United Technologies Corporation is a $37bn manufacturer of products ranging from Pratt & Whitney jet engines in the aerospace sector to Otis elevators in the commercial market. Two years ago, UTC rolled out a supply chain program called Operational Transformation Leadership (OTL) to invest in the health of suppliers in order to improve the entire value stream. UTC wanted to replace the usual cost-based supplier negotiating approach with one that emphasizes supplier quality and reliability.
Because UTC's divisions rely on very lean supply networks, any single supply disruption can have catastrophic implications. The cost to switch suppliers is extremely high, and the impact of missed deliveries can be crippling financially and can impact national security. Nor does signing on solely with Tier One suppliers provide the needed security.
To allow its supply managers to have new levels of information to monitor and manage suppliers, the UTC OTL staff turned to a solution called SBManager from technology vendor Open Ratings. The software toolset uses pattern recognition technology to constantly monitor supplier data to determine if any of UTC's 18,000 suppliers are heading for trouble.
The software searches through third-party information such as Environmental Protection Agency and Occupational Safety and Health Administration violations, government debarment, pending suits filed in county courthouses and consumer complaints. Risk issues such as financial duress, impending quality and delivery problems, and degradation in performance are compared to peer groups.
The software detects these patterns and sends an alert to the OTL staff to perform a web-based supplier assessment addressing lean manufacturing capabilities, quality systems, and supply chain management. After a supplier answers a rigorous set of questions, the tool produces a set of reports showing opportunities for supplier improvement The OTL staff puts a contingency plan in place, but at the same time, they can intervene with the supplier to improve business processes, and in some cases, detailed guidance through Chapter 11 protection.
In August 2004 the system generated a financial alert based on a recognized pattern of events for a key castings supplier. That partner was immediately identified as being important to a number of product lines, and a system-generated e-mail was sent to the OTL staff warning of a potential bankruptcy.
A web-based, financial questionnaire was sent to the supplier, revealing a worsening situation, including a 22 percent drop in sales. Additionally, a web-based lean assessment was initiated that identified several weaknesses, including equipment maintenance, space utilization, product movement and production complexity. UTC changed the commercial terms of its agreement with the supplier to help them through the crisis. UTC's lean experts also guided the supplier through several opportunities for new efficiencies in manufacturing, order processing and logistics. Meanwhile, UTC increased its inventory buffer as an added layer of protection. Within a year of UTC's intervention, the supplier achieved profitability, cut lead times by 20 percent, and experienced vastly improved quality and on-time delivery performance.
UTC gained three key advantages through Operational Transformation Leadership:
1. Cost reductions: Each UTC OTL staffer is able to eliminate more than $1m in waste annually from the manufacturing value stream.
2. Effective deployment of resources: The Open Ratings solution not only raises alerts when a supplier is facing crisis, it helps ensure that the right team of experts is deployed to intervene and help shore up the supplier with the assistance it needs most.
3. Risk mitigation: $11bn of UTC's $15bn annual spend is captured in this risk monitoring system worldwide; avoiding the high cost of switching suppliers due to vendor bankruptcy saves hundreds of thousands if not millions of dollars.
In the past two years, the OTL program has delivered such positive results that UTC is now extending it further into its supply network and mandating that suppliers invest the same commitment and involvement to their suppliers to mitigate the risk below them.
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