Sponsored By
Bill Tobin

April 12, 2016

7 Min Read
Why lower tier suppliers need to ‘trust, but verify’

Back in the 1960s and 1970s, Fortune 500 companies were vertically integrated. In our case, a train car or gaylord of plastic showed up and, after passing through several departments or plants, you ended up with a car, medical equipment, washing machine or some other product. It was all done in house, because a supplier base capable of fully assembled subassemblies didn't exist. Years later, we started hearing phrases like “core competency,” “right sizing” and the like. Some MBA types crunched the numbers and said it was more profitable to purchase complete subassemblies and/or integrate someone else's technology breakthrough into your product and assemble it, than to do all the R&D and component manufacturing in house (i.e., self-driving cars technology from the computer and robotics industries).

Image courtesy David Castillo Dominici/freedigitalphotos.net.

Some molding companies saw this as an opportunity and expanded their services by allowing, for example, the automotive industry to purchase a fully assembled dashboard. In many cases, this included R&D, where the supplier gets a design or concept and then engineers it to the customer's specifications. It cleverly leaves the dashboard manufacturer dealing with the logistics of coordinating all the parts to assemble and administering subcontracts, tooling design/build/qualification contracts and the like. Hence, the Tier 1 supplier. 

The customer only needed to specify the part and the approval process and then pound on the desk for lower costs, just-in-time (JIT) manufacturing, zero defects and the like. This included a highly complex shipping schedule, so that the Tier 1’s deliveries were only hours ahead (and in the proper order) of the customer's daily production schedule, as well as purchasing the tools.

Oh yes, and somewhere in this highly complex Gant chart is the Tier 1’s responsibility to pay the subcontractors for all the tool jigs and fixtures. The Tier 1 businesses told their supplier base, “We'll pay you when we get paid . . . .”  But often it didn't work that way.

Occasionally we hear the horror stories about seeing a product in the marketplace that the lower tier company made the components for while the Tier 1 supplier had been singing the song of waiting for his payment because of a slow approval process, and then the chorus of, “we'll pay you when we . . . ."  In reality, someone higher up the supply chain is using the lower guy's money as an interest-free loan.

What's a Tier 2 or 3 supplier to do? As a small subcontractor, you didn't get the job because “it's a privilege to do business with [fill in the blank].” You got it because you could deliver a quality part, at a reasonable cost, in the volumes required and on time. It was just business. But you feel like you're being played like a newbie at a Vegas poker game. Here are a few pointers to get out of this “game” and to do business in a professional manner.

  • Don't believe the “there are a dozen companies who can do what you do faster, cheaper and better” ploy. If there were someone better, the Tier 1 supplier wouldn't be talking to you in the first place.

  • While you might be told, “We're building the automatic assembly equipment around your parts” as an excuse for not paying you, what they've really told you is, “Our customer has approved your parts; now we have to finish the assembly equipment.” Don't send more than a few dozen parts/cavity as approval samples without getting paid for the mold. (How many parts do you believe the manufacturer really needs to cut up and inspect?) If the company needs 10,000 parts to approve the equipment, it is free to order and pay for them.

  • The first dance should be with the host of the party. When it comes to tooling contracts, write your quote directly with the customer, not the Tier 1 supplier, so you can get paid on approval. The Tier 1 supplier is still doing all the admin stuff, but this way, you get paid faster.

  • Take the dry cleaner approach: If you don't have the ticket, you don't get your fur coat. If your terms are N-30, don't ship the next release until the previous releases have been paid for.

  • When in production, don't fall for the “JIT reject.” While JIT is an interesting concept, it's based on the ability to predict production requirements and have immediate access to components. The customer's fantasy is that you have a warehouse of non-ordered product (the secret JIT warehouse), so that if he orders 10,000 parts this week, he doesn't see a problem if next week he orders 500 or 50,000 parts. Occasionally the Tier 1's customer does a “push back,” leaving the Tier 1 supplier with a bunch of components for which it no longer has orders. One of the tricks is to reject this excess inventory back to the lower tier supplier. Here's how you stop this.

Write a policy manual. Since you've already statistically approved this part, your process and part quality have made salable product in the past. The only way you'd make unsaleable product is if something changed.

Tell your Tier One customer to keep the shipment, and to send you a few samples of the rejected parts, noting what's wrong and why they are rejectably different from previous shipments. If you agree with the reject, tell him there will be no further shipments for the next six weeks while you (1) hunt down the cause, (2) eliminate the cause and (3) re-certify the process until you're absolutely sure the problem won't arise again.

If this is a legitimate problem you're doing the appropriate thing. If this is an ‘acceptable defect”—something that came up that wasn't in the specifications and yet was in compliance with the approval process—there is no reject. Accept a 30-day deviation, giving the customer time to put through an engineering change. Do not accept a “perpetually continuing deviation” or a “lifetime/end-of-product-life” deviation. When the deviation expires, stop shipping until the specifications have been revised. This is what your production purchase order required in the first place.

If this is a JIT reject, the Tier 1 supplier already knows he cannot afford to be without parts for six weeks. By insisting you'll only ship approved parts “in compliance with stated specifications,” he will withdraw the reject with a little blustering, telling you to improve your quality at no increase in cost, and then push back any future orders. For you, it's a problem in scheduling, but it is not the snipe hunt that would have cost you the next six months of profit on this part along with the large expense of labor and materials solving a problem that never existed.

If you count up the businesses in the manufacturing sector, you'll find that more than 90% of them are Tier 2 or lower. Yes, form the relationships with the Tier 1 supplier as well as its customers. Good business practice is (using Ronald Reagan's phrase) done with a “trust but verify” mentality. We're all in business to make money. When you get an RFQ, your expectation is that you've been given all the information necessary to make the part. What you assumed was the way you'd be doing business. Don't assume—if it isn't in writing, it was never agreed to and there are no rules. We used to be able to do business based on a handshake. Today, however, accepting a job and not having the rules for doing business in writing is done at your company's peril.

It's your choice.

Bill Tobin is a consultant and owner of WJT Associates. He has authored several books and articles and teaches courses on plastics processing. Books, additional articles and the current public training seminar schedule are available at www.wjtassociates.com, or contact the author directly at [email protected].

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