One major change involved merging what had been essentially two separate supply chains. “This provided a 10% savings in administrative costs and made us more efficient in terms of how we deploy capital,” Chappelle says.
The company also intensified its focus on Lean manufacturing and Six Sigma efforts and exited some product lines. Mattel is also paring its catalog; it plans to eliminate the bottom 20% of products that, as CEO Eckert says, “don’t contribute much to our success or our customers’ success.”
One aspect of supply-chain management that is likely to become a legacy of the recession is a much more careful assessment of the financial viability of suppliers and customers. “The credit and stability of our vendor base has certainly elevated itself in the supply-chain risk-management category,” says Michael Kramer, CEO of Kellwood Co., a St. Louis–based apparel manufacturer, with sales of $1 billion annually from labels like XOXO, Vince, and Baby Phat. “We’ve extended our due diligence further into their operations to get a better read on their financial stability. We also talk to the suppliers’ suppliers. We’ll ask them flat out, ‘Are you getting paid?’ If they’re not, it could be an indication that their customer — our supplier — has financial problems.”
Paul Reilly, CFO of Arrow Electronics, a $17 billion distributor of electronic components and enterprise computing gear, has a similar perspective. “We have increased our due diligence to ensure suppliers have the financial strength to withstand stress in their businesses,” Reilly says. “Our customers, incidentally, are requesting the same things from us.”
At Corning, assessing the financial condition of suppliers has become so strategic that the procurement group has turned to the finance group for credit analysis expertise. “The global economic crisis catalyzed the need for us to be more deliberate and rigorous around examining the financial security of our suppliers; consequently, finance has taken on the task,” says Mark Rogus, senior vice president and treasurer of the $5.6 billion maker of specialty glass and ceramics.
Corning now employs the same processes used to diagnose its customers’ financial health to diagnose its suppliers’ financial health. “The underwriting rigor we use on the accounts-receivables side has been ported over to the accounts-payables side,” Rogus says. “We’re analyzing key financial metrics like ratios for working capital, investment performance, return on invested capital, return on equity, and others on a historical basis, and then doing our own projections of what the future might hold using market-driven data. We also try to find information on a supplier’s access to available capital, determining whether they are borrowing from banks or have committed credit facilities, and the terms thereof, including the credit spreads on existing debt.”
If Corning can’t get this information from public sources, someone picks up the phone to contact the supplier. “Once we have what we need, we make short-term projections of the supplier’s financial health, since our typical supply contracts extend out only 12 months,” Rogus says. Armed with this data, Corning’s procurement organization prioritizes the suppliers based on their financial condition and other key performance indicators, like product and raw-material quality, data transparency, and reliability of supply. It then compares the supplier’s financial condition with Corning’s exposure. “The more we spend with a supplier the higher the potential risk, particularly if it’s a sole-source supplier,” Rogus says. “This is all about business continuity.”