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Supply Chain Management

SCM201

Chapter 9
Supplier Management and
Development
 Chapter Overview

• Supplier Performance Measurement

1

• Rationalization and Optimization: Creating a Manageable Supply

2 Base

• Supplier Development: A Strategy for Improvement

3

• Overcoming the Barriers to Supplier Development

4

Chapter 9: Supplier Management and Development 2

 Supplier Performance Management

How does buyer know how well any given supplier is

performing?
Consists of methods and systems to collect and provide
information to measure, rate, or rank ongoing supplier
performance
Acts as supplier “report card”

Chapter 9: Supplier Management and Development 3

 Supplier Measurement Decisions

Corporate and business unit goals, objectives, and strategies

must drive supply management’s corresponding goals,
objectives, and strategies
Supply management must develop appropriate supplier
evaluation strategies to support the business unit
Not all suppliers need to be evaluated in the same way

Chapter 9: Supplier Management and Development 4

 Supplier Measurement Decisions

Supplier segmentation must consider …

Supply base risk levels
Category spend amounts
Switching costs
Must understand …
Types of information required
How information will be deployed
Methods needed to obtain information in a timely and cost-
effective manner
What resources will be required to collect the information
Chapter 9: Supplier Management and Development 5
 Supplier Measurement Decisions

What to measure
Quantitative variables
Delivery performance
Quality performance
Cost reduction
Qualitative variables
Compare to standards and goals
Measurement and reporting frequency
Uses of measurement data
Chapter 9: Supplier Management and Development 6
 Qualitative Service Factors

Factor Description
Problem resolution
Supplier’s attentiveness to problem resolution
ability
Technical Supplier’s manufacturing ability compared with
ability other industry suppliers
Supplier’s ongoing reporting of existing
Ongoing progress
problems or recognizing and communicating a
reporting
potential problem
Supplier’s solutions and timely response to
Corrective
requests for corrective actions, including
action response
engineering change order requests
Chapter 9: Supplier Management and Development 7
 Qualitative Service Factors

Factor Description
Supplier cost- Supplier’s willingness to help find ways to
reduction ideas reduce purchase cost
Supplier’s ability to help reduce new-product
Supplier new-
development cycle time or to help with
product support
product design
Subjective rating concerning how well a
Buyer/supplier
buying firm and a supplier work together,
compatibility
a.k.a. “wavelength”

Chapter 9: Supplier Management and Development 8

 Measurement and Reporting Frequency

Reporting frequency to buyer

Day-to-day performance for troubleshooting and expediting
Reporting frequency to supplier
Routinely summarized monthly or quarterly
Annual face-to-face appraisal meeting
Never delay reporting supplier’s poor performance

Chapter 9: Supplier Management and Development 9

 Uses of Measurement Data

Identify poor and high performing suppliers

Support supply base optimization and rationalization efforts
Determine future purchase volume allocations
Identify performance improvement opportunities
Make sourcing decisions

Chapter 9: Supplier Management and Development 10

 Designing a Measurement System

What data to analyze

When to collect the data
What metrics to use
What performance categories to include
How to weight different categories
How often to generate performance reports
How to use performance data

Chapter 9: Supplier Management and Development 11

 Types of Measurement Techniques

Categorical system
Weighted-point system
Cost-based system
Each system differs in terms of …
Ease of use
Level of decision subjectivity
Required system resources
Implementation cost
Chapter 9: Supplier Management and Development 12
 Categorical System

Advantages Disadvantages Users

• Easy to implement • Least reliable • Smaller firms
• Requires minimal • Less frequent • Firms in the process
data generation of of developing an
• Different personnel evaluations evaluation system
contribute • Most subjective
• Good for firms with • Usually manual
limited resources
• Low-cost system

Chapter 9: Supplier Management and Development 13

 Categorical System

Assign subjective rating score for each performance category

May be completed by buyer, other internal users, or
combination
Minimal insight provided
Often significant variance between subjective ratings

Chapter 9: Supplier Management and Development 14

 Weighted-Point System

Advantages Disadvantages Users

• Flexible system • Tends to focus on • Most firms can use
• Supplier ranking unit price this approach
allowed • Requires some
• Moderate computer support
implementation costs
• Quantitative and
qualitative factors
combined into single
system

Chapter 9: Supplier Management and Development 15

 Weighted-Point System

Less subjective
Weighs and quantifies relative scores across different
performance categories
Weights can be adjusted depending on needs
Need to carefully select categories
Need to choose proper weights
Need to develop a set of decision rules

Chapter 9: Supplier Management and Development 16

 Weighted-Point System Example

Chapter 9: Supplier Management and Development 17

 Cost-Based System

Advantages Disadvantages Users

• Total cost approach • Cost accounting • Larger firms
• Specific areas of supplier system required • Firms with large
non-performance • Most complex supply base
identified • Implementation
• Objective supplier costs are high
ranking • Computer
• Greatest potential for resources required
long-range improvement

Chapter 9: Supplier Management and Development 18

 Cost-Based System

Most thorough and least subjective

Seeks to identify and quantify total cost of doing business
with given supplier
Challenge
Identifying and recording appropriate costs that result when
supplier fails to perform as expected
Logic is based on calculation of supplier performance index (S
PI)

Chapter 9: Supplier Management and Development 19

 SPI Calculation

Total Purchases  Nonperformance Costs

Total Purchases

SPI has base value of 1.0

It is total cost index calculated for each item or commodity
provided by supplier

Chapter 9: Supplier Management and Development 20

 Cost-Based System Example

Commodity: Integrated Circuits

** Lowest total cost supplier for item (Unit price × SPI = Total cost)
Chapter 9: Supplier Management and Development 21
 Supplier Performance Example

Chapter 9: Supplier Management and Development 22

 Rationalization and Optimization

Determining optimal number and quality of suppliers in

supply base
Rationalization
Analysis of how many and which suppliers to maintain
Optimization
Analysis to ensure that only most capable suppliers are kept
Should be a continuous process

Chapter 9: Supplier Management and Development 23

 Rationalization and Optimization

Requires effective supplier evaluation and measurement

system
Usually results in net reduction of suppliers
However, may result in adding new suppliers in some spend
categories
Key is to determine the “right” number of suppliers, not just
arbitrarily reduce the number

Chapter 9: Supplier Management and Development 24

 Rationalization and Optimization Activities

Development of supplier evaluation and measurement

systems
Elimination of marginal and small volume suppliers
Replacement of “good” suppliers with “better” ones
Initiation of supplier development activities to improve
performance
Global search for world-class suppliers

Chapter 9: Supplier Management and Development 25

 Advantages

Buying from world-class suppliers

Use of full-service suppliers
Reduction of supply base risk
Lower supply base administrative costs
Lower total product cost
Ability to pursue complex supply management strategies

Chapter 9: Supplier Management and Development 26

 Buying from World-Class Suppliers

Concentrate on closer relationships with smaller core group

of exceedingly capable suppliers
Fewer quality and delivery problems
Access to leading-edge technologies
Opportunities to collaborate
Lower total product cost

Chapter 9: Supplier Management and Development 27

 Use of Full-Service Suppliers

Remaining suppliers are often larger in size

Offer broad range of value-adding services
Provides greater access to supplier’s engineering, R&D,
design, testing, production, service, and tooling capabilities
Allows outsourcing of integrated items

Chapter 9: Supplier Management and Development 28

 Reduction of Supply Base Risk

Supply base risk defined

“Magnitude of exposure to financial loss or operational disruption
and stems from uncertainty”
Need for carefully selected and qualified suppliers
Can actually reduce overall risk
Results in reduced variability and more consistent quality

Chapter 9: Supplier Management and Development 29

 Lower Administrative Costs

Greater information sharing

Formalized communication processes
Fewer problem-related interactions with suppliers
Joint problem-solving

Chapter 9: Supplier Management and Development 30

 Lower Total Product Cost

Lower variability in quality and delivery

Greater production volumes spread among fewer suppliers
Supplier’s fixed costs spread out over greater volumes
Provides incentive for supplier process improvement
Economies of scale and scope

Chapter 9: Supplier Management and Development 31

 Ability to Pursue Complex
Supply Management Strategies

Supplier development
Early supplier design involvement
Just-in-time sourcing
Development of cost-based pricing agreements

Chapter 9: Supplier Management and Development 32

 Possible Risks of Maintaining Fewer Suppliers

Supplier dependency
Absence of competition
Supply disruption
Overaggressive supply reduction

Chapter 9: Supplier Management and Development 33

 Supplier Dependency

Overly dependent on buyer for its economic survival

Lack of financial viability if purchase volumes are reduced
Unhealthy dependence

Chapter 9: Supplier Management and Development 34

 Absence of Competition

Supplier may hold buyer “hostage”

Unduly raising prices
Becoming too complacent
Higher switching costs
Requires careful selection and evaluation
Need for equitable contracts

Chapter 9: Supplier Management and Development 35

 Supply Disruption

Loss of continuous flow of materials

Need for multiple production facilities from a single supplier
Select suppliers with multiple or redundant capabilities
(cross-sourcing)
Primary and secondary suppliers

Chapter 9: Supplier Management and Development 36

 Overaggressive Supplier Reduction

Can result in inadequate supplier capacity if demand

increases
May cut otherwise qualified suppliers out of supply base
May need to identify and qualify new replacement suppliers

Chapter 9: Supplier Management and Development 37

 Formal Approaches to Supply Base
Rationalization

Twenty-eighty rule
Based on Pareto principle
“Improve or else” approach
Need to improve quickly
Triage approach
Categorization of existing suppliers
Competency staircase approach
Series of performance milestones

Chapter 9: Supplier Management and Development 38

 Supplier Segmentation Categories

Chapter 9: Supplier Management and Development 39

 Summary of Supplier Rationalization and
Optimization

There are a variety of approaches

Organization may use more than one approach
Buyer does not have to limit its analysis to current suppliers
May add new suppliers as necessary
Benefits are real
Drawbacks are manageable

Chapter 9: Supplier Management and Development 40

 Supplier Development Defined

“Any activity undertaken by a buyer to improve a supplier’s

performance or capabilities to meet the buyer’s short- and
long-term supply needs”

Chapter 9: Supplier Management and Development 41

 Supplier Development Activities

Sharing technology
Providing performance incentives
Promoting competition among suppliers
Providing necessary capital
Directly involving buyer personnel
Training
Process improvement

Chapter 9: Supplier Management and Development 42

 Steps to Supplier Development

1. Identify critical commodities for development

2. Identify critical suppliers for development
3. Form cross-functional development team
4. Meet with supplier’s top management team

Chapter 9: Supplier Management and Development 43

 Steps to Supplier Development

5.Identify opportunities and probability for improvement

6.Define key metrics and cost-sharing mechanisms
7.Reach agreement on key projects and joint resource
requirements
8.Monitor status of projects and modify strategies as
appropriate

Chapter 9: Supplier Management and Development 44

 Supplier Development Process Map

Identify critical commodities for development

Identify critical suppliers for development
Form cross-functional development team
Meet with supplier’s top management team
Identify opportunities and probability for improvement
Define key metrics and cost-sharing mechanisms
Re a c h a g re e m e nt o n ke y p ro j e c t s a n d j o i n t re s o u rc e
requirements
Monitor status of projects and modify strategies as appropriate
Chapter 9: Supplier Management and Development 45
 Identify Critical Commodities

Do externally purchased products and services account for >

50% of product or service value?
Is supplier existing or potential source of competitive
advantage?
Does buyer currently purchase or plan to purchase based on
total cost vs. initial purchase price?
Can existing suppliers meet buyer’s competitive needs 5 years
from now?
Chapter 9: Supplier Management and Development 46
 Identify Critical Commodities

Does buyer need suppliers to be more responsive to its

needs?
Is buyer willing and able to become more responsive to
suppliers’ needs?
Does buyer plan to treat suppliers as partners?
Does buyer plan to develop and maintain open and trusting
relations?

Chapter 9: Supplier Management and Development 47

 Identify Critical Suppliers

Use formal supply base assessment system

Routinely evaluate suppliers and rank them from best to
worst
Poor performers are candidates for elimination
Middle-of-the-road suppliers are candidates for development

Chapter 9: Supplier Management and Development 48

 Form Cross-Functional Team

Develop internal consensus and support

Improve internal processes first
Typical members
Supply management
Engineering
Operations
Quality

Chapter 9: Supplier Management and Development 49

 Meet Supplier’s Top Management

Establish relational building blocks

Strategic alignment
Measurement
Professionalism
Establish positive tone
Reinforce collaboration
Foster two-way communication
Develop mutual trust
Chapter 9: Supplier Management and Development 50
 Identify Opportunities and
Probability for Improvement

May be driven by final customer ’s requirements and

expectations
Determine probability and scope of improvement
Jointly agree upon areas of improvement

Chapter 9: Supplier Management and Development 51

 Define Key Metrics and Cost-Sharing
Mechanisms

Evaluate project feasibility

Determine return on investment (ROI)
Determine if opportunities are realistic and achievable
Establish agreed-upon measures and improvement goals
Determine equitable cost and benefit sharing arrangements,
often 50-50

Chapter 9: Supplier Management and Development 52

 Reach Agreement on Key Projects and
Joint Resource Requirements

Identify necessary resources

Obtain commitment to deploy resources
Develop specific measures and metrics that demonstrate
success
Develop visible milestones and time horizons

Chapter 9: Supplier Management and Development 53

 Monitor Status of Projects and
Modify Strategies as Appropriate

Routine monitoring
Ongoing two-way exchange of information
Creating visible milestones
Posting progress
Creating new or revised objectives
Modify plan as necessary to maintain momentum or address
new findings

Chapter 9: Supplier Management and Development 54

 Overcoming Barriers to Supplier Development

Direct-involvement activities (hands’ on)

Shared personnel in joint projects
Incentives and awards (the “carrot”)
Increase future order volumes
Annual award ceremonies
Warnings and penalties (the “stick”)
Pull back current business
Withhold future business

Chapter 9: Supplier Management and Development 55

 Buyer-Specific Barriers

Barrier Solution
Buying company’s purchase volume from Parts standardization across product lines
supplier does not justify development Single sourcing
investment.
No immediate benefit to supplier Pursue small wins to build momentum
development is evident to buyer
Importance of purchased item does not Take a longer-term focus
justify development efforts Include integrated solutions to be used in
future designs
Lack of executive support at buyer Prove the benefits
organization for supplier development Document and publicize

Chapter 9: Supplier Management and Development 56

 Buyer-Supplier Interface Barriers

Barrier Solution
Supplier is reluctant to share Create ombudsman to deal with non-
information on costs or contractual issues
processes
Confidentiality inhibits Establish confidentiality agreements
information sharing Non-disclosure agreements
Exclusivity agreements
Engage in ethical behavior
Supplier does not trust buyer Spell it out with properly executed written
agreement
Chapter 9: Supplier Management and Development 57
 Buyer-Supplier Interface Barriers

Barrier Solution
Organizational cultures are Adapt new approach to local conditions
poorly aligned Supplier partnership manual
Training

Not enough inducements to Designed-in motivation

participate are provided to Future business
supplier Financial incentives
Payment terms favorable to supplier

Chapter 9: Supplier Management and Development 58

 Supplier-Specific Barriers

Barrier Solution
Lack of commitment on part Implement after commitment
of supplier’s management Joint development of goals and objectives
Determination of potential costs and benefits
to each party and how they will be shared
Supplier’s management agrees Supplier champions
to improvements but fails to Key supplier employee
implement proposals Training in tools and techniques

Supplier lacks engineering Direct support by buyer personnel

resources to implement
solutions
Chapter 9: Supplier Management and Development 59
 Supplier-Specific Barriers

Barrier Solution
Supplier lacks required Direct electronic data interchange (EDI) support
information systems Direct financial assistance as required
Training on hardware and software
Supplier is not convinced Let suppliers know where they stand
development will Supplier evaluation and measurement system
provide benefits View supplier performance vis-à-vis competitors

Supplier lacks employee Establish training centers

skill base to implement Develop supplier skill levels
solutions Provide human resource support
Co-location and direct involvement

Chapter 9: Supplier Management and Development 60

 Lessons Learned from Development

Many barriers are interrelated

Managerial attitude is common and difficult barrier to overcome
Requires strategic orientation toward S C M and alignment of supply
management objectives with business unit goals
Relationship management is critical to supplier development success
Supplier development is neither quick nor easy
It requires …
Vision and commitment from both parties
Open communication
Equitable sharing of costs and benefits
Chapter 9: Supplier Management and Development 61
Supply Chain Management
SCM201 - Session 15 & 16

Chapter 9: Supplier Management and Development 62