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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

4Time

Supply Base Performance/Capability

Higher

TOTAL QUALITY

MANAGEMENT

SUPPLY BASE ASSESSMENT

SUPPLY BASEREDUCTION

REACTIVE SUPPLIER

DEVELOPMENT

STRATEGIC SUPPLIER

DEVELOPMENT

Lower

Evolutionary Strategies

Evolution of Supplier Development

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Early Stages

1. Identify Strategic Supply Chain Needs

2. Search for Competitive

Suppliers

3. Establish Performance Metrics and Assessment

4. Supply Base Rationalization

GOAL:Pool of

Potentially Capable

Suppliers

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Identifying key suppliers via Pareto analysis

Supplier PerformanceDefects/Total Cost/Late Delivery/Cycle Time/Service/Safety/Environment

CriticalCommodity

A

TOP TENLIST

TOP TENLIST

CriticalCommodity

B

CriticalCommodity

C

SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED SUPPLY BASE

SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED SUPPLY BASE

High Performance

Minimally acceptable performance driven by customer requirements

High

Low

Eliminate

Eliminate

Identify Candidates for Development

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High OpportunityHigher RiskCommodities

Low Volume Purchases

Substitution difficult Monopolistic markets High entry barriers Critical geographic/

political situation

Lower OpportunityLower RiskCommodities

High Volume Purchases

BOTTLENECK SUPPLIES

Strategically important Substitution/alternate

supplier difficult Major importance for

purchasing overall

CRITICAL STRATEGICSUPPLIES

Availability adequate Standard specifications

of goods/services Substitution possible

NON-CRITICAL SUPPLIES

Availability adequate Alternative suppliers Standard product

specifications Substitution possible

LEVERAGE SUPPLIES

TARGET COMMODITIES/

SUPPLIERSFOR

DEVELOPMENT

For Supplier Development

Commodity Portfolio

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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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5. On-site Risk Assessment by

Cross-functional Team

6. Problem-solving to Eliminate Suppliers’

Deficiencies

GOAL:Suppliers Meet

Current Production

Requirements

Reactive Supplier Development

•Reactive Approach to Development

•Single Supplier

•Remedial

•Ad hoc

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Problem-Solving Development

8. Establish open relationship through

feedback and information-sharing

9. SystematicSupplier

Development

GOAL:Self-Reliant Supply Base – Continuous

Improvement

10a. Direct Involvement

Activities

10c. Warnings& Penalties

10 a. Incentives& Rewards

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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 supplier’s performance improvements with awards

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

“Hands-on” Approach

•Supplier Engineers•Kaizen Breakthrough•5S Training•Total Preventive Maintenance

Threats (“Stick”)

•Alternative business•Fines / penalties•Late payments•Supply Base Reduction

Rewards(“Carrot”)

•Increased volumes•Cost savings sharing•Supplier Integration•Performance Databases

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

“Mix of SD Approaches”

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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

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 %

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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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Supplier reluctant to share information Lack of commitment on the part of supplier’s 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

Top Ten Barriers For SD

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BARRIERS SOLUTIONS

Supplier is reluctant to share information on costs/processes

Lack of commitment on the part of supplier’s top management

Develop contracts based on cost savings/sharing which do not impact the supplier’s 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 supplier’s top management, explaining the buying company’s vision and potential benefits to the supplier organization

Establish alignment objectives

Solutions to Barriers

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BARRIERS SOLUTIONS

Supplier’s 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 supplier’s 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

Solutions to Barriers

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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 firm’s 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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Cost Quality Delivery Technology and innovation Responsiveness Environmental compliance

HP’s Supplier Measurement Categories