Smarter Sourcing Is the Key to Smart Manufacturing

May 7, 2018
Legacy procurement processes aren’t designed to handle the complexities of smart manufacturing. High-tech solutions that fail to rapidly deliver business results are all too common.

In a previous post, I explored how smart manufacturing projects need more focus on business impact, not just cool technology. Like all investments, smart manufacturing systems must provide tangible returns in a prescribed timeframe. Many times, they don’t—and a big reason is how we engage with technology suppliers.

Legacy procurement processes aren’t designed to handle the complexities of smart manufacturing. They assume an equipment purchase that meets specification is good enough. The prevalence of high-tech solutions that fail to rapidly deliver business results suggests otherwise.

In my days at GE, we used Six Sigma tools to identify product performance criteria that were important to customers and we flowed down those criteria to specifications. By designing products with the customer’s needs in mind, we put focus on the critical functions that improved performance.

This kind of design rigor is not typically applied to equipment. But it’s needed. Some 30 years ago, during Industry 1.0 and 2.0, we had islands of automation that worked autonomously and added value by reducing labor and improving quality. Equipment like multi-axis milling machines were purchased based on the capabilities required, like cutting speeds, dimensional tolerances and part size envelope. If delivered equipment could perform to those specifications, the factory would see benefit.

More recently (Industry 3.0 and 4.0), smart manufacturing systems have become more complex, relying on connections between physical equipment, cyber systems and people. The process of translating business need into delivered system specifications hasn’t kept pace.

Demand more from suppliers

Simply put, we need more from technology suppliers. Unfortunately, sourcing processes have not adapted as technologies have become more sophisticated. Most companies have sourcing practices that value equipment capability over business performance—number of parts per hour; number of staff needed to operate; amount of electricity consumed; size of part processed. Procurement specifications rarely detail the expected business result (e.g., higher realized throughput, lower total labor cost, improved product performance).

So equipment suppliers do exactly as they’re asked: deliver on time, on budget and fully compliant with specifications. Upon fulfilling that commitment, suppliers receive final payment and walk away. But that’s when the hard work starts.

Once the operations team takes ownership for smart manufacturing systems, real world variance comes crashing in. Sourced materials have less controlled attributes than delivered equipment can process. Operators have varying levels of capability, skills and attention span. Information systems experience software upgrades that disrupt communications with connected controllers. The result is almost constant debugging and reengineering of the installed system.

Worse, during this troubleshooting period, the new system is not delivering on the investment rationale—the financial impact expected prior to placing the order. Often, the loss in contribution margin (profit on variable cost) during this period can dwarf the cash investment in equipment.

This is why a new approach to sourcing is required.

Smarter sourcing

The typical sourcing process begins and ends with business operations. As the true customer, they define the need (investment rationale) and are responsible for achieving results once the sourced system is operational. Along the way, their need is translated into engineering specs, then request for quotes, contract, designs and finally a physical system.

The owners of each step in the process have their own motives. Engineers are looking to get the best technical solution. Procurement wants the lowest cost, best schedule and most compliant solution. The supplier seeks to deliver a system at a profit. In the handoffs between each group, information about the original need is lost.

For simple equipment, the disconnect from investment objectives is less critical. If the equipment meets basic capabilities, the sourcing process works. However, when the system relies on adjacent business processes to deliver value, the information loss due to handoffs virtually assures a suboptimal solution.

In the age of smart manufacturing systems, the sourcing process needs to be smarter. In my view, there are five critical changes required:

  1. Focus on business performance, not specifications. When engaging suppliers, sourcing teams should modify their success criteria to include business performance objectives. A new smart manufacturing system that reduces low-cost operator labor and, after startup, requires the addition of higher-cost maintenance technicians is not meeting the labor reduction initially expected. It’s just shifting the cost from one operational budget to another.
  2. Ensure specifications clearly articulate CTQs. In Six Sigma terminology, the key factors that drive customer benefit are identified as critical to quality. When applied to smart manufacturing systems, these CTQs might be reliability of a critical component (to achieve higher uptime), consistent adherence to tolerances (for improved product performance) or shorter setup time (to allow faster response to customer orders). Specifications should identify these CTQs and inform the supplier—through the specification—that testing will be performed during system commissioning to show adherence to each CTQ.
  3. Improve communications within the sourcing process. Throughout the sourcing process, from need identification through build and commission, there should be strong communications with the operations team—the stakeholder that will ultimately be responsible for meeting business objectives with the new system. If the interconnectivity of the smart manufacturing system relies on adjacent business processes to succeed (e.g., production scheduling, maintenance skill development, etc.), those teams must be part of the design and commissioning process as well.
  4. Incorporate robust design methods. Identifying the sources of variance in operations is necessary, but not sufficient, to develop high-performing smart manufacturing systems. Design processes, at the supplier, must develop solutions that are less sensitive to variations. Some of the design methods that should be required of suppliers include tolerance analysis, failure modes and effects analysis and design of experiments to demonstrate process capability.
  5. Implement enhanced commissioning. Most equipment sourcing processes include some form of factory acceptance test prior to shipment from the supplier’s factory and site acceptance test as a final check of capability after installation. Acceptance testing, even in the best case, involves exercise of system functions to a well-defined, yet limited, test plan. The focus of these tests is to demonstrate capability, not business performance. Commissioning services should be part of the system startup process and payment should be withheld until performance is achieved. A better structured contract, would stage progress payments at completion of design, successful completion of factory acceptance test, successful completion of site acceptance test and demonstrated performance capability after commissioning.

Final thoughts

Most of my career has been spent on the buying side of manufacturing technology projects. Only recently have I shifted to a supplier role. As a buyer of technology, nothing was more frustrating than making final payment for an expensive manufacturing system only to fight with it for another year before it met all expectations. What I’ve found interesting, now that I’m working for an industrial system supplier, is that engineering teams designing and building systems are just as frustrated as their customers. They have pride in their work and struggle to understand why their solutions sit idle after final acceptance.

When all participants in a value chain share the same frustration, it usually means there is a systemic problem within the process. And that is the point of this blog post and the one that came before it. It is possible for complex smart manufacturing technologies—whether an enterprise database application or an interconnected shop floor machine—to provide rapid return on investment. But it won’t happen if we don’t push our sourcing processes to evolve.

Pete Kalish is director of business development at O’Brien & Gere, a certified member of the Control System Integrators Association (CSIA). For more information about O’Brien & Gere, visit its profile on the Industrial Automation Exchange.

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