“You’re Only as Good as Your Worst Supplier”

“People always ask, ‘What’s the one thing that keeps you up at night?’ ” United Technologies Chief Executive Greg Hayes said last month. “It’s the ramp. The technology, I’m very confident we’ve got that right. But you’re only as good as your worst supplier. When you’ve got 8,000 parts in an engine, one of those parts aren’t there, you’re not building an engine.”

That quote came from a Wall Street Journal article published last week about supply issues Pratt & Whitney (a unit of United Technologies) experienced this summer that almost brought its engine production operations to a halt. Here are some additional details from the article:

Pratt had contracted with United Parcel Service Inc. in an effort to streamline its supply chain as it prepared to ramp up manufacturing…UPS said last year it would set up a logistics center in Londonderry, N.H., to take in parts from Pratt’s suppliers, package them into kits holding about 8,000 parts, and ship them to Pratt factories for assembly by company’s machinists.

But the 130-person logistics facility was beset by problems after it opened in July, said people familiar with the operation, slowing assembly to a crawl. Some engine kits arrived at Pratt’s engine centers in Middletown, Conn., and West Palm Beach, Fla., without all the required parts.

I encourage you to read the article by Ted Mann for more details, but here are my three quick takeaways based on the information reported:

Inadequate training is the Achilles’ heel of any operations ramp up. I speak from personal experience. When I started my career at Motorola in the early 90s, I worked in a group called People Reaching Out for Innovation in Semiconductor Manufacturing, or PRISM for short. Our mission was to develop technologies and business processes that would enable us to transfer semiconductor packaging from Asia to the United States in order to shorten our supply chain, decrease lead times, and respond more quickly to customer demands and issues. To overcome Asia’s labor cost advantage, we invested heavily in state-of-the-art automation equipment and IT systems, and we streamlined and integrated work processes to maximize productivity and throughput. PRISM started out as a pilot production line (9 am to 5 pm, Monday through Friday), but we were so successful, the company quickly decided to scale us into a high-volume operation (24 hours a day, 7 days a week, 365 days a year).

In the early days of the ramp-up process, as we struggled to find people to work the night shifts, I volunteered to be a second shift supervisor. I’ll spare you all the details, but after several weeks of dealing with a wide variety of production issues and getting paged in the middle of the night countless times, I learned a couple of things:

  • It doesn’t matter how much you invest in technology or processes – if you don’t also invest in people, you won’t succeed.
  • If you don’t have a well-defined strategy and execution plan upfront around finding, screening, hiring, and onboarding talent, you will pay for it later in lost productivity, quality and safety issues, and high turnover rates.

As reported in the article, it appears that inadequate training was a contributing factor in this case too: “After the problems emerged, high-ranking Pratt executives spent weeks on the ground in Londonderry, training UPS workers who were unfamiliar with jet-engine parts [emphasis mine] and working out kinks in the companies’ inventory software.”

It is more critical than ever for companies to understand how each component, raw material, finished product, and node in their supply chain impacts their operations and financial performance. Pratt’s experience immediately reminded me of what happened to Boeing back in 2007 when the company experienced a shortage of nuts and bolts used to assemble the Dreamliner, which resulted in a costly delay. Both of these cases underscore the growing importance of supply chain mapping and risk management. Which components, products, or nodes in your supply chain would take a large bite out of your sales and profits if a disruption occurred? If you can’t immediately answer that question and quantify the potential financial impact, you have serious work to do.

Third-party logistics providers (3PLs) are taking on more supply chain risks and responsibilities, and customers are also expecting faster ramp-up times, which means companies have to take a smarter approach to how they select 3PL partners and manage the relationship. The article does not provide any details about the nature of Pratt’s relationship with UPS, but I assume (and hope) the company did not make the same mistake so many other companies make when selecting a 3PL partner, a mistake I wrote about earlier this year in Procuring Logistics Services is Not the Same as Buying Paper Clips:

The lesson is simple, yet many shippers still don’t get it: there is no incentive for 3PLs to be innovative and creative if your objective is to beat them down on cost, shift all the risk to them, and then put the business out to bid again in 1-3 years. Procuring logistics services is not the same as buying paper clips, yet that’s how many procurement organizations approach it. As many shippers ultimately discover, the cost and consequences of a failed 3PL-customer relationship are exponentially greater than the cost and consequences of buying cheap paper clips.

This disruption only lasted about a month, but with UPS playing a critical role in helping Pratt work through a backlog of more than 7,000 orders for its commercial engines, and when you consider that Pratt accounts for 22% of United Technologies’s $65 billion in annual sales, it’s clear that we’re not talking about saving a few cents on paper clips here — we’re talking about billions of dollars on the line, with a ripple effect on customer satisfaction, market share, and stock price.

So, if you’re a CEO, here’s another thing that should keep you up at night: Are you enabling a procurement organization that treats logistics service providers like commodities, tasking them with squeezing every penny out of the provider and shifting as much risk as possible onto them, or are you incentivizing your procurement organization to focus on building lasting relationships, where the risks and rewards are shared in a fair and balanced manner, relationships that are built on trust for the long term instead of the next bidding cycle and are guided by a shared vision statement focused on the end customer?

The sad reality is that the approach companies take is often dictated or influenced by the CEO and CFO. If the edict comes down from the corner office that every department must find ways to cut costs by 10 percent this year, then the old and tired “I win, you lose” approach to negotiations will prevail — and the CEO will be as responsible as anyone for the consequences.

And if that doesn’t keep you awake, what will?

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