Supplier Management and Supplier Development Chapter 8 Supplier Management and Supplier Development Chapter 4

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

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

Supplier Evaluation is an event to 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

Supplier Performance Measurement Quantitative Variables Cost reductions Quality performance Delivery performance Contract Deficiency Notices (CDNs)

Supplier Performance Measurement Qualitative Variables ETDBW Responsiveness Problem resolution ability New Product Development Support Technical ability Commitment to R&D Trust levels

Supplier Performance Measurement Reporting and using the information Regular reports to the commodity buyer Buyers meet with suppliers Carrots and Sticks

Supplier Management Techniques Categorical system Weighted point system Cost Index

Categorical System Score Performance Category E G F P  Meets Delivery Requirements Customer focused Fair pricing Problem resolution capabilities An innovative supplier Communication and trust levels     

Weighted Point System A weighted average of scores across a number of categories

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

Cost Index: Quantifies total cost of doing business with a supplier The Supplier Performance Index example:

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

Cost Index: Quantifies total cost of doing business with a supplier The Supplier Performance Index with the Q adjustment: Where Q is

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

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

Supply Base Optimization Rationalizing versus Optimizing Implementation: First phase is to eliminate marginal and perhaps very low volume suppliers “Optimization” is a continuous process

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

Risks of a reduced supplier base Absence of competition may generate complacency and price increases Risk of supply disruption

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

Supplier Development 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

Supplier Development Step 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?

Supplier Development Step 2. Form a CFT Step 3. Meet with supplier’s top management Discuss your supplier development plan Seek a commitment on Kaizen Sense if “alignment” and trust develop

Supplier Development Step 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

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

Example of Supplier Development Results 527 firms surveyed Example of Supplier Development Results

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

Let’s move on