Striking Gold with SRM

[From iSource Business, April/May 2003] Is there gold in them thar' suppliers? Proponents of supplier development programs believe so. They point to the oft-cited statistic that suppliers are responsible for 70 to 80 percent of an original equipment manufacturer's costs these days. That means, these proponents say, that much of the opportunity for cost reduction can be found in the shop floors and hallways of the OEM's suppliers.

For example, Dave Nelson, vice president for global purchasing at tier-one auto supplier Delphi and a long-time evangelist for supplier development, once estimated that the team of supplier development engineers he ran while he was vice president for worldwide supply management at heavy equipment OEM Deere & Co. uncovered $22 million in hard savings by working with suppliers to take costs out of their processes, all at a price tag to Deere of less than $7 million.

Supplier development advocates suggest that OEMs must be willing to shoulder at least part of the cost of these programs because their small and midsize suppliers will not be able to foot the bill on their own, lack the personnel or necessary skills, or simply will not be willing to change long-established processes without a push from a major customer. However, a case in point from the aerospace industry demonstrates not only that opportunities do exist for process-based cost savings at smaller suppliers, but also that some of those suppliers are ahead of their OEM customers in identifying and profiting from those opportunities.

Focusing on Cycle Time

Jamie Yelle, president and general manager of Royell Manufacturing, knew he had a problem. Royell, based in Everett, Wash., just north of Seattle, is a manufacturer of precision-machined components and assemblies for the aerospace and commercial industries. While a small operation, with 32 employees and an annual turnover of about $7 million, the 30-year-old company nevertheless services some of the biggest names in the aircraft industry, making it an important link in the aerospace supply chain.

Trouble was, the company was taking too long to produce a particular machined part for an aircraft assembly. The triangular-shaped part, a strut fitting made out of the exceptionally strong 6Al-4V titanium, was highly complex, requiring surfacing over all its faces. Unfortunately, that kept the part on the company's Hitachi four-axis, horizontal mill for 18 hours, or about six hours more in cycle time than Royell had originally bid on the part.

Consequently, the part was costing the company 35 percent more to make than it could charge the customer, a large manufacturer of aerospace components, under the multiyear contract for the part.

Looking back, Yelle realized that in bidding the part, his company had made certain assumptions that did not fully allow for the complexity of the parts configurations and surfacing.