Supply Chain Chapter 3 Creating & Managing Supplier Relationships

Supplier Evaluation & Certification

- A process to identify best & most *reliable suppliers.* - Sourcing decisions are made on *facts* & not on perception. - *Frequent feedback* can help avoid surprises & maintain good relationships. - Suppliers should be allowed to provide *constructive feedback* to the customer - Supplier Certification refers to "an organization's process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections." -*Institute for Supply Management.*

Key to Successful Partnerships

- Building Trust - Shared Vision & Objectives - Personal Relationships - Mutual Benefits & Needs - Commitment & Top Management Support - Change Management - Information Sharing & Lines of Communication - Capabilities

Supplier Recognition Programs

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

Strong Supplier Partnerships

- Important to achieving *win-win* competitive performance for the buyer and supplier -- these require a *strategic perspective* as opposed to a tactical position - Involve "a mutual commitment over an extended time to work together to the *mutual benefit* of both parties, sharing relevant information and the risks and rewards of the relationship"

Metrics need to be:

1. Aligned with the company's goals 2. Understandable 3. Measurable at key intervals 4. Focused on value generation 5. Based on facts, not perceptions

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 *based on company goals.* 4. *Evaluate performance measures* on a fixed scale (eg. 0 - 100). 5. *Rank & Classify* the suppliers based on scores achieved 6.* Take action*

Focus on *Total Cost of Ownership*

All costs associated with the acquisition, use and maintenance of a good or service

Supplier Relationship Management (SRM)

Refers to extended procurement processes such as: • Execution improvement • Sourcing analytics • Supplier scorecards • Performance monitoring • Supplier Development

SRM enables companies to identify their most important suppliers. This enables companies to focus their resources and maintain more strategic relationships with suppliers. This will result in positive impacts from the supply base on costs, quality, delivery and innovation.

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Continuous Improvement (Kaizen)

• Making a *series of small improvements* over time results in the elimination of waste in a system. • Buyers & suppliers must be willing to continuously improve their capabilities in meeting customer requirements of *cost, quality, delivery, & technology.* • What is the risk / failure in focusing too heavily on Continuous Improvement

Performance Metrics Measures Include

• Measurements related to the firm's *strategic objectives* should be used to evaluate key suppliers • Measures include: - Quality (defect rates) - Cost (TCO) - Delivery (on time, reliable, secure) - Flexibility (responsive, creative) - Environment - Technology (Development) - Business (Financial stability, management capability)

ISO 9000

• addresses various aspects of quality management & *quality* standards in design, development, production, installation, & service. • It is based on a number of quality management principles including a *strong customer focus,* the motivation and implication of *top management,* the process approach and *continual improvement.*

*SRM* *Involves developing partnerships with key suppliers* *Focus on a small set of critical suppliers* *Manage remaining suppliers based on segmentation*

*• Involves developing partnerships with key suppliers* - Reducing total costs - Innovating new products and services - Creating value for both companies *• Focus on a small set of critical suppliers* - Largest impact on profitability - Provide most value - Critical to firm's success *• Manage remaining suppliers based on segmentation* - Segmented based on company's supply goals - Manage all suppliers in the segment

Group Costs around the transaction

*• Pre-transaction* - Costs incurred prior to order and receipt - Purchase Planning, Certifying & training suppliers, researching suppliers, supplier setup *• Transaction* - Costs incurred during acquisition - Cost of goods, cost to place and receive order, inspection costs, delivery costs inaccurate shipments *• Post Transaction* - Costs incurred after receipt of goods - Quality failures, warranty, company reputation, returns

Criteria Commonly Used in Certification Programs

- Product quality rates (defective product). - Non-product issues (e.g., on time delivery). - No significant negative incidents - Recognized agency certified or successfully passing a recent audit - Fully documented process & quality system with cost controls & continuous improvement capabilities - Supplier's process is stable with proper controls

Supplier Performance Review 1. *Categorize suppliers based on performance scores*

1. *Unacceptable* - Immediate action or drop 2. *Conditional* - Specific areas need improvement 3. *Certified* - Meets all performance targets 4. *Preferred* - Top performers gain additional business / expand

Supplier Performance Review 2. *Meet regularly with each supplier to review performance report (monthly, quarterly, annually)*

1. Current performance vs. previous scores by category 2. Agreed action plan to address deficiencies and timing of implementation 3. Business expansion for top performers

Supplier Development

A buyer's activities to improve a supplier's performance and/or capabilities based on the following approach: 1. Identify critical products & services 2. Identify critical suppliers 3. Form a cross-functional team 4. Meet with top management of supplier 5. Identify key projects 6. Define details of Agreement 7. Monitor status & modify strategies

International Organization for Standardization (ISO)

ISO International Standards ensure that products and services are *safe, reliable and of good quality.* For business, they are *strategic tools* that *reduce costs by minimizing waste and errors and increasing productivity.* They help companies to *access new markets, level the playing field for developing countries and facilitate free and fair global trade.*

ISO 14000

• addresses various aspects of *environmental management* and constantly improve their environmental performance. • The benefits include reduced energy consumption, environmental liability, waste & pollution, & improved community goodwill.