Today Multinational Corporates operate in a global environment managing customer demand from various markets on one side and leveraging global supply markets and supply chains on the other side. Many companies are focusing on their core competencies and reduced the level of vertical integration by outsourcing more and more parts of their value chain to external suppliers and partners.
As a result managing the capacity of suppliers becomes as crucial as managing own production capacities and assets. In times when demand is low, suppliers are able to produce sufficient quantities that meet required demand levels. When customer demands suddenly rise it could be that suppliers are struggling to produce sufficient volumes leading to constraints in supply and lost sales opportunities. Balancing supplier capacity in an upturn, inventory levels during downturns as well as managing customer demand throughout the business cycle requires an agile and responsive supply base.
However companies struggle to manage the cycle due to numerous reasons:
- All capacities of suppliers are treated the same, but not all product parts and thus supplier capacities are equally important
- No consistent way to manage capacity changes across plants, products, suppliers
- Unclear demand requirements beyond the short-term (scheduling) horizon
- Lack of enterprise decision capabilities and performance management
- Lack of capacity data, analytics and metrics in place to monitor and track supplier capacity issues and resolution
Procurement can play a major role in an enterprise’s Demand/Supply Framework. Typically Procurement is accountable for managing supplier relationships and risks. Furthermore leading Procurement organizations are engaged with suppliers throughout a product’s lifecycle from the development phase until product termination.
Typically capacity problems arise during the mass production phase, however active Supplier Capacity Management hast to begin much earlier.
First capacity limiting and therefore output related decisions are made when choosing and contracting a supplier. Therefore it is essential that Procurement together with the business/project team investigates the demand requirements and potential implications prior e.g. such as:
- What is the anticipated sales forecast over life time?
- How accurate and confident are we with our forecasts
- What limitations do we need to consider e.g. own production/plant/line capacity?
- How much flexibility do we require to cover demand peaks, volume/mix changes?
Depending on the time-to-market and industry there is a significant time gap between approval of a project/product and start-of-production (SOP). In the ‘Capacity Planning’-phase, project teams need to be aware of future demand uncertainties. Applying specific flexibility levels on the predicted demand item (product family, product, derivative and/or feature) is one way to reflect future demand swings. These flex factors can be derived by statistical methods considering historical data (e.g. variant/feature/market mixes). Forecast and applied flexibility levels will set the basis for total agreed capacity with suppliers e.g. by average and peak daily outputs. Prior, Procurement should also evaluate the capacity limiting factor along the suppliers’ value chain. An early identification of potential process bottlenecks and capacity limitations in the supplier’s production concept provides more options for capacity uplifts prior the production concept has been finally laid out.
By increasing a supplier’s possible capacity, a manufacturer’s entire value stream provides the framework for a truly agile enterprise. After contract conclusion with the supplier, any new sales forecast and demand changes need to be carefully tracked on an ongoing basis against agreed capacity levels.
In the ‘Capacity Control’- phase, the supplier has to demonstrate that he is capable to provide the agreed capacity (e.g. on average and peak level). In industries such as automotive these activities are an integral part of the supplier and component qualification process (e.g. acc. to PPAP, VDA requirements).
Especially during Launch phase the balance between demand versus existing capacity becomes more known as first real sales forecast from customer orders are available. Procurement and Supplier Quality Management need to work closely with suppliers to spot potential shortfalls early and to identify mitigating (short, mid, long-term) measures. Success factor in this phase is to have pre-configured mitigation plans and to be responsive, requiring fast decision making and clear responsibilities throughout the project team.
In the ‘Execution’-phase the product will be produced under mass production conditions. Key activities in this phase are to monitor that agreed capacity levels are in line with the current production plan. Many companies use delivery schedules to provide a short term outlook to their suppliers and to call-off materials for their production over a predefined horizon.
Nevertheless suppliers should also receive mid-term demand forecast that go beyond day-to-day operations. In addition some companies have established frequent capacity studies with their suppliers where they request their supply base to provide actual capacity levels against most recent demand requirements.
In order to be innovative and competitive in the market, suppliers continuously optimize and streamline their production lines to utilize their assets the best way. As a result they share and assign spare capacity to other products and customers. Procurement and Supply Management need to have visibility on the actual physical capacity of their suppliers and to evaluate the existing flexibility of their supply base to react on upcoming demand uplifts.
Being able to map current capacity in the supply base against a company’s mid-term demand forecast, Procurement and Material Planning can spot potential upcoming constraints at an earlier stage. This allows them to make more conscious and timely decisions for constraint resolution e.g. where and how to best invest in additional capacity, opportunities to bridge shortfalls with short term actions or how best to allocate existing capacities.
Managing the end-to-end capacity management cycle is a challenging and time consuming task. The impact of potential delivery short falls for a company is too critical to be managed in between other day-to-day operations. Effective Capacity management requires a structured and cross-functional approach as almost all operational functions are involved. Overall key success factors are:
- Supplier Engagement – Develop a collaborative and proactive framework that defines the relevant level of intervention with suppliers
- Capacity Assessments – Assess and document all related capacity related information from contracting till detailed on-site assessments in order to identify all capacity challenges at a business level and to get a point of reference
- Mitigation Planning – Define scenarios and control measurements on how upcoming constraints shall be managed in a structured way rather than a reactive firefighting way
- Scenario Modeling – Ability to map demand against existing capacity in a data model/cube that allows to derive best case scenarios, a strategic understanding of the mid-long term supply and demand gaps
- Governance – Develop a cross functional governance structure as Capacity Management is not a single functional responsibility. Collaboration, coordination and control across Sales, Operations Planning, Procurement and Supplier Quality Management are extremely important for providing continuous focus on the common goals and ensuring success
- Action Plan Management – Ultimately, relentless execution by working the plan is the key to achieving success
Today Supplier Capacity Management is an integral part of Supply Chain Risk Management securing top and bottom line profit. Particularly in the discrete manufacturing industry such as Automotive, Supplier Capacity Management became a shared responsibility amongst Material Planning and Procurement (incl. Supplier quality management) to manage demand and supply across all stages of a product lifecycle and even across all products. Having a deep understanding of the overall supply network and a supplier’s individual manufacturing processes combined with an end-to-end view from demand to supply requirements, Procurement is capable to add significant value beside traditional Procurement core competencies.