Tier One Consolidation Process: 3 Easy Steps

Tier One Consolidation Process: 3 Easy Steps

What is Tier 1 Supplier Consolidation all about? “At Fapco we’ve successfully refined the process of consolidating hundreds of OEM suppliers into one efficient Tier One supplier—Fapco,” states Fapco President and Founder, Larry Gardiner.

“Believe me, this is a daunting process for the management teams of many OEMs to wrap their heads around. But our experienced staff and unique customer service systems—from initial startup, to continuous improvement once the system is up and running—make this custom full service solution something for every OEM to consider. This first segment of a three part series of Outside The Box, is dedicated to answering the questions OEMs have when starting this process with Fapco in three distinct steps.”

OEM QUESTION #1: “How do I begin the process of turning my existing integrated parts management supplier process over to a single-source, Tier One parts supplier? I have hundreds of suppliers and I don’t know where I should begin.”

ANSWER: The Fapco team has a Tier One consolidation “Starter Kit” to help guide the process for the OEM.

“We prefer to start the process with a statement of work which includes everything that an OEM customer is going to expect Fapco to do and what key elements they are going to bring to the table,” states Fapco President, Larry Gardiner. “We call this our ‘Starter Kit.’ It lays out the scope of work to be done and enables everyone at the table to understand the needs and demands of both the customer and Fapco.”

Fapco has an organized approach to establishing OEM Tier One consolidation needs:

  • Does the OEM want Fapco to purchase all the components from the supplier?
  • Do they want Fapco to perform inspections of the incoming components?
  • How many suppliers will Fapco be consolidating for the OEM?
  • What are the negotiated prices the OEM is currently paying?
  • What is the negotiated supplier lead time?
  • Who is going to pay the freight costs of the parts coming in?

“Everything that’s going to be expected of us here at Fapco needs to addressed in our ‘Starter Kit,’” answers Gardiner. “Next we would typically ask for a representative group of parts with the release quantities to prepare a quote. From the Starter Kit Q&A process the OEM customer begins to understand our structure, pricing and processes, and can start looking for savings opportunities involved in doing business with our Tier One program.”

Our quoting process at Fapco provides a breakdown of the price into component costs, labor, packaging materials, receiving, warehousing, shipping and any other associated components.

“This way our customer can tell what each component entails as well as what the associated burden costs will be” explains Gardiner.

“Our new customer can then take a look at the detailed cost analysis and see some aspects that fall in line with their own cost estimates,” states Gardiner. “They also see others where we may need to help them lower costs a bit. It’s a productive partnering negotiation. When we complete that process, we are ready to work out a contract.”

The President of Fapco went on to explain that the contract negotiations will include the following:

  • The length of time the contract will be in effect
  • How obsolescence will be handled
  • How the customer sales forecast will work
  • Any other business issues including quality and performance issues

“The bigger the supplier base you are consolidating, the more time it takes to negotiate the details,” states Gardiner. “The consolidation takes time. These negotiations include establishing credit, terms, and minimum buy quantities with all the suppliers to be consolidated. This can include three or four hundred suppliers; and all of the required communications exchange.”

Gardiner stressed the importance of acquiring honest and realistic forecasting from both the OEM customer and its suppliers.

“Sales forecasts will tell Fapco what to buy and when to ship it to the customer. We prefer a weekly sales forecast. And typically our customers also have emergency orders. If a part is needed today that has a four week lead time from the supplier, we must be honest and tell them we can’t do it, unless we’ve got a safety stock policy in place. This is why accurate forecasting information from the OEM customer is such a key component to helping them cut cost with our consolidation services,” states Gardiner.

OEM QUESTION #2: “How are we going to cost out this program? Will you provide a structure for my financial group to follow?”

ANSWER: The Fapco team has over 36 years experience in cost analysis and estimating Tier One consolidation for OEMs.

Fapco’s Controller Ken Douglas is as deeply involved in the cost analysis process as its president. A graduate with a degree in accounting, Douglas has been providing detailed cost accounting since 1977. He was with Clark Equipment before joining Fapco in 1980. His cost analysis and estimating team is involved in all aspects of the financial details for Fapco Tier One programs.

Douglas explained the customer requirements for on-time delivery, product quality, agreement on payment terms, definition of order process, inventory turns and shipping methods are the prerequisites to begin the cost analysis and estimating process.

He said he usually works with specialty buyers for large OEMs, and purchasing and engineering teams with smaller companies.

“Once the scope of the customer needs has been completed, then the detail work begins,” answers Douglas.

“The new customer needs to provide some representative part numbers of the various types of products to be processed. The customer also provides us volumes by product type to give a good representation of the overall business. The representative part numbers should have a bill of material, supplier source and location, supplier cost of the component parts, minimum buy quantities of each component part, supplier lead times by component part, supplier payment terms and packaging specifications. Our team is here to help guide the customer through this process using our expertise and templates from proven, successful programs that are already up and running.”

He explained that most of the time, the potential customer has already established the suppliers of the component parts. They have already negotiated the cost of the components. Their engineering and quality departments have approved the supplier. This makes the process more about documentation than discovery.

The Fapco team then begins their work to analyze the in-house processes and procedures, equipment, floor space, manpower and administration required to provide the service levels to meet the Fapco quality policy “We Delight Our Customers.”

“The packaging process is engineered and work flow determined from receipt to shipment,” explains Douglas. “Fapco’s costs are then applied to the various aspects of each element to produce and deliver the finished product.”

Our experience and expertise in this process makes it a far less burdensome task than most OEMs expect. Many of our OEMs are enlightened by the many efficiency gains and begin to understand as they streamline their former in-house systems.

Gardiner explains how these first two steps to Tier One consolidation are expertly controlled and orchestrated by the dedicated Fapco team.

“These experienced Fapco team members are assigned just to them. We understand the OEM is taking a risk by doing something they’ve never done before. They also begin to understand that we are very much partnering in that risk. We’re going to be investing a good amount of money in their inventory as their new, single Tier One supplier. Our goal is that new OEM customers are delighted with the service they are receiving and begin to join forces with the Fapco team to cut their costs even further, improve service to their customers and become more competitive in their industry,” Gardiner concludes.

OEM QUESTION #3: “What about the information exchange? Do you have the IT experience to handle all of our suppliers? Are you compatible with our current systems? Is your IT department robust enough to handle us?”

ANSWER: Fapco’s IT department has been working with the Big Three automakers for over 30 years and they can handle whatever the OEM needs.

Director of IT for Fapco, Dennis Cooper, has been with the company for over 18 years. Since the 1970s, Fapco has continuously served some of the most demanding clients in the world—the Big Three automakers of Detroit.

“This exchange of data has become second nature to us,” states Cooper. “We are required to do it to do business in the automotive industry. We’ve been doing EDI (Electronic Data Interchange) with major automakers since 2000—because we have to.”

Cooper explains that many companies who don’t do business with major automakers simply don’t have Fapco’s capabilities in EDI. “We can do anything the client needs us to do when it comes to IT. We can do what the large companies want or what the smaller companies need. That’s the big difference between Fapco and other strategic parts integration firms. Many are very rigid and can only do it one way—not here at Fapco. We specialize in customizing solutions for our Tier One parts customers.”

Connectivity and network security are also a non-issue when doing business with Fapco. With redundant high speed access to the Internet, Fapco has stable and ample bandwidth for doing daily business. For security in the automotive industry, Fapco was one of the first 200 companies in North America to have access to the ANX (Automotive Network Exchange) network. This specialized Extra-Net provides secure data exchange in the auto and medical industry—a private worldwide Internet highway providing access only to its members. This adds a higher level of security for Fapco and its automotive customers. Fapco accesses the mainframes of the major automakers and exchanges EDI within this secure network. Fapco runs nine servers—three Unix-based and six Windows-based.

After meeting directly with the new customer’s IT department, Fapco’s IT team sets up a test environment to start the data exchange process.

“Both IT departments sit down and determine how we are going to work together and who the key players are,” Cooper states. “The exchange of data between two companies is always on a unique, case-by-case basis. We can customize it to suit the needs of any customer.”

Many smaller customers provide their forecast and requirements with Excel spread sheets. Others have web portals to download info. Depending on the size of the company, there may even be a specialized EDI department.

The start-up process will be different depending on the customer and how we will exchange data. We always do testing of the data exchange to and from our customers to verify that the format and content will upload into our systems correctly. For Standard EDI data transfer, the format of the data is an industry standard format that feeds the data into Fapco’s and the customer’s system without human interaction. We test every data format that will be exchanged between Fapco’s and the customer’s systems. Testing of the data exchange can take from a week to a few months depending on how simple or complex the data is. Once we are done testing and sure that the data exchange formats are correct, we can then start exchanging real time data between our two companies.

Common data we exchange is planning and forecasts, scheduling with releases, ship schedules, inventory, advance ship notices and invoicing. There are many more types of data we can exchange depending on customer specific needs. We can also help you with nearly any packaging needs, providing top-quality carton packaging, automated packaging technology, cold seal packaging, along with many other types of part kitting packaging. Get Started with Fapco Inc. today!

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