Contract Compliance in Tier 1 Manufacturing (part 1)

In the world of manufacturing, learning the tier system and how they interlock to benefit OEMs is an inevitable step to achieving success; automotive is no different. Some tiers manufacturers create components and have less red tape, others manufacture large parts and are under strict deadlines. In order for all these branches to stay on task and on budget – while also reporting following OEM rules and legal guidelines – a contract must be created to keep the process running smoothly.


In this interview, I sit down with Alan to talk about contracts and some of the difficulties that can occur to meet contract compliance as they pertain to tier one automotive manufacturers. He will also discuss how certain pieces of planning/scheduling software such an ERP or an MES can help will help with contract compliance through their wide variety of data collecting features.

Jean: What is a tier one automotive manufacturer?

Alan:tier one automotive manufacturer, supplies parts or assemblies to an automotive OEM, who actually assemble the vehicles. So, they are providing parts, whether it is a seat or a dashboard or wiring harnesses or carpets or fenders or whatever the parts are to the automotive assembly company.

Jean: And is this concept unique to automotive manufacturing or all different kinds of manufacturing?

Alan: It is applicable to all different kinds of manufacturing. Of course, automotive manufacturing is some of the most advanced manufacturing that we have in the country. They have things down pat from the specifications that they give to their suppliers all the way through other elements of that supply chain.

Alan: They have a very good process in place, industry wide, in order to get the parts they need when they need it. Contract compliance describes a series of checks and procedures that businesses implement in order to ensure that they are conforming with regulations as well as contractual terms that they have bound themselves by.

Alan: It usually forms part of a broader contract management strategy. And the goal is to ensure that the contracts are executed properly at all stages including both before and after signing those contracts that the standards of contract compliance are determined both by internal and external influences, and they can be set by contract managers, by operations leaders, other industry leaders or governments, and all of them are just seeking to ensure that the contract process is fair and it’s secure for all the parties regardless of the power dynamic.

Alan: But given the complexity of contracts, especially in the automotive markets, the sheer volume of contracts being processed in scaling companies, the job of contract compliance can often become unmanageable, and particularly for teams that you know that have low legal head counts and simply operational head counts.

Alan: So, there are several problems that are commonly encountered in contract compliance workflows.

Jean: Okay. So, seeing that we are in the ERP business, when does this contract come into play when it comes to ERP migrations?

Alan: Before I answer your question, let me take a step back first.

Alan: Some of the problems that companies encounter – and ERP is an integral part of all of this – when they’re trying to comply with their contracts is, one, it’s time consuming. There has to be some oversight and it can be hard sometimes to strike a balance between not consuming too much time, both from a legal perspective and an operational perspective, but ensuring that the contracts are compliant and reliable.

Alan: Furthermore, sometimes the standards change for contract compliance, depending on the industry but if those contracts are changing or made worse by the fact that the regulatory landscape often changes. Look at California and how they have mandated that all vehicles produced or sold in California by a certain date must be electric vehicles.

Alan: Those standards change and compliance with those standards have to be documentable. However, data is hard to collect, it’s hard to keep, and it’s hard to use, especially the volumes of data that we’re talking about. Automotive suppliers execute contracts with vehicle manufacturers, and those contracts have stipulations regarding the quality of the products that are being delivered, the performance of the manufacturing operation, and how those products are then produced. And quite frankly, just information availability – so whether it addresses production or quality or recalls or just analyzing that information – that data has to be collected.

Alan: And managing large volumes of contracts is tough. So, ensuring that the contracts are fully compliant without letting them consume all your time is even tougher sometimes. Because there’s legal and commercial ramifications for the supplier, those requirements are supported by the required data collection.

Alan: The question becomes “how do I easily and accurately collect product production data in order to meet the contract compliance requirements?” As companies move toward becoming a truly integrated manufacturing operation that will make your operations more efficient, productive and responsive.

Alan: Your team can harness that power to not only resolve production issues in the short term, but also transform them into operational advantages in the long term. In the past, contract compliance was typically relegated to information gained from the company’s transactional record system, their ERP.

Alan: In today’s manufacturing environment, it’s not a case of manufacturing execution systems versus ERP – together, MES and ERP bring a level of operational clarity to the supplier that neither system can provide on its own. A manufacturing execution system is software that’s designed to optimize manufacturing processes, and it does that by monitoring and tracking and documenting and controlling the entire production lifecycle.

Alan: Manufacturing execution system – MES – tracks a huge amount of data and it produces some real time insights and that’s key. Real-time insights that can boost production efficiency and save costs. And there’s several drivers of an MES that include, and I’ll tell you some of those drivers and many of these benefits are directly associated with contract compliance. Improved quality control, and again, a lot of contracts have a quality standard that has to be met and as quality control and in information is transmitted in real time. Companies with an MES can immediately halt production if there’s an issue.

Alan: You can reduce waste; you can reduce scrap. You can reduce overages. You can reduce rework. There are a lot of benefits from a quality control perspective. MES can generate a realistic production schedule because it balances all of the resources, the people, the material, the equipment.

Alan: And it can integrate scheduling and maintenance just to maximize that product flow and that the utilization of the assets. And which of course increases the uptime, and it improves the OEE, the overall equipment effectiveness. MES can reduce inventory. It’ll update inventory records with new production and scrap and non-conforming materials so that purchasing and maintenance can maximize the product flow.

Alan: Scheduling knows exactly what materials are on hand at all times, and can reduce them just in case inventory that is sometimes produced as increased work in process inventory. Again, saving money on both the manufacturing and transportation costs and as well as storage and it improves that inventory planning process.

Alan: I had one customer who has a lot of cardboard, and what they would do is take the cardboard and cut it up into scraps and record information, production information at the workstations on pieces of cardboard, and then collect those pieces of cardboard at the end of the day.

Alan: Eliminating paperwork means that there’s less chance for human error. It also means that the data recorded from the shop floor is immediately available for both decision making, within the integrated system, as well as data collection for contract compliance.

Alan: This is very important for contract compliance. It also improves the product tracking and genealogy. It follows the entire production cycle from the beginning to the end. And it grips the final parts or batches with the corresponding manufacturing data and that data allows for improved regulatory and contractual compliance so that they can meet the terms of those of those contracts. There’s a lot of features to a typical MES application. There are some that are common practical applications of the MES functions and the specific details for each of the function might differ depending on the software system, but they should all contain some key features, especially if you’re looking to support contract compliance. So, a few of those key points that are associated with the specific requirements of your contracts include scheduling. First, data acquisition and collection. It allows the input of all the information during production, and it can be done manually, or it can be done automatically.

Alan: And of course, most organizations try to drive towards the automatic collection and acquisition of that data. Another feature is scheduling, providing a global view of the planned production orders and the production routing and electronically transferring those work orders.

Alan: MES will help to manage the staff, will help to manage resources and also provides a bidirectional flow of production data between your ERP and the shop floor. And probably most importantly, from a contractual compliance perspective, MES can do product traceability and genealogy. Associating a final part to a batch with all of its manufacturing from the raw material to the component assembly is data that is a dream for anybody who has to go back later and track either issues or just the production consistency of particular parts.

Alan: Oh, a couple other things. Equality, process management, again, like typically or often contract compliance requirements as well as documents, being able to provide work instructions to the floor is, again, often required by contract.

Alan: And then of course doing preventative maintenance operations. More of an internal thing, but certainly helping to optimize the planning processes. There are many functions to MES, but as per the subject of today’s discussion contract compliance is one of the key benefits that you can achieve with MES.

Alan: The cool thing is that you’re spending money to, to provide automation to comply with the contracts, but you’re also providing data and technology to start accruing the benefits that MES can provide in terms of efficiency and effectiveness to help move your company towards your industry 4.0 goals.

Alan: It, quite frankly, is a project that has the benefit of paying for itself quickly.

D4M is a privately owned company specializing in leveraging digital technologies to accelerate manufacturing clients to their transition to Industry 4.0. With long tenure and hundreds or successful projects, we are confident that our approach and experience provides the roadmap to help bring clarity and efficiency to your manufacturing operation.

To find out how we can help with your SAP environment, or to learn more about how we rolled out SAP to 60 locations in 60 months, reach out to us today. Contact form and office numbers listed below. 

We look forward to partnering with you!

Most Recent Blog and News Posts

About Us

D4M International is an IT consulting company focused on transforming manufacturing and operations for optimal performance with SAP and DELMIA. 

We have expertise to help our clients assess, deploy, and maintain key solutions, driving productivity that impacts the bottom line. 

Leaders in Automotive, with expertise in other industries with advanced manufacturing, we operate in North and South America as well as Europe, enabling us to support our clients globally.

Let’s Socialize

Popular Post