Published: <a target="_blank" rel="noopener noreferrer" href="https://www.dnaindia.com/">www.dnaindia.com</a>, January 2023.The relationship between Original Equipment Manufacturers (OEMs) and their tier-1 vendors is often fraught with conflict. It is very common to witness mistrust between the two entities, even though both need the other for their survival. This article’s main aim is to examine the reasons why each partner views the other in this way and also to point out the ways in which an amicable and rewarding collaboration can be established. Smaller Guy, Bigger IssuesVery often, the tier-1 vendors are significantly smaller in size, scale, revenue, etc., compared to the OEMs that they support. Hence, they perceive themselves as at the mercy of the whims and fancies of the OEMs they work with. This feeling is reinforced every time the OEMs reschedule their production plans (OEM production plans are worked out based on a monthly/three-month forecast. Forecasts often go wrong and don’t match real demand) and expect the vendors to adjust their deliveries accordingly. It also happens from time-to-time that the vendors would have made some FG as per an earlier schedule, but because of such changes in plans, the OEMs do not pick up or pay for that material. This blocks both the storage space and working capital of the vendors. Trying to meet deliveries of parts as per a new timeline means the vendor will have to their change its manufacturing plans based on which they had already sourced RM and optimised their production batches. This means that some capital will be tied up in raw materials that will now not get used, set-up may have to increase, and capacity utilisation might be below expectations. Since most vendors service multiple OEMs, any change in schedule by one OEM can have a cascading impact on the vendor’s ability to deliver orders from their other customers as well. The only way to try and prevent this is to work overtime, incur the extra cost and/or sacrifice their own after-market orders. However, in spite of all this, one or the other OEM may experience poor OTIF. OEMs are Unhappy TooWhen OEMs experience unreliability- either orders are not in time, or they are not in full, or both, this impacts their ability to manufacture their products on time. This forces them to reschedule their production plans so that their assembly lines do not go empty. Senior management teams have to waste their precious time and effort in chasing such vendors. Therefore, they start viewing their vendors as unreliable. To most OEMs, this inability of vendors is seen as a capacity issue- after all, when they visit the vendors’ plants, they look very busy. So, to solve this problem, they urge their vendors to augment their capacity and/or have dedicated capacity for their business. But vendors, (already struggling with the OEM’s way of working) are reluctant to add or dedicate capacity, as they are unsure whether the augmented capacity will be fully utilised by the OEMs. So, they, in turn, negotiate for a commitment from OEMs for a set volume of business that they can anticipate and for schedules that do not change.  Thus, there is a virtual standoff between the two entities.When at a stalemate, OEMs are forced to look out for more reliable partners. Additionally, if they can get the components cheaper or if the vendors agree to a larger payment window, it is a bonus for them. Thus, over a period, OEMs tend to add more vendors or replace existing vendors. Strangely, these new vendors, too, will soon turn unreliable! What is the Way Forward?From the problems listed above, it is clear that to evolve a win-win solution for these, the following elements will have to be built into it: <ul><li>OEMS should get ~100% On-Time In-Full (OTIF) Delivery: This is the biggest pain point for the OEMs. OEMs are usually willing to support their vendors as long as the OTIF performance is good.</li><li>Increased vendor productivity: To achieve excellent OTIF performance, vendors will have to increase their productivity.</li><li>Vendor costs should not go up: At the same time, vendors’ costs for doing business should not go up.</li><li>Long-term partnership: The vendors will would also need some assurance that their partnership with the OEM is a long-term one. Without this, they will not be in any position to put in additional investments to improve their productivity, reduce wastage, etc. </li></ul>A Solution that WorksThe way out of this seemingly impossible situation and to achieve the above objectives is to implement a ‘pull’ replenishment system, wherein the vendor replenishes raw material stock maintained by the OEM from his own FG stock based on daily consumption signals. To achieve this, the vendor can maintain a mutually agreed-upon level of finished goods stock for most of the items he has to supply to the OEM. And the OEM, instead of sharing a schedule, should provide the vendor visibility of the consumption data from his RM stock daily. A simple colour-based priority system can help the vendor understand the depletion level of the stock and react quickly. Anyway, with stock buffers in place at both the vendor’s and OEM’s end, lead times for manufacturing the components will come down dramatically to only that of the transportation lead time. So that there is no interruption to the OEM’s production plans. Thus, OEM will experience with high reliability from these vendors! The vendor, on his part, will now not need to react to changes in the plan by the OEM, since he is buffered from it. Instead, he can schedule production batches according to the penetration into his FG stock buffer and based on his batching considerations. This will not only protect his productivity but also improve it. The FG buffer vendors have to maintain will usually be much lower than the slow-moving/un-lifted inventory that they generally end up carrying. However, with an assurance from the OEM that any left-over inventory from this stock will definitely be picked up or compensated for, will overcome any objection vendors may have about this. Peace of mind for both vendor and the OEM! It goes without saying, therefore, that it is in the interest of both parties to engage in long-term business, and OEMs tend to increase the share of business with such reliable vendors.

Key Takeaways

The OEM and Tier 1 vendors often face conflict and mistrust, despite needing each other for survival. This article explores solutions for a win-win collaboration.

OEMs and vendors – From tug of war to partnership

Published: <a target="_blank" rel="noopener noreferrer" href="https://www.dnaindia.com/">www.dnaindia.com</a>, January 2023.The relationship between Original <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/equipment-manufacturing/">Equipment Manufacturers</a> (OEMs) and their tier-1 vendors is often fraught with conflict. It is very common to witness mistrust between the two entities, even though both need the other for their survival. This article’s main aim is to examine the reasons why each partner views the other in this way and also to point out the ways in which an amicable and rewarding collaboration can be established. Smaller Guy, Bigger IssuesVery often, the tier-1 vendors are significantly smaller in size, scale, revenue, etc., compared to the OEMs that they support. Hence, they perceive themselves as at the mercy of the whims and fancies of the OEMs they work with. This feeling is reinforced every time the OEMs reschedule their production plans (OEM production plans are worked out based on a monthly/three-month forecast. Forecasts often go wrong and don’t match real demand) and expect the vendors to adjust their deliveries accordingly. It also happens from time-to-time that the vendors would have made some FG as per an earlier schedule, but because of such changes in plans, the OEMs do not pick up or pay for that material. This blocks both the storage space and working capital of the vendors. Trying to meet deliveries of parts as per a new timeline means the vendor will have to their change its manufacturing plans based on which they had already sourced RM and optimised their production batches. This means that some capital will be tied up in raw materials that will now not get used, set-up may have to increase, and capacity utilisation might be below expectations. Since most vendors service multiple OEMs, any change in schedule by one OEM can have a cascading impact on the vendor’s ability to deliver orders from their other customers as well. The only way to try and prevent this is to work overtime, incur the extra cost and/or sacrifice their own after-market orders. However, in spite of all this, one or the other OEM may experience poor OTIF. OEMs are Unhappy TooWhen <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/articles/spare-parts-strategy-for-oems-in-the-automobile-sector/">OEMs</a> experience unreliability- either orders are not in time, or they are not in full, or both, this impacts their ability to manufacture their products on time. This forces them to reschedule their production plans so that their assembly lines do not go empty. Senior management teams have to waste their precious time and effort in chasing such vendors. Therefore, they start viewing their vendors as unreliable. To most OEMs, this inability of vendors is seen as a capacity issue- after all, when they visit the vendors’ plants, they look very busy. So, to solve this problem, they urge their vendors to augment their capacity and/or have dedicated capacity for their business. But vendors, (already struggling with the OEM’s way of working) are reluctant to add or dedicate capacity, as they are unsure whether the augmented capacity will be fully utilised by the OEMs. So, they, in turn, negotiate for a commitment from OEMs for a set volume of business that they can anticipate and for schedules that do not change.  Thus, there is a virtual standoff between the two entities.When at a stalemate, OEMs are forced to look out for more reliable partners. Additionally, if they can get the components cheaper or if the vendors agree to a larger payment window, it is a bonus for them. Thus, over a period, OEMs tend to add more vendors or replace existing vendors. Strangely, these new vendors, too, will soon turn unreliable! What is the Way Forward?From the problems listed above, it is clear that to evolve a win-win solution for these, the following elements will have to be built into it: <ul><li>OEMS should get ~100% On-Time In-Full (OTIF) Delivery: This is the biggest pain point for the OEMs. OEMs are usually willing to support their vendors as long as the OTIF performance is good.</li><li>Increased vendor productivity: To achieve excellent OTIF performance, vendors will have to increase their productivity.</li><li>Vendor costs should not go up: At the same time, vendors’ costs for doing business should not go up.</li><li>Long-term partnership: The vendors will would also need some assurance that their partnership with the OEM is a long-term one. Without this, they will not be in any position to put in additional investments to improve their productivity, reduce wastage, etc. </li></ul>A Solution that WorksThe way out of this seemingly impossible situation and to achieve the above objectives is to implement a ‘pull’ replenishment system, wherein the vendor replenishes raw material stock maintained by the OEM from his own FG stock based on daily consumption signals. To achieve this, the vendor can maintain a mutually agreed-upon level of finished goods stock for most of the items he has to supply to the OEM. And the OEM, instead of sharing a schedule, should provide the vendor visibility of the consumption data from his RM stock daily. A simple colour-based priority system can help the vendor understand the depletion level of the stock and react quickly. Anyway, with stock buffers in place at both the vendor’s and OEM’s end, lead times for manufacturing the components will come down dramatically to only that of the transportation lead time. So that there is no interruption to the OEM’s production plans. Thus, OEM will experience with high reliability from these vendors! The vendor, on his part, will now not need to react to changes in the plan by the OEM, since he is buffered from it. Instead, he can schedule production batches according to the penetration into his FG stock buffer and based on his batching considerations. This will not only protect his productivity but also improve it. The FG buffer vendors have to maintain will usually be much lower than the slow-moving/un-lifted inventory that they generally end up carrying. However, with an assurance from the OEM that any left-over inventory from this stock will definitely be picked up or compensated for, will overcome any objection vendors may have about this. Peace of mind for both vendor and the OEM! It goes without saying, therefore, that it is in the interest of both parties to engage in long-term business, and OEMs tend to increase the share of business with such reliable vendors.

Problem: The OEM–Tier-1 relationship is strained on both sides—frequent changes in OEM material schedules cause costly inefficiencies, while supplier delivery lapses compromise execution stability. Solutions: Demand-driven replenishment, strengthened with strategic buffers, helps vendors match OEM consumption patterns, maintain supply stability amid schedule changes, and unlock mutual efficiency. Benefits: This system increases vendor productivity, reduces inventory, stabilises costs, and improves OEM satisfaction with reliable deliveries, establishing a sustainable and profitable partnership for both parties.

Explore how OEMs and vendors can overcome conflicts and establish a productive partnership through effective 'pull' replenishment systems and improved communication.