How OEMs Can Leverage Raw Material Demand

More original equipment manufacturers are looking to exert their control into the extended raw material supply chain

Robert Hales
Robert Hales

It takes tons of raw material to put an aircraft together. Aluminum alloy, steel and various composite materials are all necessary to produce an aircraft capable of transporting hundreds of people around the world. If you’re an original equipment manufacturer (OEM) in the aerospace industry, the sourcing of these parts and raw materials can be a nightmare. However, this problem is not unique to aerospace. It persists across many industries, including oil and gas, heavy equipment, automotive, industrial equipment and many others.

Most OEMs continue to increase the amount of work outsourced to part suppliers, from manufacturing of parts and components to the building of sub-assemblies. This trend is resulting in a very complex supply chain, making OEMs increasingly dependent upon their part supplier’s ability to manage their portion of a very complex network. Your part suppliers may be purchasing materials from as many as five to 10 different raw material sources. As long as you get your parts on time, you may not care. However, more and more OEMs are looking for a means to exert their control into the extended raw material supply chain so that they are better able to eliminate waste and improve efficiency.

There is now a way to do that. By identifying the actual raw materials used in producing your parts and linking that information to the demand for those parts, you can get a pretty good picture of what is going on. Appropriately sharing the resulting raw material demand profile with your raw material supply network enables the raw material suppliers to operate much more efficiently. The improved visibility into raw material demand gives the OEM the ability to exert control to ensure availability and manage material pricing. In industry, most companies call this process aggregation or pooling.

Supply Dynamics helps OEMs obtain and leverage this information. We found that, in order to successfully aggregate, OEMs must first do three key things:

1.) Understand What Raw Material Is Actually Purchased for Each Part

Say an OEM’s sub-tier supplier needs to produce 1,600 pieces of an aluminum part in the coming year. The blueprint would show that this part could be machined out of an 8.0-inch long piece of aluminum grade 6061, 2.0-inch diameter round bar. However, when it is outsourced, the OEM no longer knows exactly what is being bought since the part supplier is the one that chooses the size of the material with which they plan to work. The part supplier may purchase a piece that is 8.5 inches long and 2.25 inches in diameter to produce the same part, which may be a larger and more expensive piece than necessary.

Knowing the size that may be purchased is important because it tells the service center or mill what size to stock or produce. If it doesn’t have the right size available, the OEM’s sub-tier supplier that is purchasing material may not be able to get the material on time and it could be late with the part. Looking at this information across all parts may also identify where part suppliers should standardize material dimensions in order to minimize the number of raw material stock-keeping units (SKUs) they have to manage.

2.) Share Forecasted Raw Material Demand with Service Centers and Mills that Need It

By sharing the material demand profile with the sources of the raw material, OEMs can remove a huge source of risk for their raw material suppliers. Service centers no longer have to speculate about which materials need to be purchased or who purchases it. They know what raw material is required so that they can inventory the appropriate quantities of the correct materials. That means that the lead time a part supplier must wait between placing an order with a service center and actually receiving the raw material is practically eliminated. It also means that, if a part supplier fails to purchase materials on time, the service center can remind the part supplier of the required purchase and effectively eliminate one of the most common reasons for delay in the production process.

This also gives the OEM significant leverage over the service center. The OEM could move its entire business to another service center should its initial service center partner fail to deliver the promised level of service. This visibility into the OEM’s raw material demand leads to more efficient operations and lower costs.

3.) Enforce the Agreed Purchasing Behavior

Aggregation programs provide huge benefits to the OEMs, part suppliers and raw material service centers that supply them. However, many of the benefits are contingent upon the OEM being able to give the service centers a forecast that represents what should actually be purchased. If part suppliers fail to purchase the materials that they need through the program, the quality of the demand forecast is questioned and the service centers quickly have to assume unnecessary risk again, and that ends up costing their OEM customers a lot of money. So, whether part suppliers are allowed to opt in to a program or required to participate unless they meet certain opt-out requirements, their actual purchase of material needs to be required once they are committed to participate.

There is a considerable need for greater transparency in the raw materials supply chain. Too long we relied on historical data or guesswork to forecast future raw material demand and inaccuracies in these predications can be extremely costly. By better understanding the raw materials used in their products, sharing information with their service centers that help them reduce their cost of doing business and actively monitoring purchases of program-related materials, OEMs can improve overall supply chain efficiency and ultimately improve on-time delivery of more profitable products.

Robert Hales is the director of market development for Supply Dynamics. For six years, he worked with OEMs to give them visibility into what their part suppliers purchase in order to produce the OEM’s parts. He set up these programs with Fortune 500 companies in the aerospace, rail, medical imaging, automotive, wind energy and nuclear power industries. Bob earned a Bachelor of Science degree in civil engineering and a Master of Science in structural mechanics from Brigham Young University.