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Develop an objective methodology to evaluate service providers or products, enhancing competitiveness, lowering costs, and improving quality. Learn about approaches to supplier development and real-world examples like Honda's successful partnership with Parker Hannifin Corp.
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Objective Develop a methodology to objectively evaluate service providers or products, ensuring that the best one is selected for a given situation. The intent is to consider all relevant factors and minimize the subjective issues that can potentially influence such a decision. 2
THE NEED • Decrease the number of suppliers in order to develop supplier partnerships. • Help improve competitiveness, • Lower costs • To increase quality and reliability of products. • The strengthened supplier/buyer relationships can also lead to improved trust which then can lead to more win/win team achievements through cooperative efforts.
Vendor Definition A third party that performs functions on your company’s behalf or provides services to your company. Some examples include: • Core Processing • Information and Transaction Processing • Security Monitoring • System Development and Maintenance • Print and Reprographics • Strategic Alliances • Internet Services 5
Indian Scenario • Competition is becoming increasingly intense • Manufacturing companies need to lower costs and improve quality • Materials are a significant part of cost of production for a majority of industries • Outsourcing of components is a means of lowering costs and reducing risk • Industry has developed in a protected and controlled economic environment • In the past, cost, quality and customer service were not critical parameters
Indian Scenario (cont’d) • Most suppliers are small or medium scale units • Small industry is defined in terms of investment in plant and building • Small industry has always been given special protection by the Government (reservation policy, excise concessions) • Consequently, most suppliers did not grow or increase investments to improve technology, as well as production and quality control systems • In the past, pricing was only on cost plus basis
Indian Scenario (cont’d) • To reduce/avoid tax payments, most industries declared low profits • Consequently no internal resources were generated • There were no long term contracts or relationships with buyers • Now competitive environment requires suppliers to meet stringent quality standards, regularly improve technology and be cost competitive
Approaches to Developing Suppliers • Single Sourcing • Use only one supplier per component • Pros: Strong relationship and supplier becomes an expert at providing the quality product your company expects at a low cost • Cons: Any disruption in the supplier’s production could leave you shorthanded
Approaches to Developing Suppliers • Dual Sourcing • Number of approved suppliers is limited (generally 2 -3) • Pros: Reduces risks of having a sole supplier • Cons: Reduces amount of specialization of suppliers
Approaches to Developing Suppliers • Supplier Evaluation • Rates suppliers on quality, technical capabilities, and abilities to meet scheduled requirements • Pros: All suppliers are evaluated on same basis • Cons: Minimal hands on with no focus on improvement
Approaches to Developing Suppliers • Sourcing Filters • External Validation of Quality Programs • ISO 9000:2000 • Pros: Gives customers comfort; “Seal of approval” • Cons: Qualifications do not necessarily guarantee quality product
Approaches to Developing Suppliers • Supplier Certification/Qualification • Inspections performed by company to evaluate suppliers • Pros: Thorough understanding of suppliers strengths/weaknesses • Cons: Time consuming; focused entirely on evaluating supplier, not improvement
Approaches to Developing Suppliers • Supplier development programs • Hands on work with suppliers to continually improve quality • Pros: Develop suppliers to meet your exact needs • Cons: Very time consuming to groom suppliers to meet your needs
Supplier Development in the Real World • Honda Motors • Partnered with Parker Hannifin Corp • Honda engineers worked over six Parker plants making basic efficiency changes saving Parker over $1.6 million a year.
Supplier Development in the Real World (Continued) • Areas Honda helped to improve do not all involve parts supplied to Honda • Why help suppliers improve areas that do not directly affect the company? • “We want suppliers to be better companies because, ultimately, that makes us a better company,” Richard Mayo, Honda purchasing executive
Supplier Development in the Real World (Continued) • Improvements in Parker products directly related to Honda’s developmental help -Decreased cylinder line travel from 19 days to 5 minutes -Reorganized production process to decrease scrap from 5% to 2% and increase output per man-hour by 30%
Vendor Development Policy • Technology, quality and manufacturing standards of vendors in 1983 were not of international standards • Most vendors were reluctant to make investments for Maruti • Not confident that Maruti could achieve stated volumes • First task was to dispel doubts and create confidence • Maruti assured vendors of long term relations • No annual tender system • Maruti normally limited suppliers of any component to two vendors • Good volumes thus assured
Vendor Development Policy (cont’d) • Prices fixed once a year on basis of cost of production • Transparent and quick payment system - no delays • Maruti provided financial help to vendors for tooling, payment of custom duty etc. • Maruti helped to identify sources of technology, and its transfer to Indian vendors • Maruti deputed engineers for introducing systems, improving manufacturing practices, trouble shooting • Suzuki provided opportunities for training to vendors
Vendor Development Policy (cont’d) • Where large and complex dies were required, Maruti imported and supplied to vendors • Line of credit for vendors arranged with FI’s to enable lease financing for purchase of equipment and tooling • Maruti assisted in bulking purchase of aluminium, steel, plastic materials, seat fabric to lower costs • Maruti provided feedback to vendors on their performance and monitored improvements
Vendor Development Policy (cont’d) • Annual awards were given to vendors to encourage them to improve • These measures and the sales success of Maruti made vendors willing to invest • Maruti participated upto 26% in equity of some vendors • Assisted in project formulation, implementation and management of these JV’s • Assured reasonable return on investment • Management control of JV’s left to Indian partners • 11 JV companies were established
Lessons (Cont’d) • For this, developed long term relationships and instilled confidence in small suppliers • Devoted resources to upgrade vendors in terms of technology, quality, systems, and management • Indian industry today needs to recognize the important of outsourcing and upgrading vendors • Since not many buyer companies have resources comparable to Maruti, important to build institutional arrangements to provide marketing and affordable consultancy services for small industry • This activity should be carried out by appropriate non-Governmental agencies
