1 Chapter 10 Supplier Development IDIS 424 Spring 2004

2 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.

3 Why Supplier Development Increased Competition Downsizing Outsourcing Cost of purchased items Easier to work with a “known” supplier

4 Time Supply Base Performance/ Capability Higher TOTAL QUALITY MANAGEMENT SUPPLY BASE ASSESSMENT SUPPLY BASE REDUCTION REACTIVE SUPPLIER DEVELOPMENT STRATEGIC SUPPLIER DEVELOPMENT Lower Evolutionary Strategies Evolution of Supplier Development

5 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

6  Identifying key suppliers via Pareto analysis Supplier Performance Defects/ Total Cost/ Late Delivery/ Cycle Time/ Service/ Safety/ Environment Critical Commodity A TOP TEN LIST TOP TEN LIST Critical Commodity B Critical Commodity C SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED SUPPLY BASE High Performance Minimally acceptable performance driven by customer requirements High Low Eliminate Identify Candidates for Development

7 High Opportunity Higher Risk Commodities Low Volume Purchases  Substitution difficult  Monopolistic markets  High entry barriers  Critical geographic/ political situation Lower Opportunity Lower Risk Commodities High Volume Purchases BOTTLENECK SUPPLIES  Strategically important  Substitution/alternate supplier difficult  Major importance for purchasing overall CRITICAL STRATEGIC SUPPLIES  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/ SUPPLIERS FOR DEVELOPMENT For Supplier Development Commodity Portfolio

8 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

9 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

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

11 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

12 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

13 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”

14 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

15 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

16 Supplier Development Results Survey of 527 firms Respondents: NAPM members

17 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

18  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

19 BARRIERSSOLUTIONS  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

20 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

21 Supplier Measurement Why measure supplier performance?

22 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

23 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

24 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

25 Cost Quality Delivery Technology and innovation Responsiveness Environmental compliance HP’s Supplier Measurement Categories