Chapter 7 - Supplier Relationship Management

Supplier Evaluation

-A process to identify the best and most reliable suppliers -Sourcing decisions are made on facts and not on perception (through the use of defined criteria) -Frequent feedback can help avoid surprises and maintain good relationships (hold regular review meetings) -Suppliers should be allowed to provide constructive feedback to the customer

Supplier Recognition Programs

-A program to recognize suppliers who achieve the high performance standards necessary to meet customer expectations - The success of the business can depend on the quality and performance of the company's suppliers - It is always a good practice for a company to have innovative supplier recognition programs in order to recognize their achievements and reward them for their exceptional performance and services

Early Supplier Involvement (ESI)

-Key suppliers become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, concurrent engineering, and design for manufacturability - Strategic Suppliers are asked to add their knowledge and expertise to the company's new product development process

Capabilities

-Key suppliers must have the right technology and capabilities to meet cost, quality, and delivery requirements in a timely manner (current and future)

Total Cost of Ownership

-Made up of all costs associated with the acquisition, use, and maintenance of a good or service

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

You Can't Improve What You Can't (or Don't) Measure

-Measures related to quality, cost, delivery, and flexibility are used to evaluate suppliers -Metrics should be: 1. Understandable 2. Easy to measure 3. Focused on real value-added results (SMART objectives) -A multi-criteria approach is best (i.e., a scorecard)

Supplier Relationship Management Continued

-Often a part of the rollout of Strategic Sourcing and is typically applied with suppliers: - Providing high volumes of a product/service - Providing lesser quantities of a crucial product/service - That serve many business units of a company or organization - Where intensive engineering, manufacturing and/or logistics interaction is essential

Supplier Certification Programs

-One of the elements for building a strong strategic supplier partnership is having a well-defined and established Supplier Certification program - A certified supplier is a source that through prior experience and qualification can provide material of such quality that it needs little if any receiving inspection or testing before going into approved stock or into the product process - Administration of a Certified Supplier Program requires planning and long-term attention

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 (i.e., alliance) is not likely to last

Benefits for Buyers:

-Preferred across to the supplier's best people -Increased operating efficiencies -Lower costs -Improved quality -Enhanced service -Influence over supplier investments and technology -Preferred access to supplier ideas -Increased innovation from and with suppliers, leading to lower costs and incremental revenue -Sustainable competitive advantage

Encourage Supplier Participation in Product Innovation

-Recognition to suppliers also brings about their enthusiasm to work closely with the company on new product development

Tools Used to Improve SRM

-Sourcing Analytics -Sourcing Execution -Procurement Execution -Payment and Settlement -Supplier Score-Carding -Performance Monitoring

Personal Relationships

-Strategic Partnerships begin with the development of personal relationships between key people at each company -It is people who communicates and make things happen

Tapping Into Strategic Supplier's Knowledge

-Strategic Sourcing partners offer the opportunity for a company to extend their intellectual capabilities by involving their external partner base in product development

Keys to Successful Strategic Partnerships

-Strong Supplier Partnerships -Building Trust -Shared Vision and Objectives -Personal Relationships -Mutual Benefits and Needs -Commitment and Top Management Support -Change Management -Information Sharing and Lines of Communications -Capabilities -Continuous Improvement -Performance Metrics

Improve Supplier Loyalty

-Supplier support is important to ensure that customer delivery commitments are maintained

5 Key Points in Developing and Implementing an SRM System

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

Traditional Supplier Management vs. Supplier Relationship Management

**Slide 7 on PowerPoint**

Value Engineering Activities

-Help the buyer's company to reduce cost, improve quality and reduce new product development time beginning with the initial design

Plan, Do, Check, and Act

-The process commonly utilized in continuous improvement

Supplier Development Continued

-A supplier development program must be aimed at improving suppliers performance, not bullying them into charging less or simply auditing and rewarding them -Supplier development is all about providing suppliers with what they need to be successful in the supply chain -Two of the most important functions of a supplier development program are: - Providing information about products, expected sales growth, etc. Suppliers need to become extensions of their customers - Training suppliers in the application of lean and six sigma / quality tools - Asking suppliers to lower their price without giving them the knowledge on how to lower their costs is not sustainable in the long-term

Weighted-Criteria Evaluation System Example

-A. Preferred: work with these suppliers in maintaining a competitive position and on new product development -B. Acceptable: require a plan from these suppliers outlining how they will achieve preferred status -C. Developmental: require corrective actions from these suppliers on how they will achieve acceptable level. Look for alternative suppliers if these do not achieve acceptability within a fixed period of time, e.g., 3 months

Information Sharing and Lines of Communication

-Both formal and informal lines of communication should be set up to facilitate the free flow of information -Confidentiality of sensitive information must be maintained

Shared Vision and Objectives

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

Motivate Suppliers

-Can motivate suppliers to excel in terms of their quality, pricing and delivery commitments

Commitment and Top Management Support

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

Change Management

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

Internal Certification Programs

-Example of Criteria used for an internal Certification Program - Supplier has no incoming product rejections for a specified time period - Supplier has no incoming late deliveries for a specified time period - Supplier has no significant negative quality related incidents for a specified time period - Supplier is ISO 9000 certified or has successfully passed a recent on-site quality system evaluation - Supplier consistently meets a mutually agreed-upon set of clearly specified quality performance measures - Supplier has a fully documented process and quality system with cost controls and continuous improvement capabilities - Supplier's processes are determined to be stable and in control

Benefits for Suppliers:

-Greater visibility into buyer's purchasing plans -Increased operating efficiencies -Longer term buyer commitments; greater predictability of future business -Increased scope of business and revenue -Lower cost of sales; increased margins -Opportunities to develop, pilot, and showcase innovative solutions -Sustainable competitive advantage

External Certification Continued

-ISO certified suppliers are preferred by procurement departments because ... - They have to conform to an externally defined set of standards for quality and delivery of service - They are usually more open to sharing supply chain information - They welcome building relationships with their customers - They have formal processes in place for continuous improvement of their products, services, and processes - They are easier for procurement to initially qualify and periodically audit - Certification is done by an independent third party agency - Firms have to be re-certified every three years

Plan

-Identify an opportunity and plan for change -Establish a baseline -Identify priorities -Set improvement goals and standards

Act

-If the change was successful, implement it on a wider scale and continuously assess your results. If the change did not work, begin the cycle again -Evaluate -Apply lessons learned -Modify as necessary

Encourage Suppliers to Adapt to the Company's Culture

-If the company treats its suppliers as a part of the family and engages in supplier recognition programs periodically, it can help to bring the suppliers closer to the corporate values, ethics and principles of the company

Helps to Create Entry Barriers for Competitors

-If the suppliers trust the company, they may be more inclined to sign deals of exclusivity with the company for certain crucial components

Do

-Implement the change on a small scale -Implement actions -Plans to achieve goals

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 perspective - Involves "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"

External Certification

-International Organization for Standardization (known as ISO) is the world's largest developer of voluntary international standards - Founded in 1947, today ISO has members from 163 countries and about 150 people working full time for the Central Secretariat in Geneva, Switzerland - ISO certification is highly sought after as it represents achieving and maintaining a standard of excellence verified by an independent third party organization - Benefits of ISO Certification: - Greater market potential - Compliance to procurement bids - Improved efficiency and cost savings - Higher level of customer service - Heightened staff moral and motivation

Supplier Evaluation: Performance

-It is important to actively monitor a supplier's performance and provide visibility and feedback on supplier performance at each stage of the evaluation process -Some relevant metrics include: - Supplier price and cost performance - Product receipt quality - Delivery performance - Financial stability - Contractual and standard compliance - Participation in product development - Cooperativeness in third-party production management - Support of both ethics and sustainable practices

Verification

-That a supplier operates, maintains, improves, and documents effective procedures that relate to the buyer's requirements (e.g., cost, quality, delivery, flexibility, maintenance, safety, etc.) - Supplier certification programs are used to differentiate strategic supplier alliance candidates from others - Companies may choose to develop internal certification programs, and/or require external certifications such as ISO 9000 and/or 14000 as part of their overall certification process

Supplier Relationship Management (SRM)

-The discipline of strategically planning for, and managing, all interactions with the third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions - Most supply professionals view it as an organized approach to defining what they need and want from a supplier - Establishing and managing the company-to-company link to obtain those needs - Identifying and measuring key strategic suppliers - Improving profits and reducing costs using tools

Supplier Development

-The technical and financial assistance given to existing and potential suppliers to improve quality and/or delivery performance -In simpler terms, it can be described as a buyer's activities to improve a supplier's capabilities -A supplier's knowledge and the technology that they use to produce the commodity they supply, can be leveraged through supplier development -Supplier development programs should be designed to achieve: - Lower supply chain total cost - Increased profitability for all supply chain participants üIncreased product quality - Near-perfect on-time-delivery at each point in the supply chain

Supplier Development: Process Steps

-The typical approach to supplier development is based on the following process steps: 1. Identify critical products and services 2. Identify critical suppliers of those products and services 3. Form a cross-functional team internally to work with the supplier 4. Meet with the top management at the supplier to get their support and involvement 5. Identify key development needs and projects 6. Define details of the agreement and the action plan 7. Monitor the status of the projects / action plan and modify strategies as necessary

ISO 9000

-There are eight (8) quality management principles on which the ISO 9000 series quality management system standards are based: 1. Customer focus - understand current and future customer needs 2. Leadership - establish unity of purpose and direction of the organization 3. Involvement of people - people are the essence of an organization 4. Process approach - a desired result is achieved through a managed process 5. Systems approach to management - managing interrelated processes 6. Continual improvement - performance improvement is a permanent objective 7. Factual approach to decision making - decision are based on facts and data 8. Mutually beneficial supplier relationship - interdependent benefits create value for both an organization and its suppliers

External Certification Program

-Two ISO standards commonly used for supplier certification are: - ISO 9000 - A series of management and quality standards in design, development, production, installation, and service - Companies wanting to sell in the global market seek ISO 9000 certification - ISO 14000 - A family of standards for environmental management - The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill

Check

-Use data to analyze the results of the change and determine whether it made a difference -Monitor and measure -Find and fix -Document results

Supplier Relationship Management System

-When considering a SRM program there are several technologies available to support development -The reason for a system is to provide a more comprehensive and objective view of a supplier(s) performance - A system will help in identifying and addressing supplier performance issues - A system can also be used to help make sourcing decisions. -It is important to recognize that an SRM system can only be implemented in line with the associated business process changes -The SRM system is part of the process, not the whole process by itself

Evaluating and Selecting Key Suppliers

-When evaluating key suppliers for developing a collaborative relationship, purchase cost becomes relatively less important - The assumption is that excellent suppliers will be able to drive costs out - "Squeezing" suppliers to generate a lower annual purchasing spend hurts strategic relationships! . . . but it is very often still done! [Profit Leverage Effect] -Key Supplier Selection is typically conducted by a cross functional team using evaluation forms or scorecards - Weighting techniques are often used

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, and go the extra mile

Performance Metrics

-You can't improve what you can't (or don't) measure -Total Cost of Ownership

Trends in Supplier Relationship Management

1. Close alignment of sourcing with supplier relationship management - Many companies are determining their negotiation strategies by tying them to their category management strategy, and to their supplier relationship goals 2. Focus on cross-functional engagement - A best practice for strategic supplier relationships involves SRM teams at both the company and at the supplier, each led by a relationship manager, who form a steering committee to lead the process 3. Focus on innovation - Companies that engage in more innovation with suppliers, report higher ROI 4. Investment in people & "soft skills" - Treat suppliers with courtesy and respect. Be candid, and able to disagree without being disagreeable. Hold both sides to the same standards

Supplier Recognition Programs - Three Attributes

1. Companies should recognize and celebrate the achievements of their best suppliers 2. Award winners exemplify true partnerships, continuous improvement, organizational commitment, and excellence 3. Award-winning suppliers serve as role models for other suppliers

Benefits of a Supplier Recognition Programs

1. Motivate Suppliers 2. Improve Supplier Loyalty 3. Encourage Suppliers to Adapt to the Company's Culture 4. Helps to Create Entry Barriers for Competitors 5. Encourages Supplier Participation in Product Innovation -A properly developed and led supplier recognition program will make major contributions to the organization, its suppliers, and to its customers and stakeholders -If a company is going to keep and utilize a supplier, there should be a motivation plan that reaches them

Benefits of Supplier Certification Programs

1. Reducing the amount of time and resources necessary for the buyer to conduct incoming inspections of products and materials from certified suppliers - Buyer trains supplier on approved test methods so that supplier can test product before shipment, and provide a Certificate of Analysis (COA) - Buyers may then opt to only test items periodically on incoming inspection rather than with each delivery or lot, providing that the periodic testing confirms the supplier's results -Other Benefits of Supplier Certification 2. Building long-term relationships 3. Decreasing the supplier base - Certified suppliers are more reliable and therefore, you don't need as many suppliers 4. Recognizing excellence

Supplier Evaluation: Weighted-Criteria

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