Chapter 10 Supplier Development

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Chapter 10Supplier Development
IDIS 424 Spring 2004
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Supplier Development

• An effort by a buying firm to improve the
  performance and capabilities of a supplier.
• An effort by a buying firm to improve its supply
  needs.

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Why Supplier Development

• Increased Competition
• Downsizing
• Outsourcing
• Cost of purchased items
• Easier to work with a known supplier

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Evolution of Supplier Development
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Early Stages
3. Establish Performance Metrics and Assessment
1. Identify Strategic Supply Chain Needs
2. Search for Competitive Suppliers
4. Supply Base Rationalization
GOAL Pool of Potentially Capable Suppliers
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Identify Candidates for Development

• Identifying key suppliers via Pareto analysis

SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED
SUPPLY BASE
TOP TEN LIST
High
Supplier Performance Defects/ Total Cost/ Late
Delivery/ Cycle Time/ Service/ Safety/ Environment
High Performance
Eliminate
Minimally acceptable performance driven by
customer requirements
Eliminate
Low
Critical Commodity C
Critical Commodity A
Critical Commodity B
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Commodity Portfolio
For Supplier Development
TARGET COMMODITIES/ SUPPLIERS FOR DEVELOPMENT
Low Volume Purchases
High Volume Purchases
BOTTLENECK SUPPLIES
CRITICAL STRATEGIC SUPPLIES
High Opportunity Higher Risk Commodities

• Substitution difficult
• Monopolistic markets
• High entry barriers
• Critical geographic/ political situation

• Strategically important
• Substitution/alternate supplier difficult
• Major importance for purchasing overall

LEVERAGE SUPPLIES
NON-CRITICAL SUPPLIES
Lower Opportunity Lower Risk Commodities

• Availability adequate
• Alternative suppliers
• Standard product specifications
• Substitution possible

• Availability adequate
• Standard specifications of goods/services
• Substitution possible

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Prerequisites for Supplier Development

• Supplier performance measurement system
• accurate, quick, fair
• feedback mechanism
• performance vs. goals / standard
• Good internal processes
• Optimized supply base
• Good relationships with suppliers
• Resources
• Leadership

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Reactive Supplier Development
GOAL Suppliers Meet Current Production
Requirements
5. On-site Risk Assessment by Cross-functional
Team
6. Problem-solving to Eliminate Suppliers
Deficiencies

• Reactive Approach to Development
• Single Supplier
• Remedial
• Ad hoc

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Problem-Solving Development
10 a. Incentives Rewards
9. Systematic Supplier Development
10a. Direct Involvement Activities
8. Establish open relationship through feedback
and information-sharing
10c. Warnings Penalties
GOAL Self-Reliant Supply Base Continuous
Improvement
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Warnings and Penalties

• Verbal or written communication that supplier
  should improve performance
• Keep supplier competitive by obtaining bids from
  others
• Use multiple suppliers for a purchased item to
  create competition

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Incentives and Awards

• Promise of higher purchased volumes of existing
  items if performance improves
• Promise of higher purchased volumes of future
  items if performance improves
• Recognition of suppliers performance
  improvements with awards

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Mix of SD Approaches

• Hands-on Approach
• Supplier Engineers
• Kaizen Breakthrough
• 5S Training
• Total Preventive Maintenance

• Measurement
• Supplier Evaluation
• Supplier Certification
• ISO 9000 / QS 9000
• Performance Databases

• World Class Supply Base
• Cost
• Quality
• Delivery
• Technology

• Threats (Stick)
• Alternative business
• Fines / penalties
• Late payments
• Supply Base Reduction

• Rewards
• (Carrot)
• Increased volumes
• Cost savings sharing
• Supplier Integration
• Performance Databases

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Kaizen Breakthrough

• What is it?
• A short-term process improvement project
• 1-5 day event
• creativity instead of capital
• focused on a specific process
• participants cross-functional
• operators
• engineers
• managers
• maintenance workers

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The Kaizen-Breakthrough Process

• Study the process
• Collect and analyze data
• Brainstorm and discuss improvement options
• Implement changes
• Modify or move equipment
• Measure improvements
• Show and tell

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Supplier Development ResultsSurvey of 527
firmsRespondents NAPM members
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Additional Results

• Respondents also indicated that . . .
• The supplier development effort had resulted in
• Lower costs
• An improved relationship with the supplier
• Increased expectations for relationship
  continuity
• Higher level of dependability / reliability

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Top Ten Barriers For SD

• Supplier reluctant to share information
• Lack of commitment on the part of suppliers top
  management
• Top management agrees but fails to implement
• Size of purchase does not justify
• Confidentiality
• Lack of engineering resources
• Lack of information systems
• No immediate benefit apparent to our
  organization
• Suppliers not convinced development will benefit
  their organization
• Supplier lacks employee skill base

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Solutions to Barriers

• Develop contracts based on cost savings/sharing
  which do not impact the suppliers required
  margin. Only when all other avenues for cost
  improvement have been explored, discuss margin
  reductions as a result of incremental volume,
  confidentiality agreements
• Detailed presentation to suppliers top
  management, explaining the buying companys
  vision and potential benefits to the supplier
  organization
• Establish alignment objectives

• Supplier is reluctant to share information on
  costs/processes
• Lack of commitment on the part of suppliers top
  management

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Solutions to Barriers
BARRIERS
SOLUTIONS

• Suppliers top management agrees to our proposals
  but fails to implement them
• Size of purchase from the supplier does not
  justify development investment
• Confidentiality inhibits sharing information

• Have suppliers top management sign a letter of
  support, including objectives, timelines and
  resources, or
• Seek alternative supplier
• Drive improvement through performance measurement
  and feedback to supplier, or
• Consolidate volumes within commodity family and
  leverage with supplier, or
• Use major customer leverage to seek supplier
  improvements
• Improve relationship management skills of key
  liaison, or
• Sign confidentiality and intellectual property
  agreements

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Supplier Measurement
Why measure supplier performance?
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Measurement Components

• Supplier performance measures should have four
  key parts or components--
• What we are measuring
• Performance objective
• Actual performance
• How to achieve the objective (action plans) along
  with who owns the measure

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Supplier Measurement Systems

• Categorical System
• Assign a rating (good, fair, poor) to a
  performance category
• Weighted-Point System
• Quantifies scores for different performance
  categories
• Cost-based System
• Attempts to quantify the total cost of doing
  business with a particular supplier
• Cost Reduction System
• Amount of buying firms costs reduced by supplier

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Problems with Supplier Measurement Systems

• Too much data
• Short term focus that fails to consider the big
  picture
• Lack of detail
• Drives the wrong aspects
• Emphasizes behavior versus accomplishment
• Creates Adversarial relationships

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HPs Supplier Measurement Categories

• Cost
• Quality
• Delivery
• Technology and innovation
• Responsiveness
• Environmental compliance