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Compliance: The Good, the Bad, and the Ugly

Compliance demands by original equipment manufacturers (OEMs) dictate the new information technology (I.T). programs that most suppliers must implement. OEM mandates take precedence over all other IT initiatives and spending. Consequently, excessive or foolish demands can eviscerate technological innovation in the supply base. When compliance matters are handled well, the supply chain and the ultimate consumer win. When mishandled, it drives up costs and badly hurts trading-partner relationships.

Compliance demands by original equipment manufacturers (OEMs) dictate the new information technology (I.T). programs that most suppliers must implement. OEM mandates take precedence over all other IT initiatives and spending. Consequently, excessive or foolish demands can eviscerate technological innovation in the supply base. When compliance matters are handled well, the supply chain and the ultimate consumer win. When mishandled, it drives up costs and badly hurts trading-partner relationships.

OEMs live or die based on their supply chains. They constantly seek ways to lower their cost of doing business with their suppliers. Suppliers often feel bullied into complying with IT mandates. These edicts almost always add cost and complexity to supplier operations. They frequently yield little direct benefit to the supplier. In fact, they inevitably lead to uncompensated costs. (And although it is typically the vehicle manufacturers that make the demands, large Tier One suppliers often insist that their suppliers follow their IT lead, as well.)

Compliance can range from insisting that the supplier buy and use particular brands and versions of software. An example is CAD software, such as CATIA. An OEM may insist that a particular computer-services company be used, such as Covisint. It can require a specific communications network. An OEM may also insist that particular data standards be employed such as EDIFACT for electronic data interchange (EDI).

Virtually every functional area where a supplier and customer touch has new mandates on how future exchanges will take place. These include in-sourcing such as the electronic formats and protocols for requests for proposals (RFPs). Mandates also define new approval processes for new parts entering production, especially regarding quality standards. Mandates govern how orders are released and shipped. These include new EDI and barcode standards. Electronic payment has required practices that are evolving, as well. Maddening to a supplier is the endless stream of new mandates flowing from their customers. Keeping up with them has spawned mini industries dedicated to just identifying and implementing them for suppliers. The computer vendor company, Future 3, is a good example. It keeps 30,000 users current with the latest changes in EDI translation sets.

Suppliers incur multiple costs in compliance, ranging from the purchase costs to integration costs to training. And implementation often disrupts the supplier's operations. If a supplier had only one customer, compliance would not be so bad. However, compliance costs skyrocket when each of supplier's multiple customers demands its own way of doing business. It is particularly bad for a supplier when multiple plants of the same OEM demand separate standards and practices. The supplier in effect must set up multiple, independent businesses to serve the quirks of each plant. General Motors is notorious here.

Compliance won't go away in the auto industry. The industry operates the most complex, expensive and demanding supply chain on the planet. Continuously cutting costs, time, and waste out of it is imperative. Furthermore, each OEM's business unit sees significant cost savings if it can get all its suppliers to interact uniformly with it. The OEM kicks off a new compliance requirement often by sending out an announcement to its suppliers–much like a royal proclamation. The OEM purchasing czar alternately may call all the heads of its top suppliers to a meeting to hear the proclamation.

There are right ways and wrong ways to handle compliance. One mistake is for the OEM to have a very high-level executive issue the compliance proclamation. That non-technical exec may not have a clue what the mandate really is. An example was the ANX demand a few years ago.

An OEM can order suppliers to comply with a new business practice, but dally in getting its own implementation going. For instance, last year GM ordered its suppliers to buy and implement I-man product data management (PDM) software. It said at the time that it would only exchange product data through the supplier's I-man software. Months later, GM itself still wasn't ready to handle I-man data from its suppliers.

Another OEM mistake is for it to set drop-dead dates for compliance but not enforce them. Ford did this with its MS-9000 mandate. This creates even more chaos for the OEM since it must operate two parallel ways of interacting with its suppliers–the new way and the old way.

The worst case is when the OEM issues a mandate; a portion of its suppliers complies but the OEM never transitions to the new trading practice. This situation punishes the complying supplier. It ironically rewards the non-complying supplier who wasn't so stupid to believe that the OEM was really serious. Such hollow proclamations train suppliers to ignore OEMs.

The right way for an OEM to begin a potential compliance process is to first get its own house in order by commonizing across the enterprise on how it wants to interact with its suppliers. Ford appears to be doing this well in its current eVEREST program. (This program includes Ford's tool orders, remittance advice, purchase orders, self-billing invoices, etc.) All of Ford's geographies and product lines will be using eVEREST.

Secondly, the OEM should get early supplier input. This includes getting estimates of the supplier's cost of compliance. Careful analysis here avoids cost shifting. That change merely moves costs from one center to another without lowering the total delivered cost of the vehicle.

Ideally the supplier and OEM jointly search for cost savings and collaborate on the proposed solution. Chrysler and its suppliers saved billions of dollars doing so in its SCORE program a few years ago. Under no circumstance should an OEM press forward with a compliance demand unless it is absolutely certain it will carry it out to completion. The OEM should also go the suppliers' IT vendor if that is where the changes will be made. In addition, the OEM should define a realistic schedule and not let it slip. Discipline here reduces uncertainty, procrastination and doubt among suppliers.

Overall, Honda appears to have among the best practices in managing its suppliers. This automaker is reasonably open with its plans, works closely with its suppliers and is disciplined in its rollouts. Good compliance practices are absolutely necessary to get an entire supply chain to move forward in concert. They capitalize on innovations in the computer industry. Indeed, they help create a much better "value delivery system" and stronger industry. 

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