Chapter 10 Supplier Development

1. Chapter 10SupplierDevelopment 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. Evolution of Supplier Development STRATEGIC SUPPLIER DEVELOPMENT Higher REACTIVE SUPPLIER DEVELOPMENT Evolutionary Strategies Supply Base Performance/Capability SUPPLY BASE REDUCTION SUPPLY BASE ASSESSMENT TOTAL QUALITY MANAGEMENT Lower Time

5. Early Stages 3. Establish Performance Metrics and Assessment 1. Identify Strategic Supply Chain Needs 2. Search for Competitive Suppliers 4. Supply Base Rationalization GOAL: Pool of Potentially Capable Suppliers

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

7. Commodity Portfolio For Supplier Development TARGET COMMODITIES/ SUPPLIERS FOR DEVELOPMENT Low Volume Purchases High Volume Purchases BOTTLENECK SUPPLIES CRITICAL STRATEGIC SUPPLIES High Opportunity Higher Risk Commodities • Substitution difficult • Monopolistic markets • High entry barriers • Critical geographic/ political situation • Strategically important • Substitution/alternate supplier difficult • Major importance for purchasing overall LEVERAGE SUPPLIES NON-CRITICAL SUPPLIES Lower Opportunity Lower Risk Commodities • Availability adequate • Alternative suppliers • Standard product specifications • Substitution possible • Availability adequate • Standard specifications of goods/services • Substitution possible

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. Reactive Supplier Development GOAL: Suppliers Meet Current Production Requirements 5. On-site Risk Assessment by Cross-functional Team 6. Problem-solving to Eliminate Suppliers’ Deficiencies • Reactive Approach to Development • Single Supplier • Remedial • Ad hoc

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

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. “Mix of SD Approaches” • “Hands-on” Approach • Supplier Engineers • Kaizen Breakthrough • 5S Training • Total Preventive Maintenance • Measurement • Supplier Evaluation • Supplier Certification • ISO 9000 / QS 9000 • Performance Databases • World Class Supply Base • Cost • Quality • Delivery • Technology • Threats (“Stick”) • Alternative business • Fines / penalties • Late payments • Supply Base Reduction • Rewards • (“Carrot”) • Increased volumes • Cost savings sharing • Supplier Integration • Performance Databases

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 ResultsSurvey of 527 firmsRespondents: 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. Top Ten Barriers For SD • 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

19. Solutions to Barriers BARRIERS SOLUTIONS • 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 • Supplier is reluctant to share information on costs/processes • Lack of commitment on the part of supplier’s top management

20. Solutions to Barriers 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

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