Change Management on the Direct Side – Get the Pain Over With Sooner Than Later

We usually talk about change management in the context of driving adoption of a new solution, a new process, new compliance or other initiative. For a change of pace, let’s look at managing supplier relationships on the direct side. This can be just as hard – this supplier management case comes from Singapore. The example in this piece originated as a QA or supplier performance issue at the company in question. A global director of supply chain operations at a medical device firm with headquarters in Japan and operations in SE Asia shared the details directly with me.

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The company is among the top 3 in its vertical, heavily regulated by the US Food and Drug Administration and similar agencies in the markets where it is active and correspondingly operates with an extreme focus on product quality and safety.

Much of the company’s direct materials, chemicals, etc., are sourced locally or regionally, but some key parts come directly from Japan. This case concerns one of those items, which was sole-sourced from a supplier in Japan. Contrary to the perception of Japanese supplier quality perhaps, this particular supplier wasn’t exactly a suitable candidate for implantable medical devices – it’s manufacturing lines are open air manufacturing, in stark contrast to the company’s own high level clean room plants. The company acquired the business a very long time ago, mainly owing to personal relationships between supplier firm’s owner and the executives at the manufacturer.

The QA problems with this supplier’s products went back a long time, the acceptable yield was wildly fluctuating, with some batches 100% rejected! Despite the ongoing QA issues, and the criticality of the component, the sole sourcing continued, with the “remedy” being inventory buildup – Anything not to rock the Japanese relationship boat.

There’s a Japanese expression to understand here: 従来通り(juurai-doori), which essentially means “the way we have done it in the past” and is a core part of how Japan works. It is a convenient way to let decisions be made without really making a specific decision. It relies on everyone’s attention to detail and follow through to work – the downside is that it can let suboptimal ad hoc choices continue unchanged. Also, it’s not so easy to get to work outside Japan with less cultural homogeneity.

Another change management lesson along the journey was how to look at the inventory buildup – the director in question had brought in analysts with an IT industry background, and he had to work really hard to convince them inventory turns well below 2 were perfectly acceptable. As a comparison, the IT manufacturer the employee came from operated with turns in the 40s. The difference was that the medical device profit margin is around 80%, and the IT firm operates with single digit margins. Believe it or not, it took about 6 months to get the analyst to truly internalize the change in the underlying business model and adapt to the new reality of a high margin product were availability is paramount. This, in turn, let the company ignore stockpiles of inventory.

Back to the troubled supplier relationship, which predated the employment of the director I spoke with. The supplier had been given several chances to change but to no avail. Additionally, the owner/operator was now well in his late 60s and transition was becoming a concern. It took documenting the poor track record – obviously – but more importantly, he continued to push for change, and did not let it die on the Japanese backburner.

The tipping point came when the supplier started to threaten availability – the long run of really bad batches had brought down inventory to 6 weeks manufacturing, which considering time to end consumers meant that there would be out of stock conditions – unacceptable. This finally gave the director the approval to find a replacement. After tearing into this, it took him 2 or 3 years to finally persuade the “mothership” that this supplier had to go.

We can compare this example with this LG procurement story, I think it shows quite similar mindset. Both are good examples of how a heavy hand at the till, or fear of repercussions from the corporate culture otherwise, can postpone much needed changes until it really impacts the business. Don’t be that company.

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