MGT 301 Strategic Sourcing and Supplier Relationship Management

Supplier Evaluation

A process to identify best and most reliable suppliers Sourcing decisions are made based on facts and not merely on perception Providing frequent feedback on suppliers performance can help avoid surprises and maintain good relationships Suppliers should be allowed to provide constructive feedback to the customer

Personal Relationships

It is people who communicate and make things happen

Capabilities

Key suppliers must have the right technology and capabilities to meet cost, quality, and delivery requirements in a timely manner In addition suppliers must respond quickly to changing customer requirement

Reasons Favoring Multiple Suppliers

-Need capacity -Spread risk of supply interruption -Create competition -Information -Dealing with special kinds of business

Drivers of Strategic Sourcing

-Reduce costs and reduce delivery cycle times -Improve quality and long-term financial performance -Optimize the number of global suppliers -Increase customer focus -Reduce high costs of materials -Deliver more innovative products, more frequently, and less expensively than competitors

From the buyer-firm's perspective

-Supplier tracks inventories -determines delivery schedules and order quantities -buyer can take ownership at stocking location.

Continuous improvement

The process of evaluating suppliers based on a set of mutually agreed-upon performance measures provides opportunities for continuous improvement making a series of small improvements over time results in the elimination of waste in a system Buyers and suppliers must be willing to continuously improve their capabilities in meeting customer requirements of cost, quality, delivery and technology

Reasons Favoring a Single Supplier

To establish a good relationship Less quality variability Lower cost Transportation economies Proprietary product or process Volume too small to split

Financials Measures

Total revenue Cost of goods sold Operating expenses Cash flow Working Capital Return on assets (ROA)

How well do we communicate expectations and specifications with supply chain members?

"At least half or even more of the quality problems between customers and supplier are caused by poor specifications, for which the buying company is largely responsible. Most specifications are vague or arbitrary.......When bids go out to suppliers, suppliers are seldom consulted on specifications, and most suppliers are afraid to challenge specifications for fear of losing the bid.....So, the first cure for poor supply chain quality is to eliminate the tyranny of capricious specifications." Keki Bhote

W. Edwards Deming

"We have learned to live in a world of mistakes and defective products as if they were necessary to life. It is time to adopt a new philosophy in America"

Commitment & Top Management Support

- Commitment must start at the highest management level. - Partnerships tend to be successful when top executives are actively supporting the partnership

Primary benefits of e-procurement

- Cost savings - Frees-up time to concentrate on core business

Early Supplier Involvement (ESI)

- Highly effective supply chain integrative techniques - Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product and process design, concurrent engineering and design for manufacturability techniques

Mutual Benefits and Needs

- Partnership should result in a win-win situation, which can only be achieved if both companies have compatible needs. - An alliance is much like a marriage, and if only one party is happy, then the marriage is not likely to last

Trends in SRM

- Sourcing and procurement are increasing in importance in organizations. They are becoming more strategic - More companies expect more cost reductions to come from their procurement functions - Staff is being reallocated from low-level transaction activities to more strategic and higher value-added positions - Companies with effective transaction activities tend to reduce costs better and have strategic and automated systems

From the supplier's perspective

-Avoids ill-advised customer orders -Supplier decides inventory set up and shipments -Opportunity for supplier to educate customers about other products

Five key points of an SRM system

1. Automation handles routine transactions 2. Integration spans multiple departments, processes, and software applications 3. Visibility of information and process flows 4. Collaboration through information sharing 5. Optimization of processes and decision making

Reverse auctions

Pre-qualified suppliers enter Web site & at pre-designated time & date, try to underbid competitors, monitoring bid prices until the session is over.

Early Supplier Integration Points

1. Idea Generation: voice of the customer 2. Preliminary Business/Technical Assessment 3. Product Service/Concept Development 4. Product/Service Engineering and Design 5. Prototype Build, Test and Pilot/Ramp-Up

The Weighted-Criteria Evaluation System

1. Select the key dimensions of performance mutually acceptable to both customer & supplier. 2. Monitor & collect performance data. 3. Assign weights to each of the dimensions. 4. Evaluate performance measures between 0 & 100. 5. Multiply dimension rating by weight & sum of overall score. 6. Classify vendors based on their overall score: Unacceptable, Conditional, Certified, & Preferred 7. Audit & perform ongoing certification review.

Metrics should be

1. Understandable 2. Easy to measure 3. Focused on real value-added results (multi-criteria approach is best)

You can't improve what you can't measure

A multi-criteria approach is best to measure performance Measures related to quality, cost, delivery, and flexibility are used to evaluate suppliers

Strategic supplier agreements can reward suppliers by allowing

A share of cost reductions More business and/or longer contracts Access to in-house training seminars and other resources Company and public recognization

Supplier awards

Companies should recognize and celebrate the achievements of their best suppliers Award winners exemplify true partnerships continuous improvement, organizational commitment, and excellence Award-winning suppliers serve as role models for other suppliers

Change Management

Companies must be prepared to manage change that comes with the formation of new partnerships

Are we a good customer

An organization should be a good customer, which is important to supply chain quality Examples are awarding new business, paying invoices on time, and signing long term contracts with key suppliers

Leverage Supplies

Availability adequate Alternative suppliers Standard product specifications Substitution possible

Non-Critical Supplies

Availability adequate Standards specifications of goods/services Substitution possible

Information Sharing and Lines of Communication

Both formal and informal lines of communication are maintained to facilitate free flow of information. Confidentiality of sensitive information must be maintained and is part of the Trust factor

Shared Vision and Objectives

Both partners must share the same vision & have objectives that are not only clear but mutually agreeable. The focus must move beyond tactical issues & toward a more strategic path to corporate success.

Channel equity

Channel partnerships provide value for all participants

E-procurement systems

Concentrate large volumes of small purchases with a few suppliers, using e- catalogues available to the organization's users.

Key Supplier Selection

Conducted by a cross functional team approach using evaluation forms or scorecards

Black Box

Design is primarily supplier driven, based on buyer's performance specification

ISO 9000

Developed by International Organization for Standardization (ISO) - series of management & quality standards in design, development, production, installation, & service. Companies wanting to sell in the global market seek ISO 9000 certification.

Are we involving suppliers early in product and process development (ESI)?

Early supplier involvement recognizes that competent suppliers have more to offer a purchaser than simply producing an item according to buyer-provided specification Help to ensure products are designed easier, less expensive, and with greater quality and manufacturability

Preferred suppliers provide:

Early supplier involvement: Information on the latest trends in materials, processes, or designs Information on the supply market Capacity for meeting unexpected demand Cost efficiency due to economies of scale.

Roles of Supply Base

Firms emphasize long-term strategic supplier alliances consolidating volume into one or reduced number of suppliers per commodity , resulting in a smaller supply base

Gray Box

Formalized supplier integration. Joint development activity between buyer and supplier

Successful Sourcing Strategies are different for:

Functional products versus innovative products

Characteristics of Innovative Products

High cost High profit margin Short life cycle Higher forecast viability Fashion items Many product options and variety Seasonal demand

Are we establishing aggressive supplier improvement targets?

Incremental goals, however worthy, invite supply chain members to perform the same comfortable processes incrementally better with mediocracy often the result Once a supplier proves it can satisfy current performance expectations, then more demanding objective take effect, reflecting the need for continuous improvement

White Box

Informal supplier integration. Buyer "consults" with supplier on buyer's design

Characteristics of Functional Products

Low cost Low profit margin Long life cycle Lower forecast viability Staple items Limited product options and variety Stable demand

Functional Products

MRO items and other commonly low profit margins with relatively stable demands and high levels of competition

Do we measure supplier quality performance?

Measurement is critical during supplier evaluation and during the normal course of business Helps to determine areas needing improvement, ID top performing suppliers, and to help eliminate poor performing suppliers

Key to developing successful sourcing

Must align the supply chain and sourcing strategy with the overall corporate strategy and with the strategic objectives of the product!

No Supplier Responsibility

No supplier involvement. Supplier "makes to print"

Do we reward superior supplier performance and improvement?

Offering performance-related rewards recognize that a direct link exists between rewards and supplier improvement Identify different kinds of rewards purchasers have at their disposal for superior supplier performance and improvement

Global sourcing

Opportunity to improve quality, cost, and delivery performance Requires additional skills and knowledge to deal with international suppliers, logistics, communications, political environment and other issues

Reasons given for failure of alliances

Overly optimistic Poor communication Lack of shared benefits Slow payback results Lack of financial commitment Misunderstood operating principles Cultural mismatches Lack of alliance experience

Are we applying the principles of total quality management to supplier evaluation and selection

Prevention Measurement Quality at the source Total cost of quality

Buyer-Supplier partnerships are easier with a rationalized supply base and result in

Reduced purchases prices Fewer suppliers management problems Closer and more frequent interaction between buyer and supplier Greater levels of quality and delivery reliability

Supplier Relationship Management (SRM)

Refers to extended procurement processes such as sourcing analytics, sourcing execution, procurement execution, payment and settlement, suppliers scorecarding and performance monitoring Improves profits and reduce costs

Examples of supplier improvements

Share benefits from suppliers-initiated improvements Award longer-term purchase contracts Offer greater share of purchase volume Publicly recognize superior suppliers Provide new opportunities across the business Provide access to technology Offer opportunities to participate in NPD

Framework for supply chain strategy development

Step 1: The firm's suppliers are classified as belonging either to the innovation or functional category and assigned to a commodity category Step 2: The goals and strategies of the supply chain are developed Step 3: Supply chain capabilities are evaluated and compared to required performance Step 4: Set goals for improving capabilities Step 5: Implement work plan Step 6: Monitor progress and adjust the work plans

Critical Strategic Supplies

Strategically important Substitution/alternate supplier difficult Major importance for purchasing overall

Bottleneck supplies

Substitution difficult Monopolistic marketers High entry barriers Critical geographic/ political situation

Are we committing the necessary resources to help develop supply chain members?

Supplier development activities represent a conscious effort to identify, integrate, and develop key supply chain members Companies pursue supplier development primarily for two reasons 1. Improve an existing supplier performance capability, which should improve supplier quality (reactive or proactive) 2. Develop a new performance capability (proactive)

Vendor Managed Inventory

Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer

Have we reduced our supply base to a manageable level?

Supply base optimization is the process of determining the right mix and number of suppliers to maintain What is the relationship between optimization and supply chain quality?

Supply Base Rationalization Programs

Supply base reduction/optimization Often the initial supply chain management effort

Evaluating and Selecting Key Suppliers

When evaluating suppliers to be used in a collaborative relationship, purchase cost becomes relatively less important, particularly with key suppliers

Building Trust

With trust, partners are more willing to work together, find compromise solutions to problems, work toward achieving long-term benefits for both parties, &, in short, go to the extra mile.

Do these quality-related activities require time and resources?

Yes, we have time to react but never really any time to plan, prevent them from happening, and being proactive

Punishment

a negative reward, may be to reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor quality

Value engineering

activities help the firm to reduce cost, improve quality & reduce new product development time

Sourcing

all of firm's activities used to manage external resources

Alliance development

an extension of supplier development refers to increasing a key or strategic supplier's capabilities. eventually extends to a firm's second-tier suppliers, as the firm's key suppliers begin to form their own alliance

Innovation Products

characterized by short product life cycles, volatile demand, high profit margins and relatively less competition

Organizations may require

direct suppliers to acquire goods & services from specific suppliers & under specific conditions. They can also work directly with supplier alliance partners in solving second-tier supplier problems, designing supplier selection & certification programs.

Successful alliance development can

indirectly create successful, high-performing second-tier & third-tier relationships.

Strategic sourcing

managing the firm's external resources to support firm's long term goals

Innovative

market mediation cost

Key Take Away

must align the supply chain and sourcing strategy with the overall corporate strategy and with the strategic objectives of the product

Functional

physical

Rewarding suppliers

provides an incentive to surpass performance goals

Supplier Certification

refers to "an organization's process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections."

Supplier alliances

result in better market penetration access to new technologies & knowledge, & higher return on investment

Supply Base

suppliers that a firm uses to acquire its materials, services, supplies, and equipment

Supplier Selection

the process when the buying center creates a list of desired supplier attributes and negotiates with preferred suppliers for favorable terms and conditions

Examples of Performance Metrics

• Cost/Price-Competitive price & availability of cost breakdowns • Quality- Zero defects, Fit for use, ISO 9000 • Delivery- Fast, Reliable/on time • Responsiveness & Flexibility-Responsiveness to customers & to changing situations • Environment- Environmentally responsible, ISO 14000 • Technology- Superior product/service design • Business Metrics- Reputation, information sharing • Total Cost of Ownership