Lean Sigma

18 Long Lead Time Purchasing Strategies

In project management the long pole is the part of the project that is on the critical path due to how long it will take. For example, if you have a project that consists of three independent sub-projects, then the sub-project with the longest completion date is the long pole. In a make-to-order business environment long pole purchase parts are those with the longest lead time.

What to do if your customer doesn’t want to wait for your supplier?

Customer Supplied Material Your supplier may not have the raw materials they need for your order. So buy the raw materials and have them delivered to the supplier.  Or hold the supplier’s raw material in your inventory, not the machined components. Principle: hold the inventory at the lowest level, lowest cost and then convert it only when needed.  Somewhere along the supply chain someone has to hold some stock.
Two PO’s
(or Split PO)
Use two purchase orders – one PO for supplier raw material, a second for the machined component. Make a forecast of the common raw materials. One way to do this is to set up the full Bill Of Material in the ERP/MRP system and load a forecast or master schedule and have MRP calculate the future bulk requirements for the supplier’s raw material for the next quarter or year. Give this ‘forecast’ to the supplier or place a blanket PO. Update monthly or quarterly.
Long Term Agreement Cultivate strategic suppliers and negotiate an LTA. With a strategic partnership the supplier will often agree to hold some raw material because the raw materials will be used. Especially if the buyer and supplier have frequent communication about demand requirements.
Make and Hold If the supplier must make long production runs, maybe they can ship smaller quantities as needed. A widely used method to avoid paying price increases is to authorize the supplier to make longer production runs. Part of that authorization must include an agreement to ship only what is immediately required by the customer. The purchasers require the supplier to hold the remaining inventory. In turn, that requirement usually triggers a request from the supplier for a guarantee that the excess material will be purchased. Naturally, the supplier also needs to maintain the lowest inventory levels possible in order to achieve an acceptable cash flow. The supplier may request that all material must be purchased within a specific period of time to ensure some level of inventory turnover in case of a significant drop in demand.
Minimum Order Quantity Multiples Instead of Minimum Order Quantity (MOQ) for individual part numbers, negotiate MOQ made up of several similar parts.  If the difference between parts is small, then the set up cost may also be small.
Minimum Order Value Another approach is to work with minimum order values (MOV). This option is usually used by suppliers that sell standard components through a wide range of part numbers or stock keeping units (SKUs). The MOV is built based on the total value of all part numbers shipped to a single customer.
Blanket PO with multiple Releases Give the supplier a PO for several months.  This will allow the supplier to buy raw materials and plan capacity. But don’t let the supplier ship parts until the supplier is given a ‘release’ to ship.  Frequent deliveries of small quantities.  The supplier holds some inventory.This is a common approach for kanban. Blanket PO for several months, but don’t ship until supplier gets the kanban signal.
Negotiate the Lead Time Lead times are not generally  an area of significant focus for the procurement organization, and the lead time accepted by the buyer is likely to be what the supplier requested. The approach begins with development of a standard lead time matrix. The matrix is segmented by commodity and indicates an acceptable lead time for each type of component, for example, four weeks for plastics, and six weeks for stamped steel parts. When negotiating price and delivery there are other considerations: payment terms, lead time, minimum order quantity, specification tolerances.  All are important.
Buy through a Distributor Another means by which to address long lead components is to purchase product through a distributor. The distributor will maintain an inventory level that can handle fluctuations in customer demand, and will act as the buffer between supplier lead times and variability in the customer’s ordering patterns. As demand drops, the distributor is typically more agreeable to delaying shipments than the supplier is, and may be able to transfer that inventory to support another customer’s requirements. Conversely, the distributor can generally provide product quickly when demand ramps up; but at a cost – holding cost and overhead.
Local Production The primary benefits of using suppliers that are physically closer to your receiving point is that supply chain risk is reduced. In addition, local sourcing arrangements typically involve more frequent shipments, further lowering inventories and supporting just-in-time (JIT) manufacturing.
Vendor Managed Inventory With VMI, the supplier maintains its finished goods inventory on-site, at or near the customer’s facility. The customer is responsible for the material only when it is pulled from the warehouse for production. Usually, the VMI supplier is allowed to ship into the warehouse in whatever quantities it wants to ship. As a result, the supplier bears the burden of analyzing the customer’s production efficiencies in the context of its own inventory-carrying costs.
Consolidate Shipments When several suppliers are from the same region it can reduce lead time by consolidating orders from several suppliers in to one container or shipment rather than wait for each supplier to fill a container or make multiple deliveries. A variation on this is called “Milk Run” when the buyer sends a truck to pick up materials from several suppliers along a common route.
Postpone Costs are added at each stage of production. As the supplier continues to produce material that the customer does not require immediately, inventory exposure increases. Eventually, the supplier will pressure the customer to buy product that has not been procured as originally planned. Therefore, it is imperative to communicate production requirements to the supplier using a partial release in order to minimize the amount of material in the supply chain. When components are ordered under an ongoing release schedule, the customer does not always order in finished goods quantities. A partial release will authorize the supplier to procure raw material in preparation for production, but it does not necessarily authorize it to add further value to the components. This arrangement allows the supplier to procure the material required to meet production timing, and reduces the amount of the customer’s exposure. This is related to Split PO.
Economic Order Quantity Calculate the item’s EOQ and don’t buy too little, or too much. May not help with lead time, but order interval could be too long or too short.
Adjust Payment Terms An increase in supplier payment terms can be considered a blanket approach to inventory cost reduction. While this approach does not directly reduce the amount of inventory on hand, it does delay the amount of cash tied up in carrying inventory. Some questions to ask when discussing the subject with the supply base include: What should be offered in exchange for the extension? What effect will it have on a supplier’s financial stability? Will this send the wrong signal about your company’s financial stability? Will it damage supplier relationships so that the cash gain is offset by less cooperation from the supply base?
Extended supplier payment terms can also become a profit center for an organization. Imagine, for example, that Company A pays its suppliers 90 days after receipt of product, and is paid by its customers 60 days after delivery. If that product is processed quickly and shipped to the customer with minimal time spent in process or finished goods inventory, Company A will receive payment for its product before it makes payment to its suppliers.
Consolidate Suppliers With fewer suppliers you have greater purchasing power. Multiple suppliers for the same part numbers might look to be an advantage to negotiate better price or in case one supplier has trouble. But multiple suppliers can mean that you are not important to the supplier.
Buy supplier capacity Give the supplier a PO for their machine time, pay then whether you use the time or not.  This technique ‘holds your place’ in queue.
Kaizen Make Kaizen Events with key suppliers to help buyer and supplier understand what is possible for reducing MOQ and Lead Time.

What have I missed?  Any other long pole purchasing techniques?

Leave a Comment ...