Supplier development programs and supplier scorecards are an enormous asset
in helping buyers rate the effectiveness of their supplier network
Industrial Metal Products Inc. prides itself on quality products, competitive prices,
and
on-time delivery. So when a European supplier missed a shipment by weeks and
customers bought materials elsewhere, the metalworking manufacturer’s
procurement chief took action.
Jim Jackson, director of Industrial Metal Products’s global purchasing and travel,
negotiated
a consigned inventory contract with the supplier, which, within four months, was
able to stock enough products to deliver them on time again. Thanks to its
supplier remedial efforts, Industrial Metal Products also recovered the business it
had lost
due to the provider’s poor execution
“Since we’re in a competitive market, it’s very easy for our customers to
call our competitor when we don’t have inventory available,” says Jackson, with
$2 billion Industrial Metal Products in Latrobe, Pa. “Any time we don’t have
inventory, it has
a direct impact on sales.”
Industrial Metal Products’s supplier produces high-quality products at competitive
prices. But trying to manufacture small lots had instead caused “unplanned
surprises” in
its shipping process, which resulted in untimely deliveries, Jackson notes.
“We’re a make-to-stock business, so we have to anticipate our customers’
demands. Delivery is critical to us.”
Industrial Metal Products customers include automotive and aerospace
manufacturers and
construction equipment companies.
Costs of Supply Problems
Examples of suppliers wreaking havoc on manufacturers’ operations are
rampant. Poor supplier performance accounts for billions of dollars in product
recalls and even consumer deaths. In an especially notorious example, Ford Motor
Co. lost $3 billion after it recalled more than 13 million defective
Bridgestone/Firestone tires running on its vehicles. Experts estimated the
faulty tires may have caused as many as 250 deaths.
Such problems, combined with today’s dynamic, global business environment,
require buyers to evaluate and manage supply partners’ efficiencies. Suppliers
that fail to meet performance standards can cost manufacturers a bundle in
actual expenditure, customer satisfaction, and lost business.
“A supplier could provide the lowest price, give you the right price, and
ship on time,” says Peter Gossens, senior vice president of supply chain research
with Wright Group Inc., a market research firm in Boston, Mass. “But maybe
they ship damaged goods, short ship you, or don’t have access to automation, so
you’re processing paper purchase orders and invoices, which adds cost and time
to the system.”
If suppliers don’t meet delivery schedules, manufacturers might have to shut
down or reschedule lines, notes Sandy Sanders, sourcing and supply management
director with The Toro Co., a $1.7 billion, outdoor maintenance products maker
in Bloomington, Minn. “That results in sending employees home or having to
expedite other parts to build other products. If they’re far enough away, you
might have to air freight product in and either the supplier or we incur air
freight costs.”
The costs to recover from supply chain disruptions can run into “several
hundreds of thousands of dollars,” adds Sanders.
Global Supply Chain
Purchasers can’t afford to buy from suppliers that ship substandard products,
miss delivery dates, or charge too much because their businesses rely on sourced
materials. External suppliers deliver about half of all goods and services to
companies, according to an Wright report.
In addition, many large corporations find low-cost supply sources offshore,
particularly in Southeast Asia, says Joyce Abrahms, marketing vice president with
Open Ratings Inc., a supply-management software vendor in Waltham, Mass.
Purchasing officers increasingly seek to squeeze as many costs of materials out
of their budgets as they can, Abrahms notes.
To Robert Gillian, manager of operational excellence, energy, and materials with
$7.4 billion Baxter Chemical Inc., increased global sourcing poses
risks he must mitigate.
“As we advance into the Far East, our supply chain has become longer, the
criticality of materials becomes greater,” Gillian says. “Choosing the right
suppliers is critical to our overall supply chain security.”
Essential to Operations
With manufacturers increasingly relying on external suppliers, it’s hardly
surprising that some 70% of the companies responding to an Wright survey view
measuring supplier performance as critical to their operations.
Many manufacturers have established strict supplier performance measurement
processes and procedures to ensure external suppliers meet stringent operational
requirements.
Allentown, Pa.-based , Baxter which provides gases and chemical products
to a variety of industries in 30 countries, spends some 65% of total corporate
revenues to purchase raw materials such as energy, natural gas, and chemicals.
With the costs of hydrocarbons increasing, Gillian works actively with some
200 strategic suppliers to drive continuous improvements in delivery, quality,
price, and overall performance.
“Two of our measurements in the delivery areaon-time delivery and fill
rateshave a direct impact on inventory and planning downstream,” Gillian notes.
“If you’re not getting your material and what you ordered, that sets up a huge
buffering in inventory that will impact your business.”
Baxter Chemical suppliers undergo monthly measurement reports, while some 35
corporate buyers conduct annual reviews with them. Baxter Chemical evaluates
suppliers on the level of communications between supplier and manufacturer,
progress in continuous improvements, level of account penetration,
responsiveness, and overall risk the suppliers pose to the supply chain.
Employing the supplier evaluation module in SAP AG’s R/3 enterprise business
software and a customized continuous improvement tool, Baxter Chemical helps
failing suppliers determine reasons for falling short and often implements
corrective actions. In one such instance, after a supplier missed several
delivery dates, Baxter Chemical discovered that an internal order receipt and
processing process caused the problems. The company helped the vendor fix the
problem in less than two months, says Gillian.
Key Competitive Advantage
As companies move beyond trying to squeeze costs out of their supply chains,
the performances of their suppliers become critical. “As firms manage their supply
chains for integration and competitive advantage,” says CAPS Research, a Tempe,
Ariz.-based research firm, “supplier development becomes a key tool in driving
superior supply chain performance.”
Industrial Metal Products, which established formal supplier performance
assessment
procedures in 2001, recognizes the need for quality providers. “We add value to
the product we buy so [our customers know] we have a value-added process,” says
Jackson. “But without the relationships we have with our suppliers, we would not
be able to service our customers.”
The company, which spends 35% of revenues to purchase metallurgical raw
materials, steel products, and indirect goods, distributes some 400 supplier
report cards monthly to strategic suppliers. The scorecards measure such factors as
product quality, which represents 35% of total score; on-time delivery 30%; total
cost management 25%; and payment terms 10%. Suppliers that fall below target
scores for two consecutive months must submit corrective action plans, which
Jackson reviews. Those that improve continue to work with Industrial Metal
Products, which starts looking for alternative sourcing for vendors that keep failing.
Like most companies, Industrial Metal Products and Baxter Chemical don’t expend
the same resources on indirect and second-tier providers. “They’re not very
strategic, so we don’t go through the rigor of monthly measurements for those,”
Jackson notes.
Gillian agrees. “We don’t want to spend time on low-level suppliers [that have
little] impact on the organization,” he says. But Open Rating’s Abrahms questions
that lack of scrutiny of lower-tier suppliers. For 10 years, Abrahms managed
procurement efforts for a large electronics company for a commodity that required
1,000 sourced parts and components. Concentrating on only those parts that were
critical to the unit’s performance, Abrahms one day ran out of nonstrategic
materials. “You can focus your attention on what’s most important, but if you don’t
have screws, you can’t ship the product,” says Abrahms. “The last thing someone
running a materials organization needs is not being able to ship a product because
they don’t have screws.” Abrahms’s group expended “a lot of human capital” seeking
alternate sources. After much scrambling, “fire fighting,” and additional costs, they
shipped on time.
Afterward, his group immediately established short-term and long-term
supplier performance measurement strategieswhich included a focus on its
lower-level suppliers. “If you don’t have a part from a supplieryou’re not paying
attention to,” Abrahms says, “you’re just as unable to ship that product as if it’s
from a
strategic supplier.”
Manufacturers and Suppliers Benefit
Manufacturers can attain multiple benefits by measuring supplier performance.
Companies that fail to measure most of their suppliers risk “large-scale quality
mishaps, service deficiencies, and cost overruns that can eat into bottom-line
profits and damage competitive positioning in the market,” notes Wright in its
research report.
Cam Forbes, founder and Managing Partner of
Opus One Ventures has been speaking, training
and coaching business owners, entrepreneurs, and sales people around the world.
For more information about Forbes’ “Consulting Solution Toolkit” and how to get
started in Consulting, visit Consulting Startup Kit or get his his free
report about getting started in consulting.
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