Using Long-Term Agreements with Your Machined Parts Supplier

The Most Effective Way to Harness Kanban Inventory Efficiency for Your Forecasting and Production Needs

Using long-term agreements (LTAs) with your machined parts supplier is the most effective way to harness kanban inventory efficiency. 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.

kanban long term agreements machined parts.jpgCustomer Pain Points

The points discussed below correlate directly to the common challenges and/or requirements that customers have when working with a manufacturing vendor or supplier. Some of the areas of concern that customers have when working with a supplier involve: 

  • Needing components when they need them—having some flexibility with fluctuating demand
  • Wanting one part for the negotiated price for a PO
  • Requiring on-time delivery—every time
  • Managing the inventory
  • Scheduling and assuring critical equipment availability and reliability
  • Procuring finishers and secondary processors
  • Assuring quality—with lots and tolerance consistency
  • Completing sub-assembly or kitting
  • Receiving consistent, accurate documentation
  • Having standardized packaging

Long-Term Agreements

The good news is that kanban systems inherently address many of the above pain points, as they 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 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. 

In the Absence of an LTA

LTAs have been used widely and successfully in manufacturing to avoid many of the problems incurred—for both customers and suppliers—when not using them.

Some of the issues that occur in the absence of an LTA are: 

  • Spot-buys: these require multiple POs, and no promise of ability to keep pace with demands
  • Supply chain integrity: materials may be variable from one lot to another; on-hand inventory quantities cannot always be guaranteed
  • Dynamic pricing: costs cannot be guaranteed from one PO to the next, compromising best pricing
  • Longer lead times: materials must be ordered, tooling set up takes time, machining, and secondary processes all add to production cycle when not forecasted
  • Outside vendor processing: secondary or finishing processes may not coincide with the production cycle, holding up the overall production and delivery date
  • Delivery impact: non-LTA orders are fit into existing production schedules, making for variable delivery dates (as opposed to consistent on-time delivery schedules of LTA orders)
  • Quality assurance and consistency: when tooling and machining must be broken down and set up multiple times for the same end-product, tooling tolerances can fluctuate, causing deficits in consistency and compromising quality
  • Lot traceability: non-LTA orders live outside the scope of lot quantities, resulting in multiple paper trails, which makes overarching traceability in documentation more cumbersome
  • Standardized packaging: planning for packaging can be compromised when not part of a kanban LTA    

Kanban/LTA Benefits to the Customer and Supplier

With an LTA in place, there are many benefits to all parties involved:

  • 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

Collaboration for a Successful LTA

As in any solid, successful contract, each party brings a level of trust and commitment to the relationship. Indeed, the intention of it being a “long-term” agreement intimates that a perpetual collaboration is maintained, requiring sustained commitment. When entering an LTA in manufacturing, there are elements that both the customer and the supplier need to address and commit to for the LTA to work as intended. Keep in mind that when considering suppliers, not all have the mindset or capabilities to be a solid LTA partner. As you read the supplier responsibilities discussed below, determine if your present supplier can meet these requirements and is able to consistently provide these elements in the relationship.

Customer: What You Need to Bring to the Relationship

  • Usage requirements
  • Simple list of part numbers that are consistent
  • Stable design
  • Determine scope
  • Discuss your pain points
  • Establish a payment schedule

Supplier: Responsibilities of the Supplier in an LTA Relationship

  • Annual usage
  • Consistency and quality
  • Dependable delivery
  • Service

Working Together with LTAs

Long-term agreements help provide predictability and consistency, while offering some flexibility, in what can be volatile production cycles. If any of the scenarios above strike a familiar nerve with your current operations, then you might consider exploring an LTA with your supplier.

To help you investigate LTAs further, 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. 

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