Supply chain disruptions and inefficiencies have been in the spotlight in recent years, especially since the COVID-19 pandemic, often forcing manufacturers to scramble to make changes in suppliers.

Moving from one supplier to another can create a unique set of circumstances, including process change, supply augmentation, and adjustments in interpersonal communications. Many smaller manufacturers aren’t equipped with the resources necessary to hire supply chain specialists that solely focus on vetting suppliers. 

In supplier relationships, manufacturers frequently adopt a transactional rather than a strategic approach, defaulting to a focus on cost per unit. This tendency is reflected in the evaluation criteria for different departments. Typically, the performance of accounting and purchasing departments are assessed on their ability to cut costs. Meanwhile, the operations department is measured on throughput.

Focusing solely on reducing costs without considering the broader impact on operations may lead to an increased total cost of ownership. For example, purchasing cheaper materials or selecting lower-cost suppliers can compromise the quality of the final product. Poor quality can result in higher defect rates, increased rework, warranty claims, and a higher cost of dealing with customer complaints and returns.

Manufacturers can gain competitive advantage when they have a process or framework for choosing suppliers. Possessing a clear understanding of each supplier and their processes is key to making smart business decisions pertaining to the supply chain. Following are some ways that manufacturers of all sizes can improve the supplier selection process.

Study supplier capabilities and value-add opportunities. There are important questions to ask when it comes building a solid working relationship with suppliers. What are their value-add options? Is there anything else they can do, other than provide basic materials? 

Learning the capabilities of current suppliers can lead to more efficient processes and even lucrative opportunities. For instance, if a supplier is currently sending extrusions in 12-foot sections that are then cut into nine-foot pieces, it would be helpful to find out if the supplier can adjust processes and send the needed size, saving time and money in the long run. 

Communications systems are extremely valuable when it comes to the supplier-manufacturer relationship. Having the manufacturer’s system integrated with that of the supplier can expedite processes. For instance, with integrated systems, purchase orders can be automatically issued when inventory drops to a certain level. 

Learn about suppliers’ quality systems and product segregations. Suppliers aren’t going to share their whole story with you. It’s important to ask to see a supplier’s quality systems documentation and improvement methods. This helps in understanding production and inspections. It can also provide insight into what would happen if a bad part were delivered, and how suppliers handle and resolve quality issues. Lot control will continue to be important as equipment manufacturers seek more visibility into their supply chains. 

Determine where you fit in with their scale of business. Prioritize suppliers with whom a partnership will significantly contribute to your success. While smaller shops may offer cost advantages due to reduced overhead and personnel, it’s important to consider their potential drawbacks. If your business constitutes a substantial portion of a small supplier’s customer base, issues such as limited cash flow, workforce dependency and equipment reliance could pose significant risk to your operation. The departure of a key person or a breakdown in machinery could potentially disrupt your business. 

If you choose to work with a small supplier, be sure there’s a protective barrier in place so that its problems don’t become your problems. While sourcing critical components from larger suppliers may involve higher costs, the increased reliability and reduced risk may outweigh the initial expense.

Conversely, when working with larger suppliers, you want to be in the top third of their business by volume. This ensures that you receive optimal service, and reduces the likelihood of being easily overlooked or dropped as a client. Striking the right balance between supplier size and your business's significance in their portfolio is key to building resilient partnerships. 

Identify a supplier’s capacity, and what it means for you. It’s important to know where suppliers are when it comes to production capacity. Are they able to grow without a significant capital investment? If they’re struggling with capacity, does that mean an order will get pushed back? If a potential new supplier runs at less than 60% capacity, that could mean that there are problems in the business. If it’s over 80% capacity, that could mean delays or the risk of running out of stock. Aim to be in the 60%- 80% capacity range whenever possible. 

Make periodic visits to check out the supplier’s culture and operations. Try to visit your top 10 suppliers at least every two years. Viewing the operation in person provides an in-depth look at the process. One of the first things to check out is the server closet. This might not be the first step that comes to mind, but networks are critical for consistency. The state of the server closet will tell quite a bit about an organization and how it treats its investments.

Does the organization have proper safety signage? This can be a key indicator as to whether or not they’re following safety procedures. Are the common areas comfortable and tidy? This will tell a story about how the organization cares for its employees. Be sure to stop by the shipping department and talk with workers in the department. This will give you valuable insight into the company. 

If it isn’t feasible to visit suppliers, you can ask for photos so that you’re able to get a picture of what the organization looks like.

Ask about the flexibility of staff and equipment. Smaller companies might lack the flexibility of larger companies. What would happen if the company lost a veteran machine operator or a manager that’s been there for years? Find out what processes are in place to ensure they always have the personnel needed to keep operating. Do they have a training matrix for equipment and knowledge being stored and shared?

Ask how the supplier manages and maintains machines and tools. Ensure that preventive maintenance is part of the business continuity plan. You can even ask to see logs that illustrate preventive maintenance, as well as alternative network capabilities and energy sources in the event of a natural disaster. 

Learn the supplier’s logistics network. Does it own its own trucks? If not, does it work with logistics providers? What’s the performance record of those vendors? Problems with the supplier’s logistics can turn into a problem for you. 

Extensive vetting of suppliers is a key element in solving supply chain issues. Knowing about processes and issues up front can go a long way toward preventing headaches down the road. It takes times and effort, yet by understanding the realities on the ground for suppliers, implementing streamlined processes, and nurturing open lines of communication, manufacturers can meet their ever-evolving needs and expectations in a volatile market.

Art Thomas is director of business development for the Purdue University Manufacturing Extension Partnership (MEP), part of the MEP National Network.