Chapter 8

1. Chapter 8 Supplier Management and Supplier Development

2. 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

3. 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

4. Supplier Evaluation (Ch 7) in comparison to Supplier Performance Measurement (Ch 8) • Supplier Evaluationis an event to • Pre-qualify suppliers • To award contracts • To pursue improvement opportunities • Supplier Performance Measurementis a continuing process

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

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

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

8. Supplier Management Techniques • Categorical system • Weighted point system • Cost Index

9. 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     

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

11. 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.

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

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

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

15. 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:

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

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

18. 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

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

20. 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

21. 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

22. 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?

23. 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

24. 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

25. 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

26. Example of Supplier Development Results 527 firms surveyed

27. 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

28. Let’s move on