Creating and Managing Supplier Relationships

SUPPLY CHAIN
MANAGEMENT
Creating and Managing Supplier
Relationships

Now days level of outsourcing has increased as companies are
focusing on their core competencies.
Companies require their suppliers to deliver innovative and quality
products not only in just-in-time (JIT) fashion, but also at a
competitive price.
Good supplier relations can provide many benefits such as
flexibility in terms of delivery, better quality, better
information, and better material flows between buyers and
suppliers.
Selecting the right supply partners and successfully managing
these relationships over time is thus strategically important; it is
often stated that “a firm is only as good as its suppliers.”
INTRO

Developing true partnerships is not easily achieved, and requires a
lot of hard work and commitment.
Several key ingredients for developing successful partnerships are:
1. Building Trust
2. Shared Vision and Objectives
3. Personal Relationships
4. Mutual Benefits and Needs
5. Commitment and Top Management Support
6. Change Management
7. Information Sharing and Lines of Communication
8. Capabilities
9. Performance Metrics
10. Continuous Improvement
11. Key Points
DEVELOPING SUPPLIER RELATIONSHIPS

Building Trust:
Trust is critical for any partnership or alliance to work.
It must be built not just at the senior management level but at all levels of
the organization.
Trust enables organizations to share valuable information, devote time
and resources to understand each other’s business, and achieve
results beyond what could have been done individually.
With trust, partners are more willing to work together; find compromise
solutions to problems; work toward achieving long term benefits for both
parties.

Shared Vision and Objectives:
Both partners must share the same vision and have objectives that are not
only clear but mutually agreeable.
Many alliances and partnerships have failed because objectives are not
well aligned or are overly optimistic.
Personal Relationships
Interpersonal relationships in buyer-supplier partnerships are important
since it is people who communicate and make things happen.
Mutual Benefits and Needs
Win-win situation can only be achieved if both companies have compatible
needs.
Mutual needs not only create an environment favorable for collaboration
but opportunities for increased innovation.

Commitment and Top Management Support
First, it takes a lot of time and hard work to find the right partner. Having
done so, both parties must dedicate their time, best people, and resources
to make the partnership succeed.
Commitment must start at the highest management level. Partnerships
tend to be successful when top executives are actively supporting the
partnership.
Change Management
With change comes stress, which can lead to a loss of focus. As such,
companies must avoid distractions from their core businesses as a result
of the changes brought about by the partnership.
Companies must be prepared to manage change that comes with the
formation of new partnerships.

Information Sharing and Lines of Communication
Both formal and informal lines of communication should be set up to
facilitate free flows of information.
Any conflict that occurs can be resolved if the channels of communication
are open.
For instance, early communication to suppliers of specification changes
and new product introductions are contributing factors to the success of
purchasing partnerships.
Capabilities
Organizations must develop the right capabilities for creating long-term
relationships with their suppliers.
Key suppliers must have the right technology and capabilities to meet cost,
quality and delivery requirements.
In addition, suppliers must be sufficiently flexible to respond quickly to
changing customer requirements.

Performance Metrics
You can’t improve what you can’t measure” is particularly true for buyer-
supplier alliances.
Measures related to quality, cost, delivery and flexibility have traditionally
been used to evaluate how well suppliers are doing.
Information provided by supplier performance will be used to improve the
entire supply chain.
Thus, the goal of any good performance evaluation system is to provide
metrics that are understandable, easy to measure and focused on real
value-added results for both the buyer and supplier.
Refer to Table 3.1 for Examples of Supplier Performance Metrics

Continuous Improvement
The process of evaluating suppliers based on a set of mutually agreed
performance measures provides opportunities for continuous improvement.
Continuous improvement involves continuously making a series of small
improvements over time, resulting in the elimination of waste in a system.
Both buyers and suppliers must be willing to continuously improve their
capabilities in meeting customer requirements of cost, quality, delivery and
technology.
Key Points
It must be noted that developing supplier partnerships is not easy. While in
numerous instances supplier partnerships work well, there are also
examples where the relationship did not turn out as expected.
In China, production costs are increasing and intense pressures to reduce
prices are making it more difficult for suppliers to maintain their profit
margins. As a result, suppliers compromise on quality and to deliver
substandard products.
SUPPLIER EVALUATION AND CERTIFICATION

Companies want to develop partnerships with the best suppliers to create
a competitive advantage.
Learning more about how an organization’s key suppliers are performing
can lead to greater visibility, which can provide opportunities for further
collaborative involvement in value-added activities.
Many organizations are tracking product and service quality, on-time
deliveries, customer service efforts and cost-control programs as part
of the supplier rating system.
This information can be used to develop supplier programs that will help
eliminate problems or improve supply chain performance.

It helps to identify their best and most reliable suppliers.
Sourcing decisions are made based on facts and not perception of a
supplier’s capabilities.
Providing frequent feedback on supplier performance help organizations to
avoid major surprises and maintain good relationships.

Developed a supplier portal, which allows
“Honeywell’s internal Integrated Supply Chain
professionals to share information,
interact/collaborate, and ultimately form closer
relationships with its external supply base.
In addition, the company has the Honeywell
Supplier Scorecard Training module.
The purpose is to evaluate supplier’s overall
performance in terms of quality (parts per
million defective) and on-time
delivery for the last month, last three months
and last twelve months.

One of the goals of evaluating suppliers is to determine if the supplier is
performing according to the buyer’s requirements.
Supplier certification, defined by the Institute of Supply Management as “an
organization’s process for evaluating the quality systems of key suppliers in
an effort to eliminate incoming inspections.”
Making visits to observe the operations at the supplier organizations. For
example, dirty bathrooms and messy shop floors could indicate that an
emphasis on quality is lacking in the production facility.
A supplier certification program also indicates long-term mutual
commitment. For example, a certification program might provide incentives
for suppliers to deliver parts directly to the point of use in the buyer firm,
thus reducing costs associated with incoming inspection and storage of
inventory.

WEIGHTED CRITERIA EVALUATION SYSTEM
One approach toward evaluating and certifying suppliers is to use the
weighted criteria evaluation system described below:
1. Select the key dimensions of performance mutually acceptable to both
customer and supplier.
2. Monitor and collect performance data.
3. Assign weights to each of the dimensions of performance based on
their relative importance to the company’s objectives. The weights for
all dimensions must sum to 1.
4. Evaluate each of the performance measures on a rating between zero
(fails to meet any intended purpose or performance) and 100
(exceptional in meeting intended purpose or performance).
5. Multiply the dimension ratings by their respective importance weights
and then sum to get an overall weighted score.

6. Classify vendors based on their overall scores, for example:
• Unacceptable (less than 50)—supplier dropped from further business
• Conditional (between 50 and 70)—supplier needs development work to
improve performance but may be dropped if performance continues to
lag
• Certified (between 70 and 90)—supplier meets intended purpose or
performance
• Preferred (greater than 90)—supplier will be considered for involvement
in new product development and opportunities for more business
7. Audit and ongoing certification review.

Federal-Mogul uses a weighted scorecard to evaluate their suppliers.
They have a Global Supply Net Scorecard website that provides the
Supplier Rating Criteria and rates suppliers on three main categories
• Quality (40 percent)
• Delivery (40 percent)
• Supplier cost-saving suggestions (20 percent)

The quality score is based on two equally weighted components:
• Parts per million (ppm) defective
• Quality of supplier corrective action requests (SCARs) issued.
The delivery score is computed as “line items received on time divided by
the number of line items due by the supplier for the month.”
The total score ranges from 0 to 100.
Suppliers are considered “preferred” if they score between 90 and 100.
Preferred suppliers are those that Federal-Mogul will work with on new
product development, approve for new business, and assist in
maintaining a competitive position.
Supplier rating is between 70 and 89 must provide a plan to Federal-Mogul
on how to achieve preferred status.
A score of 0 to 69 means that the supplier has a developmental supplier
rating.

ISO 9000
International Organization for Standardization (ISO) developed ISO 9000 in
1987
It is a series of management and quality assurance standards in design,
development, production, installation and service.
Many multinational companies prefer suppliers with ISO 9000 certifications.
So companies wanting to sell in the global marketplace are compelled to
seek ISO 9000 certifications.
It has been revised a number of times over the years.

ISO 9000 PRINCIPLES
There are eight quality management principles:
Principle 1—Customer focus: Organizations can establish this focus by
trying to understand and meet their customers’ current and future
requirements and expectations.
Principle 2—Leadership: Organizations succeed when leaders establish
and maintain the internal environment in which employees can become
fully involved in achieving the organization’s unified objectives.
Principle 3—Involvement of people: Organizations succeed by retaining
competent employees, encouraging continuous enhancement of their
knowledge and skills, and empowering them, encouraging engagement and
recognizing achievements.
Principle 4—Process approach: Organizations enhance their
performance when leaders manage and control their processes, as well as
the inputs and outputs that tie these processes together.

ISO 9000
Principle 5—System approach to management: Organizations sustain
success when processes are managed as one coherent quality
management system.
Principle 6—Continual improvement: Organizations will maintain current
levels of performance, respond to changing conditions, and identify, create
and exploit new opportunities when they establish and sustain an ongoing
focus on improvement.
Principle 7—Factual approach to decision making: Effective decisions
are based on the analysis of data and information.
Principle 8—Mutually beneficial supplier relationships: Organizations
that carefully manage their relationships with suppliers and partners can
nurture positive and productive involvement, support and feedback from
those entities.

ISO 14000: ENVIRONMENTAL
MANAGEMENT SYSTEM (EMS)
In 1996, ISO 14000, a family of international standards for environmental
management, was first introduced.
In 2004, it was revised to make it easier to understand and emphasized
compliance and compatibility with ISO 9000 for businesses that wanted to
combine their environmental and quality management systems.
The benefits of investing in an Environmental Management System
(EMS) based on ISO14000 standards include reduced energy and other
resource consumption, decreased environmental liability and risk,
reduced waste and pollution and improved community goodwill.
Due to Global Warming threat investment in environmental management
systems is likely to increase in the future.

SUPPLIER DEVELOPMENT
Supplier development is defined as “any activity that a buyer
undertakes to improve a supplier’s performance or capabilities to
meet the buyer’s short- and long-term supply needs.
Supplier development requires financial and human resource investments
by both partners.
It includes a wide range of activities such as training of the supplier’s
personnel, investing in the supplier’s operations and ongoing
performance assessment.

A seven-step approach to supplier development is outlined below:
Identify critical goods and services: Assess the relative importance of
the goods and services. Goods and services that are purchased in high
volume, do not have good substitutes or have limited sources of supply are
considered strategic supplies.
Identify critical suppliers not meeting performance requirements:
Suppliers of strategic supplies not currently meeting minimum
performance in quality, on-time delivery, cost, technology or cycle
time are targets for supplier development initiatives.
Form a cross-functional supplier development team: Next, the buyer
must develop an internal cross-functional team and arrive at a clear
agreement for the supplier development initiatives.

Meet with top management of suppliers: The buyer’s cross-functional
team meets with the suppliers’ top management to discuss details of
strategic alignment, supplier performance expectations and measurement,
a time-frame for improvement and ongoing professionalism.
Rank supplier development projects: After the supplier development
opportunities have been identified, they are evaluated in terms of feasibility,
resource and time requirements, supply base alternatives and expected
return on investment
Define the details of the buyer-supplier agreement: After consensus has
been reached on the development project rankings, the buyer and supplier
representatives jointly decide on the performance metrics to be monitored
such as improvement in quality, delivery and cycle time.
Monitor project status and modify strategies: To ensure continued
success, management must actively monitor progress, promote exchange
of information and revise the development strategies as conditions warrant.

SUPPLIER RECOGNITION PROGRAMS
Many companies track supplier performance but only half recognize excellent
performance with supplier awards.
Today, it is not sufficient just to reward your best suppliers with more business;
companies need to recognize and celebrate the achievements of their best
suppliers.
Boeing understands that supplier performance excellence is critical to its success.
The company’s Performance Excellence Award and Supplier of the Year Award
are presented annually to recognize “suppliers who achieve the high performance
standards.
The winners, selected are judged on “quality, delivery performance, cost,
environmental initiatives, customer service and technical expertise.”
As part of Intel’s SCQI Program, there are three recognition awards: Certified
Supplier Award (CSA), Preferred Quality Supplier (PQS) Award and Supplier
Continuous Quality Improvement (SCQI) Award.

SRM
Many organizations are investing in SRM software modules due to the
wealth of information that can be derived from these systems.
SRM software can organize supplier information and provide answers to
questions such as:
•Who are our current suppliers? Are they the right set of suppliers?
•Who are our best suppliers and what are their competitive rankings?
•What are our suppliers’ performances with respect to on-time delivery,
quality and costs?
•Can we consolidate our buying to achieve greater scale economies?
•Do we have consistency in suppliers and performance across different
locations and facilities?
•What goods/services do we purchase?
•What purchased parts can be reused in new designs?

SRM
There are two types of SRM: transactional and analytic.
Transactional SRM enables an organization to track supplier interactions
such as order planning, order payment and returns. Transactional SRM
tends to focus on short-term reporting and is event driven, focusing on such
questions as: What did we buy yesterday? What supplier did we buy from?
What was the cost of the purchase?
Analytic SRM allows the company to analyze the complete supplier base.
The analysis provides answers to questions such as: Which suppliers
should the company develop long-term relationships with? Which suppliers
would make the company more profitable? Analytic SRM enables more
difficult and important questions about supplier relationships.
Thus, we can see that transactional SRM addresses tactical issues such as
order size, whereas analytic SRM focuses on long-term procurement
strategies.

Creating and Managing Supplier Relationships

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