As business competition intensifies worldwide, it becomes ever more challenging to improve gross margins and operating profits. Because the Internet provides the ability to obtain comparative pricing on a global basis, supply chain organizations (SCOs) are increasingly pressured to pinpoint the best supplier options while still managing and ultimately driving down costs.
Many businesses have become extremely dependent on their suppliers. Since these suppliers are now more deeply integrated into the overall supply chain strategy, it is critical to fully understand the pricing structure of the materials being supplied. Supply chains that utilize Design for Manufacturing (DFM) methodologies throughout the process of component modeling can drive better discussions with suppliers and ultimately achieve better pricing.
Dynisco and DFMA
Dynisco has been utilizing Design for Assembly (DFA) for its new designs and product refresh programs for a number of years. We have seen significant benefits in terms of assembly simplification, design modularity and part count reduction. Engineers have begun consistently adopting design simplification and reduction of unique parts as a best practice.
In addition, the DFA vocabulary has become common within the organization. As Dynisco continues to evolve its use of the Boothroyd Dewhurst Design for Manufacture and Assembly (DFMA™) method, we have started to take advantage of DFM—a powerful tool that provides detailed manufacturing process models and can be used to create a cost model of printed circuit board assemblies (PCBAs) and component parts.
The DFM system uses various parameters to generate different cost models that can be compared to each other. These can then be evaluated against actual pricing to determine if fair pricing is being achieved or if the organization is being overcharged for its material components. Dynisco has been shifting its supply chain focus from transactional-based activities towards analysis-based activities utilizing the models generated from DFM. This has helped drive conversations with suppliers in addition to evaluating price based on actual data. Dynisco’s change in supply chain focus and how it is utilizing DFM models to enhance its negotiations with suppliers is summarized below.
Transforming the Supply Chain
SCOs have significantly transformed their positions in recent years. Those that are successful require a different range of skills to ensure that the flow of material is consistent. Interruptions in this flow can result in lost production, lost revenues and ultimately lost customers. Therefore, a greater importance has been placed on team members who are involved in maintaining a strong and healthy supply chain.
At Dynisco, we have been working to transform our “buyers” to “supply chain analysts.” More and more emphasis is being placed on the analysis of purchasing data while working towards minimizing and de-emphasizing the transactional activities. Tools such as E-Kanban, which support longer-term blanket orders, are being utilized to automate repetitive transactions while providing valuable data on usage, inventory turns and supplier performance. The time saved by minimizing the transactional activity has been redirected towards examining data, developing new and more beneficial contracts, and negotiating fair pricing using manufacturing data and models.
In order to help with the transformation of our SCO, we first had to recognize our limitations and identify our needs. In an historical purchasing model, the buyer and supplier bantered back and fourth regarding pricing until one or the other folded through attrition. If the supplier wanted to maintain the business, they succumbed to the pressure and reduced their price. This common practice drove many small suppliers out of business. As mentioned previously, transactional activites were a major part of the purchasing groups’ daily tasks. Dynisco made a concerted effort to minimize these activites and replace them with more value-added activites, such as data analysis.
As part of a new supply chain model, we needed to obtain a better understanding of how the components we were responsible for procuring were produced and prioritized. In order to provide the additional education on manufacturing processes, the Dynisco Value Analysis/Value Enginineering (VAVE) group was incorporated into the model. The VAVE group filled a critical gap, enabaling the purchasing department to transform into a group that added much more value within Dynisco.
Leveraging Better Information through DFM
One of the most significant benefits of incorporating the VAVE group within the Dynisco supply chain was the utilization of the information provided in the DFM analysis. Geometries and multiple manufacturing parameters were utilized to generate a model of the component. Machining libraries, contained within the software, provided the most desired paths of manufacturing.
Different materials can also be evaluated, utilizing the machining library as a route to the generation of the most logical manufacturing process. Once all of the data has been supplied, multiple cost models can be created and compared to each other in an effort to determine the most cost-effective manner of production.
One of the simplest ways to describe the power of leveraging the DFM information during price negotiations is by equating it to the experience of purchasing a car today versus 15+ years ago.
In the 1990s, purchasing an automobile was a rather painful process. Prospective buyers would reluctantly walk into an automobile show room where they would likely be quickly approached by a salesperson. The attributes of the car would be discussed for a brief time only to be followed by the dreaded locking of horns during the negotiation to finalize a sale price.
The buyer, only armed with their will to get the best deal possible off the sticker price on the window, usually endured hours of back and forth negotiations, followed by a smattering of “let me talk to my manager” delay tactics. The dance ultimately ended with a concession from the sales person or the threat of a walk out by the customer, which was eventually followed by a call to come back in. Information that could be utilized to fairly negotiate a price was rather scarce, and at the end of the day it was really difficult to judge if fair pricing was actually obtained.
In the present day, purchasing a car is very different. Information for the purchaser is much more readily available. Car Fax, Kelly Blue Book and a myriad of other informational sites are all within a couple of keystrokes on a computer. The consumer is now armed with the data needed to truly negotiate a “fair price.” Everything from manufacturers’ cost, profit margin, quality and consumer reports can be utilized to even the playing field in an effort to conduct a two-way conversation, with the end result being a price that is satisfactory to both parties.
The same type of scenario holds true when utilizing DFM information. Supply chain personnel can rely upon the detailed manufacturing information generated from the DFM model to initiate and hold discussions on the various features or operations that comprise the part cost. Material selection, material cost, labor, machine run rates and even profit margin can all be incorporated within a DFM model to help drive better negotiation through data.
Keeping in mind that a model is just that, it is important to seek to reach an understanding with suppliers. All suppliers may not have the same capabilities, therefore an open and forthright discussion of the DFM result and its inputs is a critical step in price negotiation.
One of the largest barriers to overcome was the level of uneasiness exhibited by our supply chain team in presenting the DFM data to a supplier. Initially, the perception was that the data was going to be used to challenge the supplier in an effort to put them back on their heels, that Dynisco was not only going to tell the supplier how to make the part but also how much it should cost. This made the group very uneasy and rather reluctant to adopt the new process, for fear that bridges would be burned and relationships with key suppliers would be tarnished.
In reality, this was not the case and the process of utilizing and presenting DFM information was quite different than what had been expected. In order to develop an initial comfort level with the information, the following process was presented to the supply chain group.
1. Identify a part or group of parts for DFM analysis (focus on machined components)
2. Employ the VAVE group to generate an initial model of the part
3. Evaluate current pricing against the DFM model
4. Components with a price delta of less than 10 percent are considered fair price parts
5. Components with a higher price delta greater than 10 percent should be examined in more detail
6. Generate a new list of parts for further evaluation and discussion
7. Contact the supplier(s). Explain the DFM process and how it is being utilized, and request a meeting to compare current pricing with component model cost results
In the majority of the cases, suppliers were more than willing to sit down and review pricing against the DFM cost models. Model parameters were reviewed and adjusted based on input from the suppliers. The conversations were much more meaningful due to the fact that both parties were talking with manufacturing information in hand. After several meetings with key suppliers, the supply chain team was much more open to utilizing this method to review and negotiate pricing.
Dynisco businesses began utilizing DFM analysis over the last two years. DFM was first utilized by Alpha Technologies, due to the number of component parts contained in their rheometry instrumentation. Once potential savings opportunities began to accumulate, three of the other Dynisco companies followed suit. Within the last two years over $4,100,000 of supply chain spend has been identified, modeled and analyzed. Across the four business units, over $685,000, or 17 percent, of the spending analyzed was identified as a potential for savings, based on the DFM models generated.
In the specific case of Dynisco, DFM models were created for approximately $925,000 of supply chain spend. After comparing the models to actual pricing, it was determined that the Dynisco supply chain team was achieving pricing that was 2 percent better than the DFM models, in total. This did not mean that savings potential did not exist. It did mean that, as a whole, Dynisco was achieving fair pricing from the majority of their suppliers.
The models validated that the suppliers were charging a competitive price and not in any financial jeopardy due to overwhelming cost pressure created by Dynisco. Therefore additional cost-reduction opportunities were focused in the direction of longer-term commitments, higher volumes and payment terms.
An example of a typical component part that was identified and modeled is shown in the figure below. The pricing for part number (PN) 183664 was compared to the DFM model generated using DFMA software. The standard price was compared to the model and the delta between the two was within 5 percent of the standard cost.
In a second example, we analyzed Dynisco PN 220690 using a 1,000 piece order quantity. After comparing the model to the standard pricing it was determined that the delta between the actual pricing and model was within 1 percent of each other. In both cases, the examples presented represent instances where the supplier was providing fair pricing based on the analysis of the parts.
In a limited number of cases, deltas in the range of 25 percent or greater were identified and reviewed with suppliers. After review of the models, pricing was adjusted down to close the gap between the actual pricing and the model-presented pricing. This is not to say that the supplier was intentionally charging more, but in instances such as this, additional scrutiny of other components provided by the same supplier was warranted. If similar situations were encountered, the process of developing an alternate supplier was most likely undertaken.
DFM has proven to be a powerful tool in understanding and negotiating better component pricing within Dynisco. In many instances it has helped validate that competitive pricing is being achieved and that the need to jump from supplier to supplier in order to reduce cost is minimized. Although DFM information is still generated from a model, the information is much more useful than just historical pricing alone. The SCO is in a much better position to evaluate its supply base for fair pricing, the best manufacturing options and the most efficient methods. Although nothing can take the place of developing strong and trusting relationships with suppliers, the DFM tool and the information it provides promotes better pricing through better information.
Design for Manufacture: Concurrent Costing “Version 220.127.116.11” [Software]. (2013). : Boothroyd and Dewhurst Inc.
Kelly Blue Book. Kelley Blue Book Co., Inc, 1995. Web. 27 May 2014.