OSCM Ch 8, 9,and 10
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chapter_9_supplier_management_and_development.pptxSupplier Management and Development
Chapter 9
OSCM 3660:002 Strategic Sourcing
Spring 2016
Sandeep Jagani
PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
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Chapter Overview
Supplier performance measurement
Rationalization and optimization
Supplier development
Overcoming barriers to supplier development
Managing supply base risk
Managing sustainability in the supply base
Purchasing & Supply Chain Management, 5e
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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”
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Supplier Management Issues
Corporate and business unit goals, objectives, and strategies must drive supply management’s goals, objectives, and strategies
Supply management must develop appropriate supplier evaluation strategies to support the business unit
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Supplier Management Issues
Supplier segmentation must consider supply base risk levels, category spend amounts, and switching costs
Must understand …
Type of information required
How information will be deployed
Methods to obtain information in timely and efficient manner
What resources will be utilized to collect
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Supplier Measurement Decisions
What to measure
Quantitative variables
Delivery
Quality
Cost reduction
Qualitative variables
Compare to standards and goals
Measurement and reporting frequency
Uses of measurement data
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Qualitative Service Factors
| Factor | Description |
| Problem resolution ability | Supplier’s attentiveness to problem resolution |
| Technical ability | Supplier’s manufacturing ability compared with other industry suppliers |
| Ongoing progress reporting | Supplier’s ongoing reporting of existing problems or recognizing and communicating a potential problem |
| Corrective action response | Supplier’s solutions and timely response to requests for corrective actions, including engineering change order requests |
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Qualitative Service Factors
| Factor | Description |
| Supplier cost reduction ideas | Supplier’s willingness to help find ways to reduce purchase cost |
| Supplier new product support | Supplier’s ability to help reduce new product development cycle time or to help with product design |
| Buyer/supplier compatibility | Subjective rating concerning how well a buying firm and a supplier work together, a.k.a. “wavelength” |
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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 meeting
Never delay reporting supplier’s poor performance
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Uses of Measurement Data
Identify poor performing suppliers
Support supply base optimization and rationalization efforts
Determine future purchase volume allocations
Identify performance improvement opportunities
Make sourcing decisions
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Designing a Measurement System
What data to analyze
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
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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
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Categorical System
| Advantages | Disadvantages | Users |
| Easy to implement Requires minimal data Different personnel contribute Good for firms with limited resources Low-cost system | Least reliable Less frequent generation of evaluations Most subjective Usually manual | Smaller firms Firms in the process of developing an evaluation system |
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Categorical System
Assign rating evaluation for each category of performance
May be completed by buyer, other internal users, or combination
Minimal insight provided
Often significant variance between subjective ratings
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Weighted-Point System
| Advantages | Disadvantages | Users |
| Flexible system Supplier ranking allowed Moderate implementation costs Quantitative and qualitative factors combined into single system | Tends to focus on unit price Requires some computer support | Most firms can use this approach |
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Weighted-Point System
Less subjective
Weighs and quantifies 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
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| Performance Category | Weight | Score | Weighted Score | |
| Delivery | ||||
| On time | 0.10 | 4 | 0.40 | |
| Quantity | 0.10 | 3 | 0.30 | |
| Quality | ||||
| Inbound shipment quality | 0.25 | 4 | 1.00 | |
| Quality improvement | 0.10 | 4 | 0.40 | |
| Cost Competitiveness | ||||
| Comparison with other suppliers | 0.15 | 2 | 0.30 | |
| Cost-reduction ideas submitted | 0.10 | 3 | 0.30 | |
| Service Factors | ||||
| Problem resolution ability | 0.05 | 4 | 0.20 | |
| Technical ability | 0.05 | 5 | 0.25 | |
| Corrective action response | 0.05 | 3 | 0.15 | |
| New product development support | 0.05 | 5 | 0.25 | |
| Scale: 1 = Poor; 3 = Average; 5 = Excellent | Total Rating | 3.55 |
Weighted-Point System Example
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© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Cost-Based System
| Advantages | Disadvantages | Users |
| Total cost approach Specific areas of supplier non-performance identified Objective supplier ranking Greatest potential for long-range improvement | Detailed cost accounting system required Most complex Implementation costs are high Computer resources required | Larger firms Firms with large supply base |
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Cost-Based System
Most thorough and least subjective
Seeks to 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 (SPI)
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SPI Calculation
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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
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Cost-Based System Example
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| Commodity: Integrated Circuits | |||||
| Part Number | Supplier | Unit Price | SPI | Total Cost | |
| 04279884 | Advanced Systems | $3.12 | 1.20 | $3.74 | ** |
| BC Techtronics | $3.01 | 1.45 | $4.36 | ||
| Micro Circuit | $3.10 | 1.30 | $4.03 | ||
| 04341998 | Advanced Systems | $5.75 | 1.20 | $6.90 | ** |
| BC Techtronics | $5.40 | 1.45 | $7.83 | ||
| Micro Circuit | $5.55 | 1.30 | $7.22 | ||
| Service Factor Ratings: | |||||
| Advanced Systems | 78% | ||||
| BC Techtronics | 76% | ||||
| Micro Circuit | 87% | ||||
| ** Lowest total cost supplier for item (Unit price x SPI = Total cost) |
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Supplier Performance Example
| Supplier: | Advanced Systems | |||||
| Commodity: | Integrated Circuits | |||||
| Total part numbers in commodity: 2 | ||||||
| A. Total purchase dollars this quarter: | $5,231.67 | |||||
| Nonperformance Costs | ||||||
| Event | Number of Occurrences | Average Cost per Occurrence | Extended Cost | |||
| Late delivery | 5 | $150.00 | $750.00 | |||
| Return to supplier | 2 | $45.00 | $90.00 | |||
| Scrap labor costs | 3 | $30.00 | $90.00 | |||
| Material rework costs | 1 | $100.00 | $100.00 | |||
| B. Total nonperformance costs | $1,030.00 | |||||
| C. Purchase + nonperformance costs (Line A + Line B) | $6,261.67 | |||||
| D. Supplier Performance Index (SPI) (Line C / Line A) | 1.20 | |||||
| E. Service factor rating | 78% | |||||
| (Ratio of points earned to the total possible points for qualitative or service factors) |
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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
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Rationalization and Optimization
Requires 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 to just arbitrarily reduce the number
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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
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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
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Buying from World-Class Suppliers
Concentrate on closer relationships with smaller core of better performing suppliers
Fewer quality and delivery problems
Access to leading-edge technologies
Opportunities to collaborate
Lower total product cost
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Use of Full-Service Suppliers
Remaining suppliers are often larger in size and offer more capabilities
Offer 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
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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
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Lower Administrative Costs
Greater information sharing
Formalized communication processes
Fewer problem-related interactions with suppliers
Joint problem-solving
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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
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Ability to Pursue Complex Supply Management Strategies
Supplier development
Early supplier design involvement
Just-in-time sourcing
Development of cost-based pricing agreements
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Possible Risks of Maintaining Fewer Suppliers
Supplier dependency
Absence of competition
Supply disruption
Overaggressive supply reduction
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Supplier Dependency
Overly dependent on buyer for its economic survival
Lack of financial viability if purchase volumes are reduced
Unhealthy dependence
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Absence of Competition
Supplier may hold buyer “hostage”
Unduly raising prices
Becoming too complacent in its performance
Higher switching costs
Requires careful selection and evaluation
Need for equitable contracts
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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
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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
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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
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| High | |||||||||||||||
| Low | |||||||||||||||
| Commodity A | Commodity B | Commodity C | |||||||||||||
Supplier Segmentation Categories
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World-Class Performance
Minimum Threshold
Candidates for Development
Eliminate
Supplier Performance
Minimum Threshold
Purchasing & Supply Chain Management, 5e
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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
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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”
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Supply Development Activities
Sharing technology
Providing performance incentives
Promoting competition among suppliers
Providing necessary capital
Directly involving buyer personnel
Training
Process improvement
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Steps to Supplier Development
Identify critical commodities for development
Identify critical suppliers for development
Form cross-functional development team
Meet with supplier’s top management team
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Steps to Supplier Development
Identify opportunities and probability for improvement
Define key metrics and cost-sharing mechanisms
Reach agreement on key projects and joint resource requirements
Monitor status of projects and modify strategies as appropriate
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Supplier Development Process Map
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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
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
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?
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Purchasing & Supply Chain Management, 5e
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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?
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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
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Form Cross-Functional Team
Develop internal consensus and support
Improve internal processes first
Typical members
Supply management
Engineering
Operations
Quality
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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
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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
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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
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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
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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
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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
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Buyer-Specific Barriers
Barrier
Buying company’s purchase volume from supplier does not justify development investment
Solution
Parts standardization across products
Single sourcing
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Buyer-Specific Barriers
Barrier
No immediate benefit is evident to buyer
Solution
Pursue small wins to build momentum
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Buyer-Specific Barriers
Barrier
Importance of purchased item does not justify development efforts
Solution
Take a longer-term focus
Include integrated solutions to be used in future designs
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Buyer-Specific Barriers
Barrier
Lack of executive support in buyer organization for supplier development
Solution
Prove benefits
Document and publicize
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Buyer-Supplier Interface Barriers
Barrier
Supplier is reluctant to share information on costs or processes
Solution
Create ombudsman to deal with non-contractual issues
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Buyer-Supplier Interface Barriers
Barrier
Confidentiality inhibits information sharing
Solution
Establish confidentiality agreements
Non-disclosure agreements
Exclusivity agreements
Engage in ethical behavior
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Buyer-Supplier Interface Barriers
Barrier
Supplier does not trust buyer
Solution
Spell it out with properly executed written agreement
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Buyer-Supplier Interface Barriers
Barrier
Organizational cultures are poorly aligned
Solution
Adapt new approach to local conditions
Supplier partnership manual
Training
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Buyer-Supplier Interface Barriers
Barrier
Not enough inducements to participate are provided to supplier
Solution
Designed-in motivation
Future business
Financial incentives
Payment terms favorable to supplier
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Supplier-Specific Barriers
Barrier
Lack of commitment on part of supplier’s management
Solution
Implement only after commitment
Joint development of goals and objectives
Determination of potential costs and benefits to each party and how they will be shared
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Supplier-Specific Barriers
Barrier
Supplier’s management agrees to improvements but fails to implement proposals
Solution
Supplier champions
Key supplier employee
Training in tools and techniques
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Supplier-Specific Barriers
Barrier
Supplier lacks engineering resources to implement solutions
Solution
Direct on-site support from buyer personnel
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Supplier-Specific Barriers
Barrier
Supplier lacks required information systems
Solution
Direct electronic data interchange (EDI) support
Direct financial assistance as required
Training on hardware and software
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Supplier-Specific Barriers
Barrier
Supplier is not convinced development will provide benefits
Solution
Let suppliers know where they stand
Supplier evaluation and measurement system
View supplier performance vis-à-vis competitors
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Supplier-Specific Barriers
Barrier
Supplier lacks employee skill base to implement solutions
Solution
Establish training centers
Develop supplier skill levels
Provide human resource support
Co-location and direct involvement
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Lessons Learned from Development
Many barriers are interrelated
Managerial attitude is common and difficult barrier to overcome
Requires strategic orientation toward SCM and alignment of supply management objectives with business unit goals
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Lessons Learned from Development
Relationship management is critical to supplier development success
Supplier development is neither quick nor easy
Requires …
Vision and commitment from both parties
Open communication
Equitable sharing of costs and benefits
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Managing Supply Base Risk
General risk issues …
What are common sources of risk?
How can they be managed effectively?
Risk must be evaluated relative to cost exposure and probability of occurrence
Risk is inherent in all sourcing decisions
Risk and uncertainty are not synonymous
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Risk Assessment Questions
Where is organization vulnerable to potential risk?
Why is organization vulnerable?
How will this risk affect organization if it happens?
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Risk Assessment Questions
How will risk affect organization’s …?
Customers
Suppliers
Stakeholders
What are the causes of risk?
What should organization do if, and when, risk occurs?
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Impacts of Risk
Expenditures of time, effort, and money
Negative public relations
Loss of customer confidence
Lost sales
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Categories of Supply Base Risk
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Buyer
Political risk
Market risk
Sourcing risk
Financial risk
Supplier risk
Political Risk
Country stability
Regional stability
Political party and government stability
Legal differences
Intellectual property rights
Political elections
Military actions
Civil disturbances
Terrorism
Trade balance issues
Duties and tariffs
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Market Risk
Number of buyers competing for supplier’s goods, services, and capabilities
Increasingly shorter product life cycles
Threat of emerging technologies
Maintaining trade secrets and intellectual properties
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Sourcing Risk
Longer supply pipelines
Potential for supply disruption
Level of supplier competition
Communication and time differences
Suppliers shared with competitors
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Financial Risk
Inventory carrying costs
Currency exchange rate fluctuations
“Soft” vs. “hard” currencies
Terms of sale or INCOTERMS
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Supplier Risk
Financial stability and future viability
Early detection
Sources of information
Replacement supplier evaluation and selection
Supplier capabilities
Supplier’s own supply chain
Mergers and acquisitions
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Contingency Management Tools
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Inventory
Multiple sourcing
Third-party intermediaries
Scenario analysis
Currency hedging
Insurance
Automated visibility systems
Inventory
Traditional method of dealing with risk
Expensive
Requires maintenance of the “right” mix of products
Inventory carrying costs
Reactive, short-term focus only
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Multiple Sourcing
More competitive marketplace
Alternative sources of supply
Upside volume potential
Added product variability
Limited use of more complex sourcing strategies
Need for total cost of ownership analysis
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Third-Party Intermediaries
International freight forwarders
Non-vessel operating common carriers
Export management companies
Export packers
Goods surveyors
Export trading companies
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Scenario Analysis
Attempt to explore and prepare for possible future risk scenarios
Not considered forecasting
“What if” planning or “rehearsing the future”
Creation of focused contingency plans prior to an actual risk occurrence
Need to periodically review and update
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Steps in Scenario Analysis
Identification of specific issue or risk situation
Classify risk scenarios as to severity and disruptive impact on operations
Create viable working strategies and plans to allow quick response
Identify and implement risk “triggers”
Review for continued applicability
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Currency Hedging
Managing transaction exposure
Protects domestic currency value of a future foreign currency cash flow
Protects against major swings in currency exchange rates
Futures and forward exchange contracts
Currency options
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Choice of Transaction Currency
Transaction values in buyer’s currency
Supplier bears currency exchange risk
Transaction valued in supplier’s currency
Buyer bears currency exchange risk
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Insurance
Every international shipment should be insured
Matter of “when” loss occurs, not “if”
Goods in international trade subject to much higher risk of loss or damage
Insufficient insurance coverage often discovered only after loss occurs
Not every loss can be fully covered
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Insurance
Some losses are explicitly excluded from coverage unless additional rider is attached and extra premiums paid
Need to pay close attention to choice of INCOTERMS which specify …
Who pays insurance premium?
Who owns the goods and suffers actual loss?
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Supply Chain Risk Management
How supply chain members communicate and collaborate regarding sources of risk, utilizing risk management tools to mitigate and minimize risk and uncertainty across supply chain
Systems approach to identify, assess, and develop appropriate risk responses
Purchasing & Supply Chain Management, 5e
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SCRM Capabilities
Visibility
Integrating with and deploying analytics gathered from ERP systems data
Event recognition and early warning system
Ability to react quickly and effectively in early stages of risk event
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SCRM Capabilities
Broad mix of real-time supply chain analytics
Simulating models of risk events
Suggesting risk mitigation strategies
Evaluating different risk responses
Critical evaluation of competing scenario responses
Purchasing & Supply Chain Management, 5e
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© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Managing Sustainability in the Supply Base
ISM Principles of Sustainability and Social Responsibility with a Guide to Adoption and Implementation
Sustainability
“Ability to meet current needs without hindering the ability to meet the needs of future generations in terms of economic, environmental, and social challenges.”
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Managing Sustainability in the Supply Base
Social responsibility
“Framework of measurable corporate policies and procedures and resulting behavior designed to benefit the workplace and, by extension, the individual, the organization and the community in the following areas: community, diversity and inclusiveness-supply base, diversity and inclusiveness-workforce, environment, ethics, financial responsibility, human rights, health and safety, and sustainability.”
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Sustainable and Environmental Activities and Practices
Material-related
Climate and energy
Procurement-specific
Transportation and logistics
Metrics and measures
Appropriate contractual language
Product life cycle analysis
Environmental compliance auditing
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