Ongoing supply chain challenges have heightened risk for original equipment manufacturers (OEMs) in the mass transit industry. Among the chief worries are labor shortages and rising freight and materials costs. Yet, those same market factors create an opportunity for OEMs to benefit from consolidating their supplier bases.
Supplier consolidation, simply stated, is reducing the number of suppliers with which an OEM does business to those whose commitment to cost reduction, quality and effective production management align with the OEM’s.
Benefits of supplier consolidation
As a business strategy, supplier consolidation was gaining traction even before the COVID-19 pandemic severely constricted global supply chains. The National Association of Manufacturers’ 3Q 2022 outlook reported that 78.3 percent of manufacturing leaders listed supply chain disruptions as a primary business challenge, with only 10.8 percent believing improvement will occur by the end of the year. In a study released in July 2022, respondents said they expect “significant” supply chain disruptions to continue through 2023.
Thus, the environment remains ripe for mass transit industry OEMs to take advantage of supplier consolidation to help manage supply chain challenges. For example, placing more work with proven supplier partners can give OEMs:
- Greater delivery predictability. Transparency in trusted supplier partner relationships gives OEMs insights into delivery realities – both positive and negative – and creates options for flexibility in production schedules to accommodate delivery disruptions.
- Less exposure to geopolitical and geoeconomics issues. International disturbances, such as Russia’s invasion of Ukraine and COVID-related shipping shutdowns in Shanghai, China, last spring, have underscored the value of OEMs keeping some production closer to home. One of Miller Fabrication Solutions’ mass transit customers, for instance, mitigated its geopolitical risk years ago by deciding to manufacture products in the country or region where they would primarily be purchased. In another example, an OEM customer had half of its business with us and the other half in India when the COVID-19 shutdowns were announced. A critical part languished on an overseas dock for many weeks before it could be loaded onto a vessel for shipment to the United States. Because the customer had half of its work with a domestic partner, however, Miller was able to increase production to offset that delay.
- Improved production quality. Particularly when the components being manufactured are complex, custom engineered and built to spec, OEMs can engage a smaller number of suppliers in fully understanding and adhering to critical quality requirements.
- Lower internal costs. Complexity tends to add cost. A consistent, consolidated supplier base reduces the time OEMs must spend on administrative tasks like tracking numerous contracts and purchase agreements, integrating with supplier systems and managing multiple supplier relationships. That streamlined process cuts down on errors and inefficiencies, saves time and increases productivity.
- Leverage to negotiate a supplier’s help in offsetting freight and other costs. As an OEM reduces its supplier numbers, its purchasing power increases. The smaller number of core suppliers that handle large portions of the business are motivated to serve as partners, working collaboratively with their OEM customers to find cost efficiencies in freight, handling and other related shipping fees.
- Labor shortage mitigation. Supplier partners who have certainty about retaining a significant portion of an OEM’s manufacturing business over a long period of time likely will be willing to make investments in people, processes and technologies that lessen labor shortage impacts.
- Better OEM-supplier relationship outcomes. In the current environment, maintaining a large supplier network gives OEMs less control over that supply base. Relationships with a small group of trusted suppliers, on the other hand, give OEMs freedom to enlist those suppliers as strategic allies in anticipating supply chain problems, developing joint solutions and responding to opportunities. Rather than OEMs having to manage the supply chain across numerous suppliers, supplier partners can create a clear track throughout each stage of the supply chain process. Give and take will be required by each party from time to time. OEMs and their supplier partners can jointly address challenges and work through difficulties, resulting in mutual wins and reduced overall risk. The long-term view must always be the primary focus.
Supplier consolidation considerations
Over time, it’s easy to add suppliers to meet short-term needs. But increasing freight costs, labor shortages and geopolitical issues that affect the supply chain will affect mass transit OEMs significantly for years to come. Any risk that can be eliminated to better streamline production and distribution will swiftly return benefits, and OEMs that haven’t already consolidated their suppliers should strongly consider it now.
While paring down an extensive stable of suppliers can improve an OEM’s business, it does require careful, goal-oriented evaluation and decision making. OEMs who may want to consolidate their supplier networks should:
- Weigh the intangibles. Consolidation success relies less on a supplier having the right machinery and more on that partner having the right thinking and processes in place. Suppliers worth keeping on the roster will have a deep commitment to exceptional customer service, getting paperwork and other details correct and openness to coordinating with OEMs to drive cost reductions.
- Be amenable to using suppliers that work with their competitors. The labor forces at competitors’ suppliers already are trained and proven to be successfully producing similar parts. So, the learning curve will be minimal and streamlined, and the quality level is likely to be high.
- Assess which current suppliers meet third-party industry standards. If a prospective supplier-partner does not already have an OEM’s required industry- or manufacturer-specific certifications, it doesn’t need to kill the deal. Experienced supplier-partners will have previously secured numerous environmental, safety and ISO certifications. They will be able to quickly gain any further requisite certifications and meet individualized OEM specifications by following their customary, proven processes.
- Determine the supplier’s willingness to invest in the relationship. As the consolidation process places more business with key suppliers, OEMs gain greater influence that can open discussions about supplier investments that will better meet production needs. Supplier partners may be willing to install an OEM’s existing equipment in its facilities, for example, or to invest in automation or purchase equipment specifically suitable for an OEM’s product lines.
- Look beyond purchase order pricing. A supplier that works cooperatively with OEMs to develop clear specifications, capably produces high-quality parts without requiring extensive back-and-forth during production and provides excellent finished products on time will reduce overall costs, usually resulting in a better total cost equation.
Mass transit OEMs are navigating unprecedented supply chain disruptions and skilled labor shortages. Consolidating their supplier network is a smart, strategic step that can allow OEMs to leverage key suppliers’ expertise and thinking to solve problems more effectively.
----------------------------
Eric D. Miller is president of Miller Fabrication Solutions.
