Chapter 4 1

Chapter 8

Supplier Management andSupplier Development

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Preliminaries The goal of supplier management and

supplier development is a world-class supplier base

Supplier management involves Supplier Performance Measurement Supply Base Optimization Buyers accepting some responsibility for

supplier performance Supplier management is a pre-requisite to

Supplier development

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Preliminaries Supplier development is defined as a buyer

firm infusing Suggestions and ideas, and/or Human resources, and/or Training, and/or Financial capital, and/or Technology

into a supplier to Improve his capabilities Improve his performance

In order to meet the buyer firm’s short-term and long-term supply needs

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Supplier Evaluation (Ch 7) in comparison to Supplier Performance Measurement (Ch 8)

Supplier Evaluation is an event to Pre-qualify suppliers To award contracts To pursue improvement opportunities

Supplier Performance Measurement is a continuing process

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Supplier Performance Measurement

Cost reductions Quality performance Delivery performance Contract Deficiency Notices

(CDNs)

Quantitative Variables

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Supplier Performance Measurement

ETDBW Responsiveness Problem resolution ability New Product Development Support Technical ability Commitment to R&D Trust levels

Qualitative Variables

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Supplier Performance Measurement

Regular reports to the commodity buyer

Buyers meet with suppliers Carrots and Sticks

Reporting and using the information

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Supplier Management Techniques

Categorical system Weighted point system Cost Index

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Categorical System

Performance Category

Score

E G F P

1. Meets Delivery Requirements

2. Customer focused

3. Fair pricing

4. Problem resolution capabilities

5. An innovative supplier

6. Communication and trust levels

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Weighted Point System

A weighted average of scores across a number of categories

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Cost Index: Quantifies total cost of doing business with a supplier

Price Purchase TotalCosts anceNonperform Price Purchase Total SPI

The Supplier Performance Index:

Nonperformance costs are generally per incident standard costs for late delivery, order shipped incomplete, quality problems and are based upon such things as rework costs, a line shutdown, lost customer sale, inspection and return costs, etc.

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Cost Index: Quantifies total cost of doing business with a supplier

2.1 SPI $15,000$3000 $15,000

The Supplier Performance Index example:

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Cost Index: Quantifies total cost of doing business with a supplier

2.1 SPI $15,000$3000 $15,000

The Supplier Performance Index:

02.1 SPI $150,000$3000 $150,000

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Cost Index: Quantifies total cost of doing business with a supplier

Price Purchase Total

X Costs anceNonperform Price Purchase Total Q SPI

The Supplier Performance Index with the Q adjustment:

Where Q is

suppliers allfor material oflot a of Price Averagesupplier for this materialfor lot a of Price Average

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Cost Index: Let’s adjust with the Q assuming $150,000 is the average price of a lot from all suppliers

2.1 SPI $15,000$3000 $15,000

The Supplier Performance Index:

02.1 SPI $150,000$3000 $150,000

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Cost Index: Let’s adjust with the Q = $15,000/$150,000 = .10

02.1 SPI $15,000.10 X $3000 $15,000

The Supplier Performance Index:

02.1 SPI $150,000$3000 $150,000

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Supply Base Optimization

Rationalizing versus Optimizing Implementation: First phase is to

eliminate marginal and perhaps very low volume suppliers

“Optimization” is a continuous process

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Advantages of an optimized Supply Base Reduced cost Having a World-Class Supply Base

Suppliers that generate fewer problems

Buyers re-direct their time to value-adding activities

Access to suppliers’ engineering, design and other capabilities

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Risks of a reduced supplier base

Absence of competition may generate complacency and price increases

Risk of supply disruption

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Formal Approaches to Supply Base Reduction The Pareto Rule (20/80) “Improve or Else” Triage Approach Competency Stair Case Approach

Stair Case Example

Step 1. Internal Information and Management Processes

Step 2. Quality Standards

Step 3. Production Capabilities

Step 4. Logistics Performance

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Supplier DevelopmentSupplier development is defined as a buyer

firm infusing Suggestions and ideas, and/or Human resources, and/or Training, and/or Financial capital, and/or Technology

Into a supplier to Improve his capabilities Improve his performance

In order to meet the buyer firm’s short-term and long-term supply needs

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Supplier DevelopmentStep 1. Identify candidates for

supplier development Is the supplier essential? Or Does this supplier meet minimum

requirements and show great potential?

AND Is this product or service a source or

potential source for competitive advantage?

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Supplier DevelopmentStep 2. Form a CFTStep 3. Meet with supplier’s top

management Discuss your supplier development

plan Seek a commitment on Kaizen Sense if “alignment” and trust

develop

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Supplier DevelopmentStep 3. Meet with supplier’s top

management (continued) Talk about resource

commitments, roles of each party and potential rewards

Develop agreement on specific measures that will indicate success

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Why Supplier Development? Suppliers’ capabilities are not high

enough to meet current requirements or future expectations Switching costs may be high Supplier has great potential

Joint efforts may accelerate supplier improvement

Mutual benefits

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Example of Supplier Development Results

Criteria

Before Supplier Development

After Supplier Development

Incoming defects

11.65 %

5.45 %

% on-time delivery

79.85 %

91.02 %

Cycle time (from order placement to receipt, inclusively)

35.74 days

23.44 days

% orders received complete

85.47 %

93.33 %

527 firms surveyed

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The Major Obstacles to Supplier Development Too overwhelming

Solution: Dichotomize, standardize, rationalize Lack of senior executive support

Solution: Demonstrate the potential gains Issues of trust

Solution: Nondisclosure agreements, exclusivity agreements, ombudsmen

Supplier doesn’t have the vision of the concept Solution: Supplier Evaluation Reports,

incentives, training sessions, designating Supplier Champions

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Let’s move on