OEMs and Vendors – From Tug of War to Partnership

The relationship between an Original Equipment Manufacturer (OEM) and its tier-1 vendors is often fraught with conflict. It is common to witness mistrust between the two entities in the supply chain, even though both need the other for their survival. This article’s main aim is to examine why each partner views the other in this way and to recommend how to establish an amicable and rewarding collaboration.

Smaller Guy, Bigger Issues

Very often, tier-1 vendors are significantly smaller in size, scale, revenue, etc., compared to the OEMs they support. Hence, they perceive themselves as at the mercy of the whims and fancies of the OEMs they work with. This feeling is reinforced every time the OEMs reschedule their production plans (OEM production plans are worked out based on a monthly/three-month forecast. Forecasts often go wrong and do not match actual demand) and expect the vendors to adjust their deliveries accordingly. It also happens from time to time that the vendors would have made some Finished Goods (FG) as per an earlier schedule, but because of such changes in plans, the OEMs do not pick up or pay for that material. This blocks both the storage space and working capital of the vendors. This is a major source of distrust as far as tier 1 vendors are concerned.

Trying to meet deliveries of parts as per a new timeline means that the vendor will have to change manufacturing plans as per which they would have already sourced raw materials (RM) and optimized their production batches. This means that some capital will be tied up in raw materials that will now not get used, set-up may have to increase, and capacity utilization might be below expectation. Since most vendors service multiple OEMs, the schedule change by one OEM can have a cascading impact on the vendor’s ability to deliver orders from their other customers. The only way to try and prevent this is to work overtime, incur extra costs and/or sacrifice their own after-market orders. However, in spite of all this, one or the other OEM may experience poor On-Time-In-Full (OTIF) performance.

OEMs are Unhappy Too

When OEMs experience unreliability in their inward supply chain - either orders are not in time, or they are not in full or both – it impacts their ability to manufacture their products on time. The OEMs are compelled to reschedule their production plans so that their assembly lines do not go empty. Senior management teams are forced to waste their precious time and effort in expediting vendor supplies. Therefore, they start viewing their vendors as unreliable. To most OEMs, this inability of vendors is manifest as a capacity issue - after all, when they visit the vendors’ plants, they look very busy. So, to solve this problem, they urge their vendors to augment their capacity and/or have the capacity that is dedicated to their business. But vendors (already struggling with the OEM’s way of working) are reluctant to add or dedicate capacity, as they are unsure whether the OEMs will fully utilize the augmented capacity. So, they, in turn, negotiate for a commitment from OEMs for a set volume of business that they can anticipate and for schedules that do not change. Both are not feasible for OEMs, as demand dynamics change constantly, and they do not wish to compromise their flexibility to adapt to changing situations.

Thus, there is a virtual standoff between the two entities.

When at a stalemate, OEMs are forced to look out for more reliable vendor partners. Additionally, if they can get the component parts cheaper, or if the vendors agree to a larger payment window, it is a bonus for them. Thus, OEMs tend to add more or replace existing vendors over a period. But, inexplicably, these new vendors, too, soon turn unreliable!

What is the Way Forward?

The following elements will have to be built to arrive at a win-win solution for the problems listed above in the supply chain:

• ~100% On-Time Delivery: This is the most significant pain point for OEMs. OEMs are usually willing to support their vendor partners as long as their OTIF performance is good.
• Increased vendor productivity: To achieve excellent OTIF performance, however, vendors will have to increase their productivity.
• Stable costs: At the same time, vendors'/OEM’s costs for doing business should not go up.
• Long-term partnership: The vendors would also need some assurance that their partnership with the OEM is long-term. Without this, they will be unable to put in additional investments to improve their productivity, reduce wastage, etc. 

A Solution that Works

All companies want to achieve these objectives but struggle to realize it in reality. However, there is a way out of this seemingly impossible situation. And this is to implement a ‘pull’ replenishment system in this supply chain, wherein the vendor replenishes raw material (RM) stock maintained by the OEM from his own finished goods (FG) stock based on daily consumption signals. To achieve this, the vendor can maintain a mutually agreed level of finished goods (FG) stock of most of the items he has to supply to the OEM. And the OEM should provide the vendor visibility of the consumption data from his RM stock daily instead of sharing a schedule. A simple colour-based priority system can help the vendor understand the depletion status in the stock and react quickly. However, with stock buffers in place at both the vendor’s and OEM’s end, lead times for manufacturing the component parts will come down dramatically to only that of the transportation lead time. Thus, there is no interruption to the OEM’s production plans and the OEM will experience high reliability from these vendors!

The vendor, in his turn, will now not need to react to plan changes at the OEM since he is buffered from it. Instead, he can schedule production batches according to the penetration into his finished goods (FG) stock buffer based on his batching considerations. This will not only protect his productivity but also improve it. The FG buffer that vendors have to maintain will be much lower than the slow-moving/un-lifted inventory that they generally end up carrying. However, an assurance from the OEM that any left-over inventory from this stock will definitely be picked up or compensated for will overcome any objection vendors may have about this.

Peace of mind for both the vendor and the OEM!

It goes without saying that with such a supply chain model it is in the interest of both parties to engage in a long-term relationship and OEMs will tend to increase the share of the business of such reliable supply chain partners.

For more information on how to transition a company which is working on a “push” based system to a fully “pull” system.

Author:

A graduate of IIM Indore, Aditi Merchant is a consultant with Vector Consulting Group and is considered an expert on the Auto & Auto ancillary supply chains. Vector Consulting Group has worked with organizations like Tata Motors, Ashok Leyland, Royal Enfield, TVS Motors, Shriram Pistons, Fleetguard Filters, etc., just to name a few.

(Above mentioned article is consumer connect initiative. This article is a paid publication and does not have journalistic/editorial involvement of IDPL, and IDPL claims no responsibility whatsoever)