Chapter 7 Supplier Relationship Management

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 costs of sales; increased margins Opportunities to develop, pilot, and showcase innovative solutions Sustainable competitive advantage

Capabilities

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

Supplier development programs should be designed to achieve

Lower supply chain total cost Increased profitability for all supply chain participants Increased product quality Near-perfect on-time-delivery at each point in the supply chain

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

key benefits of Supplier Recognition Programs

Motivate Suppliers to Perform Better - Can motivate suppliers to excel in terms of their quality, pricing and delivery commitments. Improve Supplier Loyalty and Commitment - Supplier support is important to ensure that customer delivery commitments are maintained. 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. Encourages Supplier Participation in Product Innovation - Recognition to suppliers also brings about their enthusiasm to work closely with the company on new product development.

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.

Performance Metrics

You can't improve what you can't measure Measures related to quality, cost, delivery, and flexibility are used to evaluate suppliers. Metrics should be: 1) understandable, 2) easy to measure, and 3) focused on real value-added results [S.M.A.R.T. objectives] A multi-criteria approach is best

Supplier Development

aimed at improving suppliers performance, not bullying them into charging less or simply auditing and rewarding them.

Supplier Development

all about providing suppliers with what they need to be successful in the supply chain.

Supplier Relationship Manager (SRM)

defining what they need and want from a supplier and establishing and managing the company-to-company link to obtain those needs

Supplier Relationship Manager (SRM)

identifying and measuring suppliers

Supplier Development

it can be described as a buyer's activities to improve a supplier's capabilities

Total Cost of Ownership (TCO),

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

Acceptable

require a plan from these suppliers outlining how they will achieve preferred status

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

Supplier Relationship Manager (SRM)

seeks to improve profits & reduce costs using tools

Supplier Relationship Manager (SRM)

the discipline of strategically planning for, and managing, all interactions with the third party org that supply goods and/or services to an org in order to max the value of those interactions

Supplier Development

the technical and financial assistance given to existing and potential suppliers to improve quality and/or delivery performance.

Preferred:

work with these suppliers in maintaining a competitive position and on new product development

The typical approach to supplier development is based on the following process steps:

Identify critical products and services Identify critical suppliers Form a cross-functional team internally to work with the supplier Meet with the top management at the supplier to get their support and involvement Identify key development needs and projects Define details of the agreement and the action plan Monitor the status of the projects / action plan and modify strategies as necessary

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 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"

Supplier Certification: External

International Organization for Standardization (ISO) ISO 9000 ISO 14000

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.

ISO 14000

A family of standards for environmental management. The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill.

Supplier Recognition Programs

A program to recognize suppliers who achieve the high performance standards necessary to meet customer expectations.

ISO 9000

A series of management and quality standards in design, development, production, installation, and service.

Supplier Certification

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

five (5) key points to consider in the development and implementation of an SRM system

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

Information Sharing and Lines of Communication

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

Benefits of Supplier Certification

Building long-term relationships Reducing time spent on incoming inspections Decreasing the supplier base Recognizing excellence

Trends in Supplier Relationship Management

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. 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. Focus on innovation - Companies that engage in more innovation with suppliers, report higher ROI. Investment in people & "soft skills" - Treat suppliers with the courtesy and respect. Be candid, and able to disagree without being disagreeable. Hold both sides to the same standards.

Three Attributes: Supplier Recognition Programs

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.

There are eight (8) quality management principles on which the ISO 9000 series quality management system standards are based:

Customer focus - understand current and future customer needs Leadership - establish unity of purpose and direction of the organization Involvement of people - people are the essence of an organization Process approach - a desired result is achieved through a managed process Systems approach to management - managing interrelated processes Continual improvement - performance improvement is a permanent objective Factual approach to decision making - decision are based on facts and data Mutually beneficial supplier relationship - interdependent benefits create value for both an organization and its suppliers.

Example of Criteria used in a Certification Program

No incoming product lot rejections (e.g., less than 0.5 percent defective) for a specified time period. No incoming non-product rejections (e.g., late delivery) for a specified time period No significant supplier production-related negative incidents for a specified time period ISO 9000/Q9000 certified or successfully passing a recent, on-site quality system evaluation Mutually agreed-upon set of clearly specified quality performance measures Fully documented process and quality system with cost controls and continuous improvement capabilities Supplier's processes stable and in control

The process commonly utilized in continuous improvement is

Plan: Identify an opportunity and plan for change. Do: Implement the change on a small scale. Check: Use data to analyze the results of the change and determine whether it made a difference. 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

Benefits for Buyers

Preferred access 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

SRM is 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.

The Weighted-Criteria Evaluation System

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

Supplier Relationship Manager (SRM) tools to inc profit and reduce cost

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

Some relevant metrics for supplier evaluation performance ncludes

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