How to Have a Mature, Efficient Supply Chain with LTAs
Who hasn’t heard of Kanban, right? From what we see, while people may be familiar with the principles of this inventory control system, not everyone has worked with precision machining suppliers that incorporate it into their business models. What we also see, far too often, is the fallout from not using kanban and long-term agreements (LTAs) to facilitate an efficient supply chain. I thought we’d discuss why it is important and how it can make all the difference in you receiving on-time delivery of your product.
Kanban was originally introduced in Japan and used in the automotive industry. It has since permeated manufacturing facilities across the globe. This “just-in-time” inventory control system releases materials only when needed. When items are pulled for use on the production floor, a card system initiates an order for new replacement materials to fill that void, retaining exact consistency in the supply chain and eliminating inventory shortages or overages. Either way, the production house does not incur extra charges for rush orders due to falling short of materials, or carries costs from being overloaded with inventory.
Most beneficial is that kanban systems are calibrated to anticipate production needs well in advance. With forecasted materials accounted for, a properly tiered kanban system allows for flexibility in long term agreements (LTAs) between suppliers and customers. A typical scenario is that a supplier has a month’s worth of finished goods on hand, releasing enough inventory to have the next production run in process, has a reserve on-hand, ready to be machined, with raw materials lined up for the next release. If a rush order comes in from a customer, the supplier is ready to go; if the demand for product has waned, the order can be pushed out. LTAs are optimized using this tiered kanban blueprint for an effective just-in-time inventory control system.
Benefits of Both for Both!
When these two processes are in place and working together, both the customer and the supplier reap many benefits.
- Better scheduling
- Flexible scheduling for critical equipment or processing
- Managing outside vendors for critical processing
- Quality benefits: lot traceability and consistency
- Lean repeat set-ups
- Better process planning
- On-time delivery
- Standardized packaging
Investigate LTAs for Your Business
Here’s an important takeaway from this overview discussion: just because you haven’t entered into an LTA with a components or parts supplier before shouldn’t keep you from investigating what it can do for your company’s efficiency—and most importantly—on-time delivery. That is one of the most pervasive problems we hear about in the industry. And one we have been able to successfully solve for customers. With the right precision machining supplier, you do have the ability to structure your supply chain like the “big boys,” and enjoy all the seamless benefits regarding your inventory, production, and delivery.
We’ve seen operations completely transformed by adopting the successful implementation of an LTA combined with kanban efficiencies. In one such situation, we had a buyer contact us who worked at a company in the electronics industry.
His pain point: all the shops are late! He wanted to know why suppliers take orders, promise a due date, and not honor it. We spoke further and found out a few more details. He was dealing with smaller shops—they had five to eight men working there—and took in work as they could get it, and neither party were structured with LTAs.
This told us a few things:
Timing and planning: Their timing and planning was not reliable. Effectively, neither of these two elements were present in any measurable fashion in this business model. Pace and scale are moving targets and there is no structure for it when there is no forecasting and/or agreement for the production and delivery of a job(s).
Consistency of pricing and quality: If a small supplier is working on one-off jobs, you can never be sure of pricing and the consistent quality of materials and set-ups either. Often, there are tradeoffs—on-time delivery may be good, but is the quality where you need it to be?
Spot-buys: In the absence of LTAs, it means that the customer does business on a “spot-buy” basis—jumping from shop to shop, looking for what appears to be the best option at the time. Chasing just one piece of the supply chain goal is often self-defeating. The problem, when you buy product (and service) this way, is that it is reflected in the product and the service—or lack thereof. You may pay a little more with shops that run at an LTA pace, but in the long run, it more than pays off. The list of benefits above is testament to that.
You Can Have a Mature Supply Chain
Regardless of how large your operation is, you can have an LTA arrangement that works in the same fashion as big industry and mature, well-managed supply chains. If you produce repeatable parts needed over time, LTAs are a fantastic solution to the challenges noted here. Sure, use small shops that are nimble for one-off jobs—they definitely can fit into your business strategy when needed. But explore partnering with a precision machining supplier that can handle the pacing of larger lots and quantities when buying larger, repeatable lots.
You can start small—you don’t have to change all your buying practices and suppliers right away. Set up a small piece and build on it. When partnering with the right supplier, you can grow the list of the LTA parts and work your way into a mature, efficient supply chain that delivers consistent cost and quality—and most importantly—on time.
LTAs and Kanban
To help you investigate LTAs further for your precision machine components, we’ve written an in-depth white paper that discusses the information above in more detail. Whether CNC milling or CNC turning, or Swiss CNC turning, wire EDM, or plastic machining, find out how this effective way to harness kanban inventory efficiency will translate to production and delivery efficiency for you.
Read about the solutions available to you in our white paper: “Kanban Inventory Control System Benefits for Contract Manufacturing LTAs: What Customers and Suppliers Must Bring to the Relationship.” Click here and receive the white paper now.