Accurately Evaluating Supplier Performance and Risk …media.apics.org/sites/AnnualConference2012/handouts/Accurately... · Accurately Evaluating Supplier Performance and Risk Alan

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Accurately Evaluating Supplier Performance and Risk

Alan G. DunnPresidentGDI Consulting & Training Company

About Alan G. DunnDirector… Board of Directors… Idaho Asphalt Supply

Chairman… Audit CommitteeChairman… Compensation Committee

Director… Board of Directors… Natural Alternatives International (NASDAQ: NAII)

Member… Audit CommitteeMember… Human Resources Committee

Recipient of National Association of Corporate Directors (NACD) “2007 Board Member of the Year” AwardPresident… GDI Consulting & Training CompanyFounder… Manufacturing Executive Institute (MEI)Co-Founder… Dunkirk Governance Specialists, LLCEx-Partner… Coopers & LybrandCurrent Instructor at the California Institute of Technology (Caltech) C t f T h l & M t Ed ti (CTME)Center for Technology & Management Education (CTME)Past President, APICS Orange County ChapterPast Chairman, APICS International Conference & Technical ExhibitPast Member, APICS Body of Knowledge CommitteeBA, Business Administration, California State University, Fullerton

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Critical Supplier Evaluation Issues

First… why most supplier evaluations do not provide adequate risk mitigationadequate risk mitigation.Second… why supplier evaluations need to be taken seriously.Third… why supplier evaluations have to be approached with a well-constructed methodology.

IT & Telecom Related

Managagement & Employee Malfeasance,

4%

All Others, 16% Supply Chain Problems, 25%

The Growing Threat of Supply‐Chain Disruptions Is a Top Concern for Many Business Leaders

Natural Disasters, 8%

Labor Issues, 8%Fire & Explosion, 6%

Pricing Fluctuations, 6%

Terrorism & Sabotage, 5%

Regulatory Issues, 5%

Issues, 5%

Mechanical & Electrical Breakdowns, 12%

When 600 finance executives were asked to identify the top risk that impacted their companies’ y p p pprimary revenue driver, 25% of respondents from North American companies and 19% of those based overseas, the largest proportion in both cases, chose supply-chain exposures as their top risk.

Harris Interactive survey commissioned by Johnston, R.I.-based FM Global, a commercial & industrial property insurer.

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Why Your Company Needs To a Better Job of Supplier Evaluation… FIVE BIG Reasons

1. Global Suppliers Farther Away2. Less Inventory In the Pipeline3 Suppliers Harder To Get To Know

Proactive and thorough due diligence of critical Suppliers is a new

it i th l b l3. Suppliers Harder To Get To Know4. Lead Times Longer5. JIT Eliminating BuffersResults From Poor Performing

Supply Chain?1 Material delivery reliability ?

necessity in the global supply world where distances can be great, supply complexities can be even greater and consequences of poor supply can be1. Material delivery reliability ?

2. Total material cost ?3. Received material quality ?

supply can be devastating to the bottom line.

Supply‐Chain Disruptions Can Seriously Impact Long‐Term Shareholder Value, Profitability and Share Price Volatility

Disruptions have a debilitating impact on performance & companies often do not quickly recover from disruptions. Companies continue to operate for AT LEAST two years at a lower performance level after experiencing significant supply-chain disruptions.

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The Most Recently Famous Case of All… One Supplier’s Impact On Mattel’s Stock Price

First News of Lead Paint On ToysJuly 2007

Continued Recalls

BIG Settlement

Lead paint prompts Mattel to recall 967,000 toys, losing TWO Christmas seasons!

DisruptionsDirect Causes of Supply‐Chain

DisruptionsHow Risks Could Have Been

ManagedAfter the 1995 Kobe, Japan earthquake, virtually all of Toyota’s assembly plants in Japan had to shut down due to an inability to get brake‐shoes from their sole‐source Supplier.

Toyota had trimmed its brake‐shoe supply‐chain to one Supplier without fully understanding the risks.

Toyota failed to understand the Supplier’s catastrophe management capabilities. This should have been assessed BEFORE a supply agreement was negotiated.

Supply‐Chain Disruptions… Could These Types of Disruptions Happen To Your Company?

Supplier.

In 2000 and 2001, the entire world‐wide electronics industry experienced a shortage of tantalum capacitors because a leading PC manufacturer began hoarding these devices at the same time new applications for tantalum capacitors developed in cell phone design. Solectron was forced to shut down entire product lines in their contract manufacturing business.

Supply effectively dried up overnight because Solectron did not understand the world‐wide growing need for one of its critical components. This forced Solectron to redesign the 25‐cent capacitor and replace it with a $1.25 alternate part. This resulted in a 5‐fold increase in capacitor costs as well as a significant shipping shortfall in 2000 &

Solectron failed to understand the tantalum capacitor industry’s volume ramp‐up as a result of new needs for old products. If they understood this, they could have begun their redesign efforts sooner when they had time on their side. Perhaps they could have discovered an alternate part that was less expensive than the replacement part they quickly,

Substantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksSubstantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksQuestion: How to get this Supplier to plan for the unexpected?

g g pp g2001

p p y q yand unfortunately, had to settle with.

Substantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksSubstantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksQuestion: How to quickly qualify an alternative component design & source?

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Supply‐Chain Disruptions… Could These Types of Disruptions Happen To Your Company?... continued

DisruptionsDirect Causes of Supply‐Chain

DisruptionsHow Risks Could Have Been

ManagedIn 2000, Ericsson failed to ship in excess of $1 billion in cell phones because a fire at a semiconductor Supplier’s plant seriously disrupted Ericsson’s inbound materials and production

Ericsson had trimmed its Supplier base and did not establish appropriate safety stocks to buffer emergencies in a buffer‐less manufacturing environment. Further Ericsson did not insist that their

Ericsson failed to understand the Supplier’s internal manufacturing points‐of‐disruption. If they did, they could have rationally determined the safety stocks needed to adjust for theproduction. Further, Ericsson did not insist that their

Supplier maintain consigned inventory stocks in a building separate from manufacturing.

stocks needed to adjust for the quantified risks. This should have been assessed BEFORE a supply agreement was negotiated.

Siemens Automation (gas chromatographs) had to shut down an entire factory and lose over two‐weeks of production because its power supply Vendor was suffering cash‐flow problems and could not pay their downstream Suppliers. This in turn led to a shortage of

Siemens Automation reduced its power supply Vendor base to 2 Suppliers. The largest of the Supplier’s had economic viability issues. The smaller of the Suppliers had ramp‐up difficulties. The result was a significant and lingering

Siemens Automation failed to understand the weaknesses of each of these Suppliers. Had they thoroughly assessed each of these Suppliers, they would have adjusted safety stocks and perhaps given the smaller Supplier more

Substantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksSubstantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksQuestion: How to best deploy safety stock inventories?

critical components to their factory and ultimately missed deliveries to their customers

shortage of parts, which ultimately resulted in market share loss.

business in order to provide them with an incentive to scale‐up their production capabilities.

Substantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksSubstantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksQuestion: How to get these Suppliers to ramp-up sooner?

“Wisdom” From the Seasoned Supply‐Chain VeteranSubstantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksSubstantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No Risks

Substantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No RisksSubstantial Risks Critical Risks Moderate Risks Manageable Risks Minor Risks No Risks

“Even moderate or manageable risks can shut you down if the risks are not identified in advance and properly managed!”

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Any global Supplier with annual spend >$2 million, orAny critical Supplier with long or erratic lead-times.Any significant sole-Supplier, especially one with difficult global logistics requirements, orAny critical Supplier with significant historical problems in

Which Suppliers Should Your Company Consider “Critical”

Any critical Supplier with significant historical problems in delivery reliability and/or quality, orAny critical Supplier that can cause significant supply-chain disruption, for any reason, orAny critical underperforming Supplier that can or has caused significant supply-chain disruptions, orAny critical global Supplier that has experienced major shifts in management, governance, operating environment, customer base or Supplier base, orA significant Supplier that needs to drive down costs in order to remain a Supplier, orA significant Supplier that needs to be second-sourced.

NINETEEN Distinct “Origins of Risk” That Can Impact Your Supply Chain

1. Supplier’s Economic Viability2. Supplier’s Production Processes, Methods, Tooling, Equipment

& F iliti& Facilities3. Supplier’s Management of Product Quality4. Supplier’s Manufacturing Planning and Scheduling

Capabilities5. Supplier’s Inventory Management Capabilities6. Supplier’s Purchasing Management Capabilities6. Supplier s Purchasing Management Capabilities7. Supplier’s Ability to Integrate with Customers8. Supplier’s Logistics Management Capabilities9. Supplier’s Customer Service Capabilities

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NINETEEN Distinct “Origins of Risk” That Can Impact Your Supply Chain, continued

10. Supplier’s Leadership and Critical Support Team’s Capabilities11. Supplier’s Catastrophe Planning & Management12. Supplier’s Delivered Cost Information, including “Should-Cost” &

“C ld C t” I i ht“Could-Cost” Insights13. Supplier’s Product and Process Engineering Capabilities14. Supplier’s Data Integrity and Information Sharing Capabilities15. Supplier’s Suppliers Capabilities16. Supplier’s Impacting Supplier Legal Issues17. Supplier’s Human Resource Issues18. Supplier’s Corporate Citizenship19. Supplier’s Corporate Governance and Ownership

Analysis of Balance SheetAnalysis of ProfitabilityAnalysis of Working Capital ManagementAnalysis of Cash ManagementAnalysis of Prospects for Revenue Growth A l i f R S and C t ti

Assessment of Supplier’s Economic Viability

Analysis of Revenue Sources and ConcentrationsAnalysis of Capital Spending History and Future PlansAnalysis of Supplier’s Audit ReportsAnalysis of Liens and FilingsAnalysis of Debt Structure and Relationships With LendersAnalysis of Foreign Currency ExchangeAnalysis of Supplier’s Fundamental Economic Business ModelAnalysis of Off Balance Sheet Liabilities and Assets


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Assessment of Supplier’s Economic Production Processes, Methods, Equipment, Tooling and Facilities Capabilities

Analysis of Production Tooling and Fixtures

Analysis of Production Processes and Methods

Analysis of Material Flows and Improvement Opportunities

Analysis of Factory Housekeeping

Analysis of Equipment and Facilities Maintenance

Analysis of Planned Improvement Initiatives


Analysis of Cost‐of‐Quality ElementsAnalysis of Finished Goods Quality Management

Assessment of Supplier’s Product Quality Management Capabilities

Analysis of Finished Goods Quality Management ProcessesAnalysis of In‐Process Quality Management ProcessesAnalysis of Quality Assurance & Control Procedures


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Analysis of Independent Demand Unit Forecasting CapabilitiesAnalysis of Master Production Scheduling CapabilitiesAnalysis of Materials Planning Processes

Assessment of Supplier’s Manufacturing Planning andScheduling Capabilities

Analysis of Materials Planning Processes

Analysis of Capacity Planning and Resource Allocation Capabilities

Analysis of Production Planning, Scheduling and Resource Allocation Systems

Analysis of Lean Practices in Planning and Scheduling


Analysis of Lean Practices in Planning and Scheduling

Analysis of Warehousing PracticesAnalysis of Inventory Management Structure

Assessment of Supplier’s Inventory Management Capabilities

Analysis of Safety Stock, Order Points, Lot Sizes, Lead‐Times and Kanban FormulasAnalysis of Inventory Record AccuracyAnalysis of 3‐Year Segmented Inventory Performance


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Analysis of Supplier Base

Analysis of Raw Material Price Reduction History

Analysis of Global Sourcing Practices

Assessment of Supplier’s Purchasing Management Capabilities

y g

Analysis of Inbound Materials Quality Management Processes

Analysis of Raw Material Planning and Scheduling Capabilities

Analysis of Supplier’s Capabilities to “Entangle” Themselves With Their Customer’s Lean Practices

Analysis of Supplier’s Methods of Assessing Their Suppliers’ Risks


Analysis of Organizational Linkage andCommunication Channels with Customers

Assessment of Supplier’s Ability To Integrate With Customers

Analysis of Key Performance Indicators (KPI’s)Analysis of Sales Force TalentsAnalysis of Customer Service ProcessesAnalysis of How Supplier Adds Value To It’s Customers


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Analysis of Shipping and Receiving CapabilitiesAnalysis of Transportation Methods, Capabilities andRisks

Assessment of Supplier’s Logistics Management Capabilities

Analysis of Backorders and Customer Service LevelsAnalysis of Customer Service Management Methods & Processes

Assessment of Supplier’s Customer Service Capabilities


Analysis of Organization Structure

Analysis of Leadership Team Capabilities

Analysis of Critical Support Team Capabilities

Analysis of Leadership & Critical Support Teams Succession Plans

Assessment of Supplier’s Leadership & Critical Support Team’s Capabilities

Analysis of Information Systems Catastrophic Event Planning

Analysis of Production Disruption Catastrophic Event Planning

Analysis of Logistics Disruption Catastrophic Event Planning

Analysis of In‐Place Insurance for Catastrophic Events

Analysis of Management of Previous Catastrophic Events

Assessment of Supplier’s Catastrophe Planning Capabilities


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Detailed Analysis of Annual Spend With SupplierAnalysis of Producing Plant Capacities, Utilizations & Efficiencies

Assessment of Supplier’s Delivered Costs

Analysis of Non‐Value‐Adding ActivitiesIdentification & Analysis of significant Cost DriversDevelopment of “Should‐Cost” valuesDevelopment of “Could‐Cost” values


A proactive and quantifying mechanism.Clear evidence of your Supplier’s strengths, weaknesses & cost reduction opportunities.Provide your company with information to negotiate:

Better prices

The Bottom Line of Formal Supplier Evaluations

Better pricesBetter terms and conditions

Will result in reduced spending, improved risk profile, improved factory productivity, added efficiencies in the Supply-Chain partnership and accelerated company profits.

The final evaluation includes clear risk-mitigating g grecommendations for SPECIFIC modifications to the Terms and Conditions that should be applied to the purchasing agreements between your company & the Supplier.

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Contact InformationPresenter Contact:

Alan G. Dunn, PresidentMANUFACTURINGEXECUTIVE INSTITUTE

140 North Maple StreetSuite 106Corona, California 92880-6996USA(951) 736-2114

140 North Maple StreetSuite 105Corona, California 92880-6996USA(951) 736-1281

(951) 736-1857 [email protected]

(951) 736-1857 [email protected]

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Accurately Evaluating Supplier Performance and Risk …media.apics.org/sites/AnnualConference2012/handouts/Accurately... · Accurately Evaluating Supplier Performance and Risk Alan