Sustaining High Performance through Effective Supplier Development

By Avaneesh Gupta and Brett Margolis

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3Thanks to the long-term uncertainty regarding the timing and extent of global economic recovery, it is becoming more important for organizations to establish strategic ties and collaborative relationships with key suppliers to overcome the myriad of challenges and increased risks associated with a more volatile operating environment.

The purpose of supplier development is to improve supplier capabilities and enable them to provide better quality and delivery, lower cost products & services on time,

Figure 1. Positioning of Supplier Development Work

Vision & Strategy

Source for SRM

Source for SRM Manage Supply Base Integrate / Collaborate

Target Setting & Performance Monitoring

Enablers

Strategy Development

Contract Management

Contracting

TechnologyOrganization

People

Successful SupplierRelationship Management

ComplianceManagement

Supplier Development

Identify &EnableIntegration

Supplier Performance Management

bring in innovation to support clients sourcing & procurement targets and sustainable development objectives, at the same time increasing supplier profitability as an extension of the benefits delivered to their customers.

Supplier development, an integral part of SRM framework as shown in figure below, is the joint process between a supplier and the buying company for carrying out innovative projects and activities, beyond existing contracts, aimed at shared goals (e.g. Collaborative product design and development,

Development of new products, services, or processes, CI Collaboration, Joined investment and Sourcing initiatives) and obtaining a competitive advantage and optimal added value for both parties.

4Trends shaping the need for Supplier DevelopmentKey trends shaping the need for organizations to focus attention on supplier development include the following:

Risk MinimizationRisk anticipation, monitoring & mitigation play an ever increasingly important role in these times of economic uncertainty. Unabated increase in raw material cost, energy prices and further pressure due to increased labor costs and currency appreciation, quality and delivery under-performance have put number of vendors in China and other low cost countries at a greater financial and operational risk. Leading organizations are working in close collaboration with their key suppliers helping them identifying new ways of working which improves their bottom line performance and ensuring the risks organizations are exposed to is minimized to a greater extent. A recently-published study conducted by Accenture in collaboration with Massachusetts Institute of Technology indicates that 77% of the companies surveyed in that study indicated that 2 out of the top 3 major procurement risk factors were related to suppliers (in first place was dependency on supplier, second was unanticipated price volatility and in third place was supplier quality problems)

Cost ReductionProcurement leaders are realizing the opportunities for further cost reduction from a Total Cost of Ownership (TCO) standpoint by working in close collaboration with key suppliers across the lifecycle of the product. For example, during the product development stage it is critical for suppliers to develop products and samples from the large scale production feasibility aspect rather than trying to make customized and/or over-engineered samples. Accenture worked with suppliers of an agricultural equipment client to carefully ensure that during the product approval process, sample products were also evaluated on their production capability to be mass produced and this

contributed to the 99%+ first time approval for those products brought through the process. Close interactions by key suppliers with buyers to proactively advise them of alternative ways of making the products may reduce the operation cost and create a win-win situation for both parties. For example, in garment making, during the sampling stage buyer can advise their suppliers to use folders (at appropriate places) which facilitates combining a set of operations and getting it executed through a single operator rather than each operation executed by specific operator. This not only leads to improved productivity but as well as better quality. Similarly, close collaboration at the mass production stage unlocks substantial opportunities for cost reduction, which can only be realized if the both the buyer and supplier collaborate closely to remove cost at all stages of the product lifecycle. For example, in garment manufacturing sometimes buyer recommends to have increased inline inspection points to ensure getting the right quality products. However, increased inspection further deteriorates Rolling Through put Yield (RTY) which is calculated as multiplication of First Pass Yield (FPY) at various check points , Working together with their suppliers and helping them to build quality in processes not only helps eliminating redundant inspection efforts but also improved RTY and accountability in the system.

Corporate Social Responsibility/Compliance Issues on the Increase in AsiaRecently there has been an increase in compliance violations issues in Asia, specifically in China. Particularly, many large organizations are under fire for underpay and overtime situations. The situation has been further exacerbated due to the global crisis as a number of key suppliers have stopped hiring new workers and forced the existing workforce to work longer hours. Achieving the right level of compliance

and to ensure that brand image does not suffer as a result of non-compliance is a core tenet of ensuring a sustainable relationship with key suppliers. Working in close collaboration with suppliers, to ensure that workers receive at least the minimum legal wage and are appropriately compensated for overtime hours is a basic necessity. A direct impact in compliance improvement can also be achieved without increasing product cost through assisting suppliers to improve their productivity and quality.

Innovation through CollaborationAn increased focus of working closely with key suppliers from the initial stages of product development leads to differentiated and innovative products at competitive prices in the market place. Rather than providing technical specifications which in many cases limits the innovation as most of the design details are fixed - leading players provide functional goals to the suppliers and let them come out with innovative ideas.

Going GreenAs natural resources become scarcer and measures to reduce pollution and global warming increase, the continued trend to go green is accelerating. Innovative companies are finding another compelling reason to adopt leaner and greener practicesthe economic and environmental benefits. Working closely with suppliers - to improve the effectiveness of their operations and reduce waste through alternative material usage, improved material utilization, transportation optimization to reduce carbon emissions etc. - facilitates the journey to becoming greener.

1. Source: High Performance in Procurement Risk Management

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5Benefits of embarking on SupplierDevelopment ProgramsThe current changing economic environment and global sourcing landscape has made it imperative for buyers to forge strategic relationship with their key suppliers. Accenture sees the following key benefits resulting from a well-implemented supplier development program:

Better Alignment of Business ObjectivesThe closer alignment of Buyer and Supplier values facilitates the development of trust-based relationships which inspire greater collaboration and opportunities for increased innovation. Supplier development initiatives help suppliers to understand buyers values, Brand DNA and thereby getting the right product out in first time meeting/exceeding the expectations of customers.

Achieving Sustainable Cost ReductionThough an investment is needed to implement Supplier Development, it is proven to bring direct financial benefits once in place. Building leading practices and indicators into the supply base helps to unlock substantial value and cost reduction. For example, based on Accenture experience in the Retail industry, typical ROI of 4-5 times can be achieved by investing in SD programs within a year time frame. Furthermore, these savings can be sustained on an ongoing basis.

Achieving right and consistent qualitySupplier Development facilitates the development of a quality culture in the supplier organization, making sure quality is built into the process, and helping clients to move towards vendor independence. Based on Accenture experience, clients can typically achieve 10-15% of First Pass Yield (FPY) improvements in retail, and 30-40% improvement in first pass part approval rate in the industrial equipment industry.

Reducing risk in the supply chainSupplier Development initiatives can

help to reduce supplier operational and financial risks, particularly related to buyers increasing dependence on its key suppliers, supplier quality issues, supply shortage issues and unanticipated price volatility etc. at each step of the risk management process - anticipation, monitoring and mitigation. In fact, Accentures study on procurement risk indicates clearly that 67% of procurement risk masters conduct in-depth supply market analysis to monitor the possibility of bankruptcy and supplier failure. In a downturn, the supply chain risk strongly increases since the risk of bankruptcy increases throughout the supply chain and thereby it is important to have closer ties with strategic partners to mitigate the risks and its potential impact.

Gaining competitive advantageLeading companies take a downturn as an opportunity and look for institutionalizing leading practices in their organization so that they are all set for reaping the gains and best prepared for the upturn. Companies can get ahead of the competition through new product development and innovation. Working in close collaboration with suppliers, helps bring innovative and irresistible products & services to the market place faster to differentiate the buying entity from its competitors.

Improving SustainabilitySupplier development initiatives lead to enhanced collaboration between clients and their suppliers as well as to efficient and effective usage of resources by adopting lean practices. Removing the waste across the whole supply chain helps to make it lean and green. For example, in the fashion retail industry, marker utilization can typically be improved by 3-4% by making appropriate adjustments in width and length, end losses etc. which potentially can lead to millions of $$ worth of fabric savings in the industry which otherwise will go to waste.

Minimizing Compliance risksCompliance can be significantly improved by improving productivity and quality which helps to alleviate excessive

overtime and underpayment. For example, based on recent work conducted by Accenture on Supplier Development with a leading European retailer, the overtime situation of our clients key suppliers was reduced by 30-40% by enhancing quality & productivity and thereby greatly reducing the risk to the companys reputation, erosion of shareholder value and market share that can occur as a result of supplier non-compliance.

Instigating Continuous Improvement (CI)Leading buyers work with key selected suppliers to improve the suppliers performance and define a roadmap with actions leading to improved processes and outcomes for both parties. Periodic targets (for 9-12 months) are set jointly between the Buyer and its suppliers and mutually agreed upon. Buyers as well use these targets in their regular review session with suppliers and ensure a clear action plan is in place and is followed to achieve the desired targets. On the other side of the coin, supplier development focuses on helping suppliers retain the learning that occurs in the development process. Retained learning enables suppliers to continuously improve their own systems. Further, a supplier which has retained its ability to improve can further develop its own suppliers. The net effect is a more competitive supply chain. A formal agreement should be developed with clearly defined clauses in contracts around KPI improvements, price reduction requirements & business growth plans. Moreover, financial benefits accrued from CI initiatives must be reasonably shared between Buyer & Supplier, creating a virtuous circle of continuous improvement and strengthened collaboration.

Developing new vendorsTo overcome too much reliance on specific suppliers, to avoid mono(duo)-polistic situations, or to increase available capacity/shorten lead times, supplier development initiatives can help to introduce alternative suppliers that are equally or more capable of providing products and services to the buyer.

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Characteristics of High PerformersAccenture studies have revealed that procurement masters typically have implemented supplier development programs. Per Accentures definition, procurement masters:

Excel across the board

Achieve high performance through procurement

Achieve higher savings

Face fewer organizational challenges

Procurement masters have a clear advantage over the competition: Fundamentally, they operate more efficiently and effectively than companies that do not excel in procurement. Below are the leading practices followed by masters relevant to establish and execute successful Supplier development programs.

Supplier Relationship Management Masters apply a supply-base segmentation strategy, implementing differentiated approaches/processes by supplier segments and tiers.

Masters focus on key suppliers and establish with them long-term partnering agreements on a risk-reward sharing basis and have intensive cooperation through mutual knowledge sharing

Masters have a formal supplier development program in place to manage the supply base

Masters build the right selection criterion and target KPIs into the sourcing process

Masters have well defined policies, SRM processes and Methodology deployed across organisation.

Masters have clearly defined and standardized KPIs

Masters utilize supplier performance information to drive improvement and value

Masters organize frequent supplier review & collaboration sessions with joint improvement plans

Masters define clear action plans and review cycles with defined meeting attendees, agendas and structures to follow

Masters obtain 360 Feedback from suppliers

Workforce and organization Masters have a formal supplier management organization and dedicated supplier development teams

Masters have a clearly defined reporting structure for the Supplier Development function

Masters focuses on high value relationships

Masters utilise advanced performance management and collaboration techniques to drive maximum value from the relationship

Masters have Win/Win mentality and culture

Masters put Skin in the game on both sides with joint investments, process improvements and shared risk and reward (contractually bound)

Masters have a clear roles/responsibilities and governance for SRM within and outside of procurement

Masters use cross-functional teams (engineers, logistics) including key representatives from suppliers to drive innovation and improvement

Masters implement defined relationships between the organisation and suppliers at differing levels (senior, middle mgmt and site level) to gain enterprise wide commitment

System/Technology/Measurements Masters measure suppliers performance, across different regions, in a standardized way to facilitate cross comparison of regional performance

Masters have automated processes in place that tracks supplier performance to provide periodic dashboard reports for senior management review

Master have supporting technology for tracking and improving sustainable procurement

Masters have a partnership approach, joint process and product improvements with regular performance target measurements for key suppliers

Masters have supplier handbooks in place, which describe the collaboration and requirements of the suppliers, tracked by service level agreements

Training and Development Masters build and customize training programs and provide training to suppliers

Masters demonstrate concepts and technical improvements through pilots

Masters provide a feedback loop for suppliers to help encourage supplier development efforts

Masters encourage suppliers to contribute to improving processes at the buyers facilities across the product lifecycle

Sustainability Development Masters focus on waste reduction, leading to lean and green value chain

Masters have specific procurement talent with defined performance targets and dedicated to drive sustainability

Masters focus on active reporting, auditing and communications on sustainable value

Masters use supporting technology for tracking and improving sustainable procurement

Masters emphasis is on sustainability beyond the code of conduct

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Challenges of implementing a Supplier Development Program

Organizational Maturity Based on aspects such as industry, company culture and location, the organizational maturity and sophistication with regards to supplier relationship management (SRM) differs widely. Companies without a strategic SRM program in place can only recognize the benefits of a supplier development program with much difficulty. It is important for the organization to recognize that not all the suppliers can be treated at the same level and a differentiated SRM approach needs to be applied for different levels of suppliers. Collaboration with key strategic suppliers is a must as these suppliers are a major source of competitive advantage. Getting the buy-in and clear understanding from top management on the need to embark upon supplier development initiatives and associated financial, resources and time commitment is absolutely critical.

For example, based on Accentures experience working with Retail organizations in Greater China, most of the local fashion retailers do not necessarily have well-defined SRM programs in place. The path towards supplier development initiatives may take another year or so to instill the basic fundamentals of SRM before embarking on advanced development initiatives. However, multinationals sourcing from Greater China typically have a more mature SRM framework in place and the need for establishing strong partnerships with strategic suppliers is well recognized.

Another complexity we have seen of implementing SRM programs is lack of accountability and clear ownership of vendor relationships. For example, within Retail companies, the Merchant is responsible for the vendor relationship, negotiating cost and vendor funds, but does not have visibility to the vendors shipping performance and its effects on the total cost to stock the product. If the Merchant is measured (incented) on a P&L that does not include Supply Chain costs, there is an inherent disconnect. Many organizations struggle with this shared ownership of vendor relationships between merchandising and supply chain.

Promoting the business caseFor an organization to establish and execute supplier development programs with their key suppliers, financial and resource commitments are needed from both sides. The organization must be willing to invest time and money to train suppliers, work with them closely so that appropriate opportunities from design to product development to production and after-sales service can be identified. On the other hand, suppliers should also be willing to invest in terms of enhancing their skill set from a resource and technology standpoint in addition to execution capabilities. Helping all companies to agree on the gains and make the investment when both time and money are in short supply is nonetheless a challenge. Building a credible business case is essential to moving ahead with an effective Supplier Development program. In most cases, buyers opt for third party help to set up and execute supplier development program with their strategic vendors.

Maturity level / Readiness of SuppliersObtaining buy-in and support from the supplier is just as important as buy-in and support from within the company. Suppliers should not see supplier development initiatives as a one-sided benefit only for the buyer. In general, there is tendency with suppliers to see these initiatives as more of a forced investment from buyers. The buyer needs to educate their vendors about the necessity to change, adopt leading practices and innovative ways of working, jointly create win-win opportunities for both sides, establishing trust based relationship and be an integral part of buyers growth story. This will enable them to create and deliver products/services aligned/exceeding with buyers expectation and helping them capture a bigger pie of buyers business volume.

Moreover, supplier development programs needs to be pitched at the right level of supplier maturity otherwise supplier development initiatives fail

through either by being over-complicated or over-simplified. For example, as depicted in the figure above, the suppliers quality level (improve product, improve process etc.) should be clearly determined and the right set of quality tools applied to implement effective quality and process improvements.

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Figure 2. Improvement of Supplier Quality Level

Level ofimprovementof process/product

Complexity ofImplementation

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Focus on product control

Product sampling Vendor Selection

(Use of basic statistical tools : SPC, 5S, Kaizen, SMED, 8D...)

(Use of complex statistical tools

(Best Practices...)

Focus on product control

Focus on processrobustness

Focus on riskprevention

Improve Operation al Process

Improve ProcessDesign

Improve Process

Improve Product

Accentures Supplier Development ApproachConsidering the value creation opportunities and potential benefits to organizations by developing closer ties with key suppliers, Accenture has developed a holistic approach to Supplier Development program. The overall approach (refer to Diagram 1 ) consists of three phases:

Assessment Phase: focuses on establishing the current state and identifying quick win/ longer terms opportunities. This step includes both Qualitative and Quantitative assessment from Quality, Cost, Design, Delivery, Management, and People (QCDDMP) perspective. The key outcome of this step is a detailed assessment focusing on improvements, identifying baseline of various KPIs and qualification of potential savings opportunities.

Improvement phase: focuses on developing capabilities in the supplier base by making the process, system and org changes substantiated by training and pilot demonstration leading to the realization of potential savings opportunities and QCDDMP improvements identified in the assessment phase. Showcasing the improvements live through the pilot lines or equivalent helps to achieve widespread consensus and buy in which in turn facilitates developing sustainability of initiatives across the wider supply base.

Sustainability Phase: focuses on establishing continuous improvement processes and measurements. Longer term targets for Quality, Cost, Design, Delivery, and Compliance are set and mutually agreed by clients and suppliers. Longer term programs are defined and backed by a clear business case to achieve target outcomes and sustainability of initiatives. Monitoring metrics is as well defined to track the suppliers performance improvement against the set targets.Accenture has worked across industries with number of leading industry players and successfully helped them to embark on supplier development program. Some key examples of successful supplier development are described in the following.

Example 1: European Fashion RetailerThe Client has in excess of 1700 retail outlets around the world and sources from approximately 800 independent suppliers, primarily in Asia and Europe. With the backdrop of major currency, labor & raw materials fluctuations, to support its aggressive business growth plan, client wanted to reassess its Asian supply base. The major concern is around current capabilities of strategic suppliers in developing a sustainable supply chain that achieves its financial and business growth objective as well as corporate social responsibility.

Moreover, the client didn't have a standardized yet customized and formalized supplier development program in place applicable across multiple regions and multiple product categories which could bring about transparency as well facilitate regional cross comparisons.

Accenture worked with more than 30 vendors in various phases across multiple regions and multiple categories in Asia. A well-defined supplier development program, aligned with the clients strategic vision and objectives, facilitated quickly assessing suppliers pain points and identifying potential value creation opportunities. Showcasing and demonstrating how to realize these opportunities in actual practice through a controlled pilot gained trust and active participation by suppliers. The project resulted in improving First Pass Yield (FPY) by 5-20% (varied by product type and region), efficiency of production lines by 10% to 40% (varied by product type and region) from the baseline, and minimized compliance issues.

Example 2: Global Manufacturer of Agricultural Equipment The client has many well known brands and nine production sites across Europe, North and South America. The client wanted to investigate and realize savings through global sourcing with a specific focus in China to integrate and optimize its supplier base, securing the

commercial business case and driving significant cost savings through supplier development.

The supplier development program was conducted in two phases. The first phase focused on supplier audit and selection with the objective of conducting onsite supplier audits and technical reviews. The second phase centered on product qualification with a focus on tooling & gage planning, product/process development & validation and corrective actions.

The program facilitated the client to source parts through new identified vendors. Through project management, supplier cooperation, PPAP process follow up, 99.02 % of supplier parts were realized and approved at first time. The average landed cost saving identified was around 27%.

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Figure 3. The Supplier Development Approach

Quality

Cost

Delivery

High level Assessment Long Term Improvement Planning

- -

- -

Qualitative AssessmentStandard QuestionnaireExpert onsite assessment

Quantitative assessmentKPI basedBenchmarking

Very Good

Quality

Very Poor

TargetBaseline

Supplier Assessment/Qualification based on QCDDMP framework

Continuous Improvement Framework/Process Set Framework and Process to develop continuous improvement

Measurements Monitoring metrics to monitor the improvement against the quantified outcomes defined

Project & Change Management

Design and Development

Management Systems

People

1. Assessment phase 2. Improvement phase 3. Sustainability phase

Process, System, and Org Re-engineering

Educational Approach

Quick Win Implementation

About Accenture

About the authors

Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world's most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. As a Fortune Global 500 company, Accenture has more than 211,000 people worldwide serving clients in over 120 countries. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010.

Avaneesh Gupta is a Senior Manager in Accenture APAC. He is based in Hong Kong and has vast experience in areas of implementing lean practices in apparel manufacturing, Process re-engineering, Developing supply chain & sourcing strategy, and Supplier development programs. During last 8 years, he has lead number of initiatives/re-engineering projects to increase efficiency and drive up bottom line savings/profits for Fashion Retailers.Email: avaneesh.gupta@accenture.com

Accenture has conducted business in Greater China for more than 20 years. Today, it has more than 5,300 people working in Greater China, throughout offices in Beijing, Shanghai, Dalian, Guangzhou, Hong Kong and Taipei. With a proven track record, Accenture is focused on leveraging local best practices and successes, and is dedicated to delivering premium client value and results. Accenture helps clients define strategy, streamline business processes, integrate systems, promote innovation and enhance overall competitive advantage to ultimately attain high performance. For more information about Accenture, please visit its corporate homepage www.accenture.com and its Greater China homepage www.accenture.cn.

Brett Margolis is a Senior Executive leading the Sourcing & Procurement Team as part of Accentures Greater China Supply Chain Practice. Based in Shanghai, Brett has over 13 years experience developing and leading multi-cultural teams to establish and manage varied aspects of supply chain operations in the Greater China region. He is fluently bilingual in English and Mandarin and has a deep understanding of customer needs in relation to supply chain performance.Email: brett.margolis@accenture.com

Copyright 2011 AccentureAll rights reserved.

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