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Supplier Management Techniques for Mitigating Risk and Driving Improvement
How risk assessments can provide reliable business intelligence to foster mutual cooperation and continual improvement throughout supply chains Prepared by: John Faust Manager, Risk Management Solutions
Supplier Conformance in a Global Environment
Growth in offshore sourcing has made supply lines longer, more complex and more vulnerable to delays and disruptions than ever. The intense pressure to cut costs leaves many companies with only enough inventories to last short periods of time. Minimal safety stocks -- coupled with long lead times and the uncertainties of low-cost, in-country sourcing -- translate into an increased risk of missed delivery dates that can delay shipments to important customers or leave store shelves bare. Now more than ever, companies are finding it crucial to have accurate, timely and reliable supplier performance metrics to assess risks and take precautionary measures when needed to avert problems. In addition, suppliers also have an inherent interest in accurate and timely information to help them preserve their preferred supplier status to ensure their products meet or exceed acceptable PPM and Corrective Action thresholds set by their clients. Hence, monitoring supplier performance is very high on the agenda for both supplier and client companies. The objective of this paper is to present a flexible, assessment-based supplier management solution that provides managers and executives with accurate and reliable business intelligence to make decisions with confidence. Support tools such as supplier scorecards and data analysis will be evaluated as potential tools to help make informed decisions that can lead to achieving important strategic business objectives.
Increasing layers of complexities make identifying priorities a challenge Even as recent as 20 years ago, management of supply chains was a relatively basic operation. Products were simple in design and came from a handful of countries. When outsourcing occurred, it was usually managed through a small, core group of suppliers. With demand at an all-time high, coupled with pressure on cost, product creation has entered a whole new era. Work is now outsourced to a multitude of countries that are further away and harder to keep tabs on. Outsourced products are also more complex, from intricate circuit boards to essential airplane parts. This, combined with an international, traditionally-unskilled labor force that consistently deals with exposure to unfair labor practices, has caused many organizations to take a critical look at how to best manage their supply chains and mitigate risk.
· Custom Requirements: Creation of unique requirements that organizations wish to monitor in their supply chains to solve problems. health and safety. · Occupational Health & Safety: Identify real and potential hazards on a job site. Examples of common KPIs include technical. it all boils down to the same age-old question: 'With a limited amount of resources.). Financial and non-financial metrics quantify objectives to reflect strategic performance of an organization. so that suppliers know exactly what the objectives are and can allocate the resources required to meet them. (Refer to Table 1-"Key Components of a Supplier Management Program". high percentage of the total product cost. developing strong contract management capabilities through excellent communication. it is not uncommon for companies to be concerned with all of them simultaneously: · Product Quality: Ensure customers receive a superior quality of product that meets their satisfaction. In larger supply chains. fair compensation. sole source. responsiveness. due to increased reliance on overseas sourcing of materials and labor. quality.Several years ago it was normal for companies to be concerned with one or two of the following initiatives. benchmark. and improve processes within an organization to meet specific goals and objectives. · C-TPAT Compliance: Create safer and faster supply chains. which as a result can provide a competitive advantage and improved profits. Whatever the situation. etc. and an effort toward continual improvement. child labor and more. delivery. critical technology but poor performance. how do we ensure our supplier management program is effectively mitigating risk?' Developing the Components of a Supplier Management Program Critical parts of a supplier management program should include identifying key suppliers. ensuring the safety of employees and contractors.g. Now. · Continual Process Improvement: Identify. and prescribe a course of action. the question becomes: 'With an increasing number of important corporate initiatives. introducing key performance indicators (KPIs) that include supplier performance measurements.) Key Components of a Supplier Management Program Identify Key Suppliers The definition of "key" is based on the criticality of the product or service provided (e. cost and environmental management. Introduces the notion of intra-company continual process improvement on leadtimes and total cost of acquisition. it is important to rank suppliers to focus on those that represent the greatest risk to your company. · Environmental Standards: Minimize the harmful effects of human and corporate activities on the environment and the community in which suppliers operate. how do executives know they are making the best decision about where to allocate expenditures for program improvements?' Applied to supplier conformance. and an organization's corresponding exposure to liability. All vested parties work to enhance visibility and communications. · Social Accountability: Ensure adherence to accepted standards for working hours. -2- Ensure Strong Contract Management Establish Key Performance Indicators (KPIs) Strive for Continual Improvement Table 1 . assess the present state of the business. transportation and possession of goods and services for the benefit of both the buyer and seller.
which is usually driven by a well-defined plan that is effectively communicated with suppliers. Effective communication that is clear. The ultimate goal is to build strong relationships that will strengthen supply chains and make both entities more profitable. a comprehensive supplier management program can be developed based on an organization's key performance indicators. it is sometimes best to start with a basic survey that focuses on the fundamental information required for management. When considering relationships with suppliers. Both of these. plus many other examples. The advantage of a scorecard is the creation of standardized business metrics that can be used to evaluate all suppliers in the same way using the same criteria. and verification of a deficiency's removal. if several suppliers consistently fail to comply with product quality standards. Organizations are also starting to make use of supplier scorecards to gauge supplier performance (See Table 2"Supplier Scorecards"). are avoidable risks well worth the investment in a comprehensive supplier management program. engineering changes. Or if a supplier is caught using child labor or sweatshops. just getting suppliers under one umbrella can be a challenge. it could lead to a costly and prolonged public relations problem from which an organization might never fully recover. companies have also become concerned with internal deficiencies in manufacturing. Depending on the breadth. depth and/or complexity of a supply chain. ranging from basic surveys to extensive on-site assessments. money and prestige. For example. This is a key area of opportunity for improvement within most companies. then eventually customers may return the products and/or discontinue purchasing from an organization -. supply chains that encompass hundreds or more suppliers seem to rely better on a several-stage approach. precise and timely will empower suppliers to improve performance. invoicing and more. For example. it is possible to keep close tabs on them through more personal relationships and data that is collected based on trust. Programs That Work for Both an Organization and its Suppliers An area that is often overlooked in supplier management programs is the need for the program to also be beneficial for suppliers. The key benefit of one umbrella is that processes can be streamlined and redundancies eliminated. Scorecards also provide critical information for future negotiation of purchasing and service agreements.costing time. Good performance metrics are essential. supply chains that include smaller numbers of suppliers can possibly be managed very efficiently through supplier surveys that are completed by the suppliers themselves to gather data related to key performance indicators. Depending on the organization's knowledge of its overall supply chain. Since there are fewer suppliers to manage. even as basic as contact information. -3- supplier components Number of corrective actions Average response and resolution time for corrective actions Number of returned material authorizations processed Number of rework hours due to supplier components Number of customer complaints regarding product quality . They are a direct result of a healthy supplier management program. Following are a few of the key operational metrics that leading organizations track in their supplier scorecards: · Number of defects per million (PPM) of · · · · · While metrics vary from company to company.Using these four key components. In addition to measuring and monitoring supplier quality. there are a number of ways this can be conducted. it is also important to determine how data is collected for use within the scorecards. shipment. Supplier Scorecards Rank Performance and Track Improvement Over Time Supplier Scorecards are one of the best methods to rank supplier performance and track improvement over time. as well as provide critical details for improving supplier performance and operational efficiencies. In contrast. This allows for precise analysis that is based on factual data. as well as manage corrective actions. a supplier conformance initiative using key performance Table 2 metrics helps companies monitor and manage results at the supplier level. For organizations where multiple departments manage multiple suppliers.
Supplier Risk Assessments Measure and Monitor Performance An excellent way to analyze supplier performance is through on-site assessments. A benefit of an on-site assessment is the ability to observe day-to-day supplier operations. invoicing. The scorecard should introduce standardized performance metrics that are directly correlated to an organization's KPIs. not only for an organization but also for suppliers themselves. If a program times the key way of clearing the gap to achieving is less mature. Organizations should consider their KPIs. or whatever customized metrics your organization would like to monitor. One question to ask is "Who will conduct the assessments?" Related questions about the assessor could be: · Is the assessor familiar with the supplier's industry and/or operations? Having knowledge of similar processes and industry expectations will enhance the audit's outcome. even to the trained eye of a seasoned assessor. Once the group is assembled. Sometimes this can be accomplished through basic supplier surveys. that management program. On-site assessments present the opportunity to interview the supplier's personnel. Speaking the supplier's language and knowing the local culture can be key to fostering the best communication. Once the assessment is complete. it is most beneficial to assess as many suppliers as possible. While surveys can give a good initial overview of a supplier's business. A fresh pair of eyes. the client and the supplier jointly identify corrective actions. perhaps assessments should focus on this core group? Any of these areas would be prime candidates for assessments.In the end. review upon the maturity of a company's current supplier documentation and more. shipping. if there are any critical areas that need attention. an assessment team could visit each of them onsite. Alternatively. assessments can be conducted on-site at the supplier's location to obtain the most reliable data. A follow-up assessment can ensure that successful actions have taken place to fix the situation. supplier scorecards can then be utilized to investigate critical measurables and gather data needed for assessing each location. are suppliers having trouble meeting certain criteria? Also consider key suppliers. but in some cases size or scope of the supply chain might prohibit a full-scale assessment program. the goal is to build a solid foundation that will enable strong contract management. · Does the assessor have experience in doing assessments? Sometimes the most critical observations are near impossible to find. No matter what the size of your organization is. many times baseline data is first needed excellence. Ensure staff has the experience needed to identify problems. and how well an organization are trained to look for critical measurables. and verify that deficiencies have been removed. and ensuring the supplier has a clear understanding what is at stake for continued deficiencies. -4- . these are one of the best ways to ensure that suppliers are following the processes and procedures that you agreed upon during the supplier selection process. Assessments should be designed to identify deficiencies in manufacturing. Depending on the size of the supply chain. In an ideal case. to establish the present day situation and present the facts. All stakeholders at both client and supplier companies should be informed every step of the way. RECAP: The scope of an assessment program depends observe the facility's overall cohesiveness. An important part of the assessment process is choosing which suppliers to assess. which must be implemented by the supplier within an agreedupon timeframe. or choose a representative sample. the most accurate observations are made by directly seeing how that supplier operates. The key to most successful supplier management programs is enhanced visibility and communications. is many understands the scope of its supplier base. engineering. · Where is the assessor located? Many organizations that have invested in resources that are local for their suppliers find great success. Excellent communication will contribute to stronger buy-in from suppliers that can ultimately strengthen the overall program. and quality at the supplier level.
And the housewares distributor needs assistance to get their transportation systems aligned for shortened delivery cycles. Local Assessment Teams Save Time And Money: What if the North American manager were able to delegate overseas visits to a local assessment team based in China? Focus could then instead be on overall management of the program for continual improvement. For instance. Supplier A is exhibiting problems in areas that rank highest in supplier performance. Take into consideration the following examples: · You are experiencing an increase in materials received from China. probably uses a translator to communicate.Analyzing Data to Ensure Continued Improvement In addition to effectively collecting the data. if an assessment using identical comparison criteria rendered ten deficiencies at Supplier A in the top tier versus ten deficiencies at Supplier B in the bottom tier. it is important that the information is also properly analyzed and prioritized. -5- . there has been a tendency for companies to rely exclusively on internal resources to develop and manage supplier conformance programs. · Last week your hottest-selling housewares item went out of stock. and a bottom tier that are good to know but not necessarily imperative to supplier success. Perhaps there is a top tier of indicators that are absolutely critical to success. and in the end is missing a very important link in supplier management: effective communication. Significant numbers of overseas suppliers. creating redundancy. Each of the three parts is managed out of its own respective department. the approach to corrective actions for each supplier might change dramatically. if an organization has created a scorecard that includes 100 key performance indicators. The main challenge with this methodology is that most companies do not possess internal capabilities to effectively maintain supplier conformance requirements. make it a difficult challenge to still provide timely and accurate information that can be translated into reliable business intelligence. In order to ensure proper management of these suppliers. Using the example above. you have a Supplier Manager who is based in North America and flies over to China every other month to perform random spot checks of these new suppliers. usually due to the sensitive nature of business performance data. coupled with increased pressure on supplier performance. The key is that each situation requires only a temporary boost to get over a time of turbulence. Similarly. How Second Party Assessments Can Strengthen the Process Until recently. The benefit of a second party solution is that organizations control the flow of the faucet: turn it on for more assistance when you need it most. the organization that requires suppliers to report into three different departments needs to re-organize and jump-start their systems. the root cause of the problem remains the same: businesses have outgrown the current internal abilities to manage the situation. a middle tier that are somewhat important. While each product is different. and another to the medical devices industry. especially when consideration is given to how much more sophisticated supply chains have become. another to the aerospace industry. and therefore would need the most assistance and monitoring. but because they have similar components some of your suppliers report into each department individually. A North American Supplier Manager has little knowledge of the local Chinese culture. they require similar components. Though each situation is different. it is critical to rank those according to importance. · Currently your organization provides one part to the automotive industry. push it back when systems are clicking into place. while the shipment to replenish them was sitting on the dock waiting to get through customs and border protection. While they have the exact same number of deficiencies.
Also key to this data collection is the ability for the second-party to provide analysis on the data that will help drive business improvements. our goal is to help you achieve your goals and objectives through risk management solutions that are designed to drive continual improvement throughout your supply chain. which are based on risk assessments that are applied uniformly throughout the supply chain. In the end. reliable. providing further insight into the overall system. QMI will assess suppliers according to your specifications. Must-haves for Making Good Business Decisions Accurate. Our industry-leading program provides an Effectiveness Rating Scorecard that cross-references unsatisfactory conditions against the location's effectiveness. Ultimately. Our experts are ready to help your organization by providing specific expertise that is available on an as-needed basis. We can work on your behalf to help you strengthen your supply chain by bridging gaps to your suppliers and creating partnerships that result in communication and trust. from industry experience working directly in the field. take actions to correct them. or based on a turnkey model benchmarked on universal best practices. These can enable organizations to measure and monitor supply chains to proactively seek out at-risk opportunities: identify root causes of problems. possibly resulting in increased sales. QMI has more than 20 years of experience in conducting many types of assessments. and timely business intelligence.Partnering Helps Reduce Costs And Increase Efficiencies: What if the manufacturer could hire a partner that would analyze the overlaps in departments and make recommendations on creating one cohesive supplier management system? This could significantly reduce overhead. Expanded Capabilities Shorten Delivery Cycles And Help Meet In-Stock Goals: What if the housewares retailer has assistance in implementing a full-service C-TPAT program that resulted in shortened delivery cycles? Stockrooms could be well-stored with items that his customers want. and timely business intelligence · Where are we getting our information? · Is it reliable? · How often is it updated? · Are we sharing this information with suppliers? Rationale for budgeting and spend management · Is it a rational plan for spend management? · Are we making best use of our resources? · Is spending linked with strategic objectives? · Do our suppliers understand what is at stake? Table 3 How QMI Assessments Help Foster Continuous Improvement Through Supply Chains QMI offers supplier conformance programs that can be customized to meet specific corporate objectives. Assessments will be built around your specific requirements and managed by a team that has experience in turning assessments into business solutions. and help your suppliers improve their processes. this can help you achieve your goal of better product. The advantage of using a second-party to conduct assessments is the flexibility that your organization can gain. allowing you to cost-effectively manage risk. reliable. and verify elimination of the deficiencies. processes and documents meet your requirements. QMI's competitive advantage is that we take our results one step further than simply showing the results of supplier assessments. Our goal is to help you build strong relationships with your suppliers. as well as additional experience conducting assessments for a variety of organizations. This analysis is helping executives make better decisions. Using a Five Phase Methodology. These services can help you ensure that products. and thus price to customers. Our assessors come with a wealth of expertise. Leading companies are recognizing the benefits of partnering with a second party service provider to facilitate the collection of accurate. and there is assurance that targeted program investments are helping the company achieve its most important strategic objectives (see Table 3-"Must-haves to make the best business decisions'). -6- .
For example. QMI thoroughly analyzes the data and provides strategic recommendations for improvement. -7- . KPIs may be fully-customized by QMI’s risk analysts or based on a checklist of critical measurables that exist for many leading organizations. and analysis of effectiveness ratings. internal QMI communications. This will provide standardized criteria by which organizations can compare sites against each other and ultimately drive improvements. a comprehensive onsite assessment of critical suppliers. Recommendations will support continual business improvement and your corporate goals and objectives. Assessments will be conducted using a standard methodology to determine conformance relative to requirements. This will also include internal continual improvement initiatives to ensure process improvement and client satisfaction. Continual Program Improvement (5) Ongoing Program Management . Our goal is to help continuously reduce risk in your supply chain and improve performance. determine which suppliers to include in the program and customize the program to fit your needs. or a customized combination of the two. QMI will also work with you to construct the program in a way that will also give value back to suppliers.QMI will analyze the results.Focus on collecting baseline data. We'll assess the overall effectiveness of each location compared to target. Together. Depending on the size of your supply chain. evaluate local resources available to achieve those objectives. and assigning a weight or an importance rating for each key performance indicator (KPI) as it relates to organizational goals and objectives. Conduct Assessments and Report Data (3) Risk Assessments -. we'll create a plan for action and a timeline for completion. where applicable Recommendations for frequency and duration of future assessments. as necessary. Analyze Assessment Data and Make Strategic Recommendations (4) Recommendations . identifying critical issues as well as providing site effectiveness ratings and opportunities for improvement. identifying specific objectives. Each of these assessors can be intentionally matched based on experience. Your QMI service delivery team will conduct a personal meeting to identify the scope of your project and how QMI can best serve you. Identify corporate goals and objectives.Establish parameters based on client needs and how QMI can deliver cost-effective solutions. Develop Measurables to Align With Key Performance Metrics (2) Checklist & Scorecard Development -. QMI has an assessment team strategically located worldwide that has extensive industry experience.Based on your feedback. While other organizations that provide assessments will deliver data. where possible. The benefits of outsourcing risk management services and QMI’s corresponding five phases include: Identify the Scope of the Project (1) Scope of Work -. QMI will present a plan for continued future management of your program. QMI can assign an assessor that has experience in this area that might provide additional insight. if necessary The key differentiator between QMI and many competitors is this Recommendations phase. if a supplier is having problems with environmental management. you could assess all your suppliers on-site or choose a representative sample.These can be offsite surveys relating to a supplier's understanding of the procurement agreement.QMI will analyze the data collected during assessments. specifically analyzing unsatisfactory conditions. At the end of this analysis you will receive: · · · · Immediate notification of critical issues as they are discovered Conformance assessment results for each facility relative to pre-determined criteria Opportunities for improvement based on assessment findings.
qmi. QMI Risk Management Solutions helps companies save time and money by offering customized risk assessments that provide executives and managers with more timely. Assessments with customized checklists help organizations identify risk opportunities and rank them against objectives of critical importance. For more information. reliable.Conclusion Supplier Risk Assessments feature a set of key performance indicators that relate to the performance of an organization's suppliers. and contractual implications.com www. Risk Management Solutions QMI (800) 247-0802 email@example.com . contact: John Faust Manager. This allow them to better evaluate risks. and make the best use of available budgets to target resources towards the areas of most critical importance in the achievement of specific operational objectives. Increased frequency of assessments for problem areas accelerates resolutions. you'll be alerted when organizational performance is failing to meet expectations. and apply standards uniformly throughout their supply chain. and alert poorly-rated suppliers about remedial steps. and accurate information. By associating each performance metric with one or more expected values. allowing you to take corrective action.
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