventually come around and say, 'Yes, OK, this is what's happening.'"
Adopting a Strategy
Carter emphasizes that the Open Ratings solution is just one tool that Goodrich Aerostructures' supply management staff use to assess and monitor supplier risk. "We use a number of tools and our own experience to measure supplier performance and assess suppliers' capabilities and the likelihood that they can be a long-term supplier to us," he says. Carter also points out that it is critical with this type of solution to ensure that it is integrated into a consistent process. As such, other enterprises adopting this type of tool must be prepared to make the changes in their processes necessary for the solution to be useful. "It's not just a matter of introducing a tool and training some people to use it," Carter says. "We're talking about changing the decision process, changing peoples' behavior, and that's always an order of magnitude more difficult."
At Goodrich Aerostructures, that change management exercise has involved, for example, developing and implementing a new version of the company's supplier selection matrix that now includes new scores based on the Open Ratings information. From a technical perspective, the company also has taken steps to ensure that it has established the necessary and appropriate linkages between its internal systems and the Open Ratings database, and to ensure that the information being fed into the data engine is "clean" and error-free. "You need to be on top of your own company's ability to supply the best information to feed into Open Ratings, because obviously the quality of the output is somewhat determined by the quality of the input," Carter emphasizes.
The aerospace industry is heading into what looks like a prolonged upturn. World air traffic is expected to grow nearly 5 percent annually through 2024, and airframe manufacturers forecast that they will deliver almost 26,000 passenger and cargo airplanes over the next two decades to accommodate this growth. Against that backdrop, Carter believes that Goodrich Aerostructures is well on its way to establishing an effective process for ensuring that its suppliers can, in fact, be long-term partners to meet future demand for the company's products. And he sums up the primary benefit from implementing this kind of process with a single word. "Predictability," he says, "that's really the crux of it."
Goodrich Aerostructures, a division of $5.4 billion, Charlotte, N.C.-headquartered Goodrich Corporation, manufactures nacelles and pylons, highly engineered structures that, surround jet engines and attach the engines to the aircraft airframe providing substantial acoustic and aerodynamic benefits. The company holds a leading position in its market. Goodrich Corporation, a Fortune 500 company, is a global supplier of systems and services to aerospace, defense and homeland security markets. With one of the most strategically diversified portfolios of products in the industry, Goodrich serves a global customer base with significant worldwide manufacturing and service facilities.
- Focus on the process. Make a predictive supplier management tool part of a consistently applied supplier risk management strategy.
- Keep the data clean. Ensure that the data you feed into a supplier management tool is error-free, up-to-date and comprehensive.
- Be proactive. Use the tool to identify supplier issues, but also be prepared to bring those issues to the supplier's attention, to work with the supplier to correct problems and, when necessary, to switch to an alternative source of supply before a disruption occurs.
- Building a solid supply base. Identify stable suppliers that can be long-term partners for Goodrich Aerostructures.
- Supplier development. Diagnose supplier issues and work with the supplier to take corrective steps to help them become better business partners.
- Cost avoidance. Spot impending supplier problems in time to take countermeasures before any impact on Goodrich Aerostructures' own operations.