Introduction to Global Sourcing and Vendor Management

1. Definition of Supply Chain and Management2. Tactical Purchasing vs. Strategic Sourcing3. Tactical Purchasing activities4. Strategic Sourcing activities5. Global Sourcing and Vendor Management

Supply Chain & Management

The Supply Chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage(extraction), through to end users, as well as the associated information flows. Material and information flows both up and down the supply chain. The supply chain includes systems management, operations and assembly, purchasing, production scheduling, order processing, inventory management, transportation, warehousing, and customer service. Supply chains are essentially a series of linked suppliers and customers; every customer is in turn a supplier to the next downstream organization until a finished product reaches the ultimate end user. The Supply Chain Management is the integration of these activities through improved supply chain relationships to achieve a sustainable competitive advantage (hence related to strategic alignment).If we consider a single firm within the context of this definition, we must include both its upstream and its downstream distributive network. According to this definition, the SCM includes the management of information systems, sourcing and procurement (purchasing), production scheduling, order processing, inventory management, warehousing, customer service and after market disposition of packaging and material. The supplier network consists of all organizations that provide inputs, either directly or indirectly, to the focal enterprise.(Discuss farm produce, apparel and Machinery organizations)

Tactical Purchasing vs. Strategic Sourcing

There are two major forms of Purchasing activities that take place in an organization.• Tactical Purchasing and • Strategic Sourcing

Each type of activity is important, but requires a different type of knowledge and skill to be successful. Let us examine each one in more detail.Purchasing carried out in just about every organization and refers to day-to-day management of materials flow and information to ensure that products and services are delivered to the right internal processes at the right time without much of a longer term horizon. These activities may include (but not limited to:)

Tactical Purchasing

• Commodity analysis—researching the requirements for purchased goods and services• Market research—determining market characteristics for commodity purchase• Purchase order tracking and follow up—managing the procurement process• Determining the needs and requirements of internal customers—matching market and

commodity information to customer needs• Transmitting forecasts of future needs to suppliers—letting suppliers know what future

requirements will be.

• Transmitting actual orders for goods and services to suppliers• Supplier performance measurement (ongoing)—tracking cost, quality, delivery and service

performance (typically shorter term)• Management of supplier quality—ensuring that supplier products and services match the

specified requirements

Strategic Sourcing Management

• Related to purchasing but somewhat broader in scope.• Strategic Sourcing team may include besides purchasing the members from engineering, quality,

design, manufacturing, marketing, accounting, strategic planning or other departments as needed.

• The focus of Strategic Sourcing Management involves managing, developing, and integrating with supplier capabilities to achieve a competitive advantage.

• A variety of activities associated with Strategic Sourcing Management include following : (but not limited to)

• Vendor (supplier)---• Identification—finding potential vendors to meet existing or anticipated purchase needs• Evaluation and selection—determining if vendors are capable of meeting needs (and Changing

needs!)• Management---Ongoing management of the entire supply base (with longer term perspective)• Development and improvement—to improve overall performance of supply base• Integration into ongoing processes—involving suppliers in new product and process

development

Global Sourcing and Vendor Management

• Thus it is no longer enough for purchasing managers to think simply in terms of internal efficiency as it relates to the processing of purchase orders. The purchasing process has changed dramatically over the years, and the rate of change in this functional area has increased most dramatically in the last 15 years or so.

• Moreover, the definition of purchasing is changing from a function emphasizing “clerical” activities to a strategic, proactive function that contributes effectively to a company's longer-term competitive advantage.

Linking Purchasing and Corp. Strategy

The Strategy of an organization (or of a SBU of a larger organization) is a conceptualization of :1. Organization’s Mission, Vision and Values as articulated expression of it’s uniqueness2. Long-term objectives and purpose of the organization3. Broad constraints and policies that restrict activities4. A guide to derive tactical action plans and near/short term goals which will achieve

organizations Vision5. Executive management must have a specific plan outlining how the company will differentiate

itself from its competitors, achieve growth objectives, manage costs, achieve customer loyalty

and maintain continued profitability in order to meet and exceed the expectations of stakeholders.

6. Customer Loyalty (though not guaranteed!!) can perhaps be a possibility if products and services are price competitive, with wide range availability, shorter delivery time and just-in-time, with newer features and so on.

7. An organization must take in more revenues than it spends on operating costs in the long term to grow and increase profits. There are two fundamental ways of balancing this equation: increase revenues or decrease costs. Increasing revenues involves either raising prices, or keeping prices stable and increasing volumes. Simultaneously, costs must be held steady or allowed to increase at a rate smaller than the rate of increasing revenues. Increasing customer choice with increasing competition means limit on price rise and volume rise.

8. Thus Cost Reduction is not an option to any organization. Out of Man, Material, Methods and Money the middle two score on priority. Corporate objectives must translate in to Purchasing Goals.

Purchasing objectives to goals

Cost Reduction Objective:

• Be the low – cost producer within our industry (Goal- Reduce material costs by 15% in one year)• Reduce the levels of inventory required to supply internal customer (Goal- Reduce raw material

inventory to 20 day’s supply or less)

Technology/New-Product Development Objective:

• Outsource non-core-competency activities (Goal- Qualify two new suppliers for all major services by end of FY 2012-2013)

• Reduce product development time (Goal- Develop a formal supplier integration process manual by the end of the fiscal year)

Supply base reduction Objective:

• Reduce the number of suppliers used (Goal- Reduce the total supply base by 30% over the next 9 months)

• Undertake joint problem-solving with remaining suppliers (Goal- Identify Rs. 2 Lacs in potential cost savings opportunities with two suppliers by fiscal year end)

Supply Assurance Objective:

• Assure uninterrupted supply from those suppliers best suited to filling specific needs. (Goal- Reduce cycle time on key parts to one week or less within six months)

• Quality Objective:• Increase quality of services and products (Goal- Reduce average defects by 200 ppm on all

material receipts within one year)

The next level of detailing requires translating company –wide purchasing goals into specific commodity level goals.

Purchasing Strategy Development

• Process Steps:• Step 1: Define Business Unit Requirements• Step2: Define the strategic importance of the Purchase requirement (portfolio analysis)• Step3:Determine business requirements and conduct supply market research• Step4: Set goals and conduct gap analysis• Step5: Develop sourcing strategy and objectives• Step 6: Execute the plan• Step7:Monitor results and review performance

Define Business Unit Requirements

• Cross organizational purchasing strategies for major products/services get derived from Corp./SBU strategy.

• These translate into purchasing goals.• More detailed strategies emerge at the commodity/service/product family levels.• The process of purchasing strategy “deployment” effectively begins at the commodity/ product

family level.

Define the Strategic importance of the Purchase requirement (portfolio analysis)

• Understanding the purchasing requirement relative to the business unit objectives is typically done through a strategy segmentation tool known as portfolio analysis.

• The premise of Portfolio analysis is that every purchase or family of purchases can be classified in to one of four categories or quadrants namely (fig. on next slide)

1. Acquisition2. Multiple3. Leverage and4. Strategic

Example of a Functional Purchasing Policy (portfolio analysis)—(discuss document)

Number of capable suppliers--FEW Number of capable suppliers--Many

Value to Buyer --HIGH

Strategic Leverage

Value to Buyer --LOW

Acquisition Multiple

Determine Business Requirements and conduct supply market research

• This step is often overlooked or quickly done.• Is critical to understand supply and demand.• First a business unit must accurately assess what it is currently spending for an item and with

which supplier.• Different B.Us have been found to be paying different amounts for the same product and at

times even to the same supplier.• The analysis should also assess some of the important characteristics of the supply market as

well as current and projected business requirements. Following are typical areas :• Determine the current strategy.• Identify past expenditures for commodity and by supplier.• Determine total expenditures for the commodity as a percentage of the total for the BU.• Identify currently used suppliers and potential suppliers.• Define the market place (i.e. best price, average price, business unit’s price, etc.)• Determine expected trends in pricing.• Perform supplier analysis• Identify the strategies of market leaders.• Determine information technology requirements.• Determine current and future volumes by using location requirements.• Identify opportunities to leverage the commodity expenditures with similar commodities.

This commodity report should provide a basis for making sound purchasing decisions, and present management with information concerning future supply, price, and profit contribution. Potential information sources include supplier literature, government reports, trade magazines, The Thomas Register, and database searches.

Set Goals and Conduct Gap Analysis

• This fourth step in the process is to establish specific targets for evaluating the progress of the strategy. Goals should relate directly to the objectives or requirements of a business. Effective goals typically share following characteristics:

• They are specific, measureable and action oriented.• They evaluate internal progress over time and compare performance to external competitors

and benchmarks.• They extend beyond price into other major total cost “drivers”.• They evaluate quality, customer service, availability, responsiveness etc.• They are established jointly with the supplier when appropriate.• Goals may be quantitative or “soft”.• In addition to goals, the details on the specific actions required to realize the goals must get

defined.(e.g. alliance, partnership, training etc.)

Develop Sourcing Strategy and Objectives

• The Strategy presented to management should provide specific details, including:• Number of suppliers and amount of business to award to each supplier• Recommended suppliers• Length and type of contract• Supplier involvement in product/service design (Supplier provided designs or traditional designs)• Local or global suppliers• Full service distributor or Original Equipment Manufacturer• Supplier development activities• Type of relationship (Traditional/Strategic alliance)• Many of these criteria will be a function of “quadrant” position of the commodity.

Execute the StrategyStrategy execution requires ownership and documentation concerning timing and tasks. All concerned should be well communicated. Key elements include:

• Establish the tasks to be completed with timelines• Assign accountabilities and process ownership• Ensure adequate resources are made available to process owners• Explain the strategy to suppliers and internal customers and obtain full participation• Develop a negotiation plan prior to meeting with suppliers, as well as an “ideal contract”.• Communicate the strategy to all users and stakeholders• Develop a contingency plan if events do not occur as planned• Implement initiatives

Monitor Results and Review Performance

The final step of the strategy process is to verify that the strategy deployment is achieving the stated objectives. Regular reviews must be held to determine the success.

• Regular review meetings• Sharing of results• Assess internal customer perception as well as that of suppliers• Determine if key goals achieved• Re-plan when needed or next cycle of planning initiated• Lessons learned report

Types of Purchasing Strategies

Organizations employ a variety of different purchasing strategies that may be unique to each commodity. Certain strategies are used more often than others, depending on how advanced an organization is at the strategy development and deployment processes. Typically these include:

• Supply-Base optimization• TQM of suppliers• Global sourcing• Longer-Term supplier relationship

Challenges and History of Insourcing and Outsourcing

• One of the most important business decision—whether to produce a component, assembly, process, or service internally (insourcing) or whether to purchase the same from an outside supplier(outsourcing).

• Being applied to various processes and functions such as warehousing, transportation, distribution, production and assembely, sales, HR etc.

• In the early 1920s, Henry Ford made number of business acquisitions that went further and further up the automotive supply chain– first acquiring component suppliers for Model T and later acquired the steel mills to supply to these same suppliers. He even acquired the mines that supplied coal to these steel mills. The process of Insourcing all of these activities (also called vertical integration) eventually proved to be too difficult and costly to manage.

• In the 1950s US television producers outsourced components from Asian suppliers. The transfer of technology allowed some to become producers of TVs themselves with US loosing out in this industry.

• A mountain bike mfg. Company in USA located a titanium manufacturing organization from Russia to benefit from this former “arms producer” to succeed in US light weight sturdy bikes market.

• Some of the challenges (Opportunities and Threats) are:• Resistance from employees, society and govt. When job/ land losses possible and issues of

national/regional importance are at stake.• Low cost labour, raw material availability and local govt. Facilities/benefits reduces costs in a big

way• Difference in Laws, regulations and cultural norms across nations• Knowledge/skill competencies may differ to work in favour or against the decision• PETELS changes may add to complexity in business.

Insourcing/Outsourcing Decision Process

• Step 1: Assess technology and demand trends• Step 2: Assess strategic alignment and core competencies• Step 3: Conduct total cost analysis of insourcing/outsourcing alternatives• Step 4: Consider the “big picture” and reach decision

Assess technology and demand trends

• I/O decision is made relatively infrequently, the required investment is usually significant, the organization changes take time and implementation involves long lead times.

• All aspects hence must get well addressed by all concerned functions like finance, account, operation, design, eng, marketing/sales etc. All should collect as much information from their own perspective to prevent “wrong decision”. The final decision gets affected by many factors: (discuss following)

• New Product Development• Strategy Development• Poor Internal/External Performance• Changing demand patterns• Shifting technology life cycles

New Product development

• I/O decisions are often initiated during NPD cycle.• Commodity under consideration may represent unfamiliar new technology/processes.• In such case, an Outsource decision may be reached initially, unless the parts or technology are

purchaser’s core competencies.• The team should carefully consider the stability of the technology in question, the possible

duration of the product lifecycle, and the availability of reliable sources.

Strategy Development

• I/O decision driven by organization’s strategy development process.• Leading organizations have divested non core businesses and are choosing to divest many

product/process technologies. GE divesting Plastics division, outsourcing IT services and acquiring new businesses. Tata Motors- Land Rover/Jaguar and Tata Steel with Corus changing the I/O scenario. Tata Group coming out of Shipping, Textiles etc.

Poor External/Internal Performance

• Sometimes I/O decisions stem from a failure of external suppliers to satisfy the business unit’s requirements.

• Capacity, capability and willingness on the part of supplier may be the reasons.• Likewise sometime internal performance is not in line with requirements when Outsourcing is

the appropriate alternative.

Changing demand patterns and Technology shift

• Changing market economics or changing sales demands due to effects from PETELS factors call for revised I/O decisions. Some suppliers may be more efficient at lower or very high volumes. Rapid geographic expansion may call for simultaneous availability of products and services across the region.

• Careful analysis of past life cycles of components and materials will provide insight into potential technology life cycles. Given the speed of introduction of new materials and products, managers may need to keep abreast of new developments through all channels possible. (e.g. Pddnet.com, ebnonline.com for electronic sector etc.)

Assess Strategic Alignment and Core Competencies

• This step requires a detailed assessment of how the I/O decision aligns or fits with an organization’s strategic long-term plans, a determination of an organization’s core competency, and in the case of physical products, an assessment of the maturity of the process technology used to make an item.

• How will the supply base contribute to the goals of the SBU?• What is the long-term vision for what the supply chain of the organization will look like five

years from now?• How the I/O decision aligned to either “Customer Intimacy” or “Innovative Products/Services” or

“Operational Excellence” or “Lock in “ strategic direction. (discuss)• Those who are responsible for I/O decision must also be keenly aware of organization’s core

competencies.• C.K.Pralahad and Gary Hamel defined core competence as “the collective learning in the

organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies”

• What really defines a core competence? A capability is also a core competence when the following three conditions are true:

1. The capability is valued by the customer2. The capability can be applied to many products and service across multiple Business Units3. The capability is unique and cannot easily be imitated by competitors

Discuss Polaroid, Mittal, McDonald and Our organization

• A final I/O consideration during this second step involves an analysis of process technology.• An organization perceived its process –• capabilities in relation to it’s competition as Weak, Tenable or Superior• Stage of maturity of process technology across industry as emerging/embryonic, growth or

mature and • The significance of the process technology for competitive advantage—low today, high today or

high in future

Consider the “Big Picture” and take decision

• Consider a variety of non-cost factors to provide a balanced and complete picture of advantages and disadvantages of the I/O decision.

• Insourcing advantages :

1. Degree of control the buyer wishes to exert over the transfer of technology. If a high degree of control is desired so that proprietary designs or processes can be protected from unauthorised use, then vertical integration may be preferred over outsourcing.

2. Vertically integrated firm increases its visibility over each step of the process.3. Dedicated facility can also result in lower per unit cost when economies of scale provide higher

efficiencies.4. Fixed costs get spread over larger volumes.5. Also considering culture, competency, influence and consistency factors their are distinct

advantages

• Outsourcing advantages :

1. A major advantage to outsourcing is that it often provides a greater flexibility. As market demand levels change, a purchaser can more easily make changes in its product or service offerings in response.

2. There is lower investment risk as the supplier assumes the uncertainty in investment. Ideally both the buying and supplying firms should concentrate on their own distinct competencies.

3. Dell supported $ 3 billion in annual revenues with only $ 60 million of fixed assets in the mid-1990s. This also made Dell’s ROI figures much higher than the industry average.

4. Lower wages, lower retirement and medical expenses and lower hiring of full time employees possible.

• Outsourcing Disadvantages:

1. Great risk if the purchaser chooses wrong supplier to provide the product/service being outsourced. The supplier’s capabilities may have been misstated, the process technology may be obsolete, or the supplier’s performance may not be meeting the buyer’s expectations. (this may cost—loss of customer/business)

2. Issue of loss of control. Monitoring and regulating quality, availability, confidentiality or performance of products/services may become greater concerns and may lead to extra inspections/audits etc.

3. Potential danger of losing key skills, technology or productive capacity and hence competitive advantages— “Hollowing out of corporation”

Global Sourcing – Challenges

• World Markets are becoming increasingly competitive and open to trade.• Nations and organizations are looking for domestic as well as international sources of supply so

as to continuously “Create Value for Stakeholders” who themselves are Global in Nature.

Global Sourcing & Materials Management

• Materials Management function calls for entirely new set of competencies in this “Global” scenario.

• Logistics capability to accommodate longer material pipelines• Management of complex set of transactions that occur as materials and services move beyond

borders• Appreciation and acceptance of the cultural and legal differences• Ability to deal with complex and dynamic rules that govern international trade.

Why Source World-wide?

• The four most predominant reasons are :

1. To achieve cost/price benefits (e.g. Wal-Mart)2. To ensure better quality (Coal from Indonesia)3. To gain access to technology(Cement, Nuclear Power)4. To access the only source available (Oil, Pharma)

Some other reasons are:

• Introducing competition (automobile)• Satisfying counter-trade agreements (between nations/regional)• Reacting to the sourcing patterns of competition (Defense)• Establishing a presence in foreign marketplace (Africa)

Global Sourcing – the Costs Involved

• Following are the key cost elements :• Freight charges and Freight forwarding fees• Import Duties• Warehousing charges• Quality Costs• Damage in transit• Obsolescence• Warranty Costs• Field service costs• Other administrative costs

Barriers to Global Sourcing

• Lack of understanding of international purchasing procedures and documentation e.g. Letter of Credit, Multiple Bills of Lading, Dock receipts, Import Licenses, Certificate of Origin, Inspection certificates, Certificates of Insurance coverage, Packaging-seaworthiness, Commercial Invoices, Customs clearance, Quantitive rules and procedures etc.

• Lack of knowledge about potential sources of supply• Resistance to change from an established, routine procedure or shifting from a long-standing

supplier• Domestic nationalism and protests due to public perception / provocation.

• Changes required to accommodate longer lead times and lengthened material pipeline. With longer lead times, accurate material forecast over extended time periods become critical.

• Lack of knowledge about foreign business practices, language and cultural differences.

Overcoming the Barriers

• Education and training for all concerned on all issues and in all areas.• Publicizing the success stories to show the performance benefits that world-wide purchasing

provides• Usage of global communication using relevant software (e.g. CAD in Engineering) for consistent

understanding and at times joint development. • Ensuring “local support” services being available for your product.• Measurement and reward systems to encourage sourcing from best suppliers.• Use of third-party or external agencies -called trade brokers in USA-e.g. FedEx acquired TOWER,

a major international broker firm in 2000, due to the high volume of customer interaction it performs in its daily operations that were previously outsourced.

• Top management’s true commitment and communication to all “that global sourcing is a means to remain competitive”..

Global Sourcing Process- steps 1 &2

• Evaluate the need to improve the firm’s competitive position. Evaluate in terms of Quality, Cost, Technology, Customer responsiveness and Product features.

• Identify items that qualify for global sourcing consideration e.g.:• A) Items providing benefits on Q,C,D etc. without unusual level of risk• B) Initiating with non-critical items and then extending to others.• C) Selecting items with standard or easily understood specifications• D) Items at a stage in the product life cycle that will provide sufficient benefit for longer term

sourcing.• E) Items with sufficient high purchase volumes to justify global sourcing.

Global Sourcing Process – step 3

• Obtain Information about sources– following sources can provide valuable leads e.g.:• A) International industrial Directories e.g. The World Marketing Directory published by Dun &

Bradstreet covering 50,000 major businesses or Marconi’s International Register, ABC Europe Production etc.

• B) Trade shows in different countries which are industry, commodity, technology or location specific/oriented.

• C) Trading companies offering full range of services e.g. finding sources, inspection, contract negotiations etc.

• D) Trade Consulates data and information references• E) Your own foreign office data base• F) Independent agencies-Importers/Exporters.

Global Sourcing Process – step 4

• Evaluation of Sources of Supply – Whether the purchaser or an external agent coordinates the international purchase, foreign suppliers must be subjected to the same performance evaluation and standards as (or even perhaps even more rigorous than) domestic suppliers. Some questions to ask:

• Will the foreign supplier maintain the “total cost difference” over time, as against the domestic one?

• What is the effect of longer material pipelines and increased average inventory levels?• What are the suppliers technical, design and quality capabilities?• Can we develop a longer-term relationship?• How much is the lead time requirement of the supplier?

Global Sourcing Process – step 5

Award the Contract :

• After identifying the qualified supplier, the RFP/RFQ can be obtained for specific items, negotiations can be held and purchase contracts finalized. Buyer must continue monitoring performance on an ongoing basis.

Organizing for Global Sourcing

• The purchase organization needs to ensure organizational preparedness to be effective at Global sourcing

When evaluating whether a company is ready for global sourcing, four major elements should be considered:

1. Corporate Global Vision: Does the organization create an effective global vision as a primary driver for investing resources and effort in seeking global suppliers? (Communication, Alignment and Action-and thus considers this as of strategic importance).

When evaluating whether a company is ready for global sourcing, four major elements should be considered:

2. Management Structure and Systems:

• Is the company effectively organized to promote coordination among the different global strategic business units / entities/ functions? (like global commodity councils – e.g. IBM, international purchasing office- e.g. Arcelor Mittal, global information system –like Hasbro!– etc.)

• When evaluating whether a company is ready for global sourcing, four major elements should be considered:

3. Sourcing Strategy : Configuring the global supply base: Are sourcing strategies developed to optimize the mix of local suppliers and trans-plant suppliers?

4. Supplier Development : Is the sourcing organization deploying resources to ensure that supplier’s capabilities are aligned with the competitive and manufacturing strategies?

Other key aspects of Global Sourcing

Global Sourcing has other three aspects to be considered very carefully:

A> Costs specific to global purchase

B> Currency related risk management and

C> Counter-trade agreements to be honored

• Home-work : Students to prepare short notes for each of these three

Key elements of Vendor / Supplier management

Having ensured that Strategic Sourcing is aligned to the overall organizational strategies and having finalized the Insourcing / Outsourcing decisions (as studied in previous sessions) we have now our focus on key elements of vendor / Supplier Management.

Key elements of Vendor / Supplier management are: Evaluation, Selection and Continuous Measurement of Performance Managing the Vendor / Supplier base including effective quality management Vendor Development Initiatives

Importance of Supplier Performance

Global organizations who have demonstrated sustained growth, view their suppliers as an extension of their enterprise wherein they are viewed less as “cost centres” and more as “supplier-partners”, who add value to the business value propositions (A, I, R of our stakeholder model)

Hence “Supplier Performance” becomes an integral element of “Organizational Performance”

Supplier Performance Management

Supplier Performance Management is defined as the “process of evaluating, measuring and monitoring supplier performance and supplier’s business processes and practices for the purpose of reducing costs, mitigating risk, and driving continuous improvement”.

Benefits to be derived from SPM

Through systematic evaluation, selection and monitoring along with appropriate resource allocations the companies avoid / reduce supplier-induced problems such as defects, excess inventory, late deliveries to customers, work stoppages and reduction in market competitiveness.

Importance of Mutual Understanding

In what ways, and how effectively, the organization ensures a two-way flow of understanding between the company and its vendors, specifically as it pertains to communicating and negotiating requirements and performance expectations within the supply chain will determine the overall success of Supplier Performance Management (SPM) or Supplier Relationship Management (SRM).

Most Common Metrics

Based upon an AMR research (now under Gartner) survey of 100 manufacturing companies in 2006, following were found to be the most commonly used metrics (within bracket % respondents)

Inventory levels (71) Fixed manufacturing costs ( 68) Average cycle times (67) Scrap and rework (63) Variable manufacturing costs (61) Products / mix profitability (60) Supplier Quality (raw material) (59)

Based upon an AMR research survey of 100 manufacturing companies in 2006, following were found to be the most commonly used metrics (within bracket % respondents)

Finished goods quality (59) Demand variance (55) Manufacturing line scheduling visibility (52) Transportation schedules and costs (52) Manufacturing line capacity visibility (51) KPIs / Performance of key assets (51) Supplier on-time delivery (48) Use of Statistical Process Control (45)

Supplier Evaluation and Selection Process

Typical steps in sequence1. Recognize the need for supplier selection2. Identify key sourcing requirements3. Determine sourcing strategy4. Identify potential supply sources5. Limit suppliers in pool6. Determine method of supplier evaluation and selection7. Select supplier

Recognize the need for supplier selection Supplier Evaluation and Selection process may begin

1. In anticipation of a future need for upcoming products as part of new product development process

2. Against a new purchase requisition for a specific need3. Due to an existing supplier’s failure to perform---say “supplier switching” need

Identify Key Sourcing Requirements Understand the requirements that are important to the specific purchase.

1. These requirements differ from item to item, organization to organization or industry to industry

2. Requirements could be demands or constraints w.r.t. safety, pollution, legal aspects, govt. regulations / laws/sanctions etc.

3. While different requirements exist for each evaluation area, certain categories—e.g. QCD and tech. are at a minimum evaluated

Determine sourcing strategy This topic has been covered in detail in our “Sourcing Strategy” session.

1. Note that the sourcing strategy provides direction on the overall objectives to be achieved for the commodity such as no. of suppliers that will be used, the types of contracts (ST vs. LT) and the type of suppliers (e.g. design/ production/service etc.)

Identify Potential Supply Sources Depending upon the strategic importance and/or technical complexity of the purchase

requirement and considering the capability of existing supply base to satisfy cost, delivery, technology and service requirements, the intensity of information search may vary from minor through moderate to major (including extensive internet usage)

Identify Potential Supply Sources (continued) Sources of information could be :

1. Current suppliers2. Sales representatives3. Information databases from trade journals, business/financial news papers and other

publications4. Trade directories specific to industry5. Industrial trade – shows6. Information from various industry associations or publicly recognized purchaser —

certified supplier info. – etc. Limit Suppliers in Pool (first-cut selection) Result of the information search is that, depending upon the item under consideration, a

purchaser may have many potential supply sources from which to choose.1. Performance capabilities may vary significantly and in-depth visit / evaluation call for

extensive resources. Hence first-cut elimination becomes important. (Identify clear non-capable suppliers)

Limit Suppliers in Pool (first-cut selection)—contd. Financial Risk Analysis based on different financial performance parameters and ratios is an

important step in E&S process. Buyers often consult external sources of info. such as Dun & Bradstreet reports to support the evaluation (dnb.com)

1. Experience based evaluation using performance records with buyer or outside resource2. Evaluation of supplier – provided info. using methods such as RFI, surveys etc.

Determine the method of E & S Once the first-cut elimination is done, then decision as to how to evaluate the remaining (i.e.

short-listed) suppliers becomes important as they all appear to be equally qualified1. RFP (request for proposal) or RFQ (request for quotation)– which was the “only

transaction few years back in pre-order stage.2. Cross functional team performs site visit- to get unique perspectives3. Developed a list of preferred suppliers4. External / third party evaluation like D&B, JD Power etc.

Select Supplier

The activities associated with this final step can vary widely depending upon the item under consideration. For routine items this may involve only notification and awarding a purchase contract. For major purchase these may be the detailed negotiations to reach specific agreement.

Key Supplier Evaluation Criteria

For an in-depth analysis of supplier’s capabilities (including Q,C,D – etc.), a more detailed study considers following areas (ref. Moncza ch.8)

Supplier management Capability Overall personnel capabilities Cost structure Total quality performance systems and philosophy Process and Technology capability Supplier’s design capability Environmental regulation compliance

For an in-depth analysis of supplier’s capabilities (including Q,C,D – etc.), a more detailed study considers following areas (ref. Moncza ch.8)—contd.

Financial capability and stability Production scheduling and control systems Supplier delivery performance Information system capability (e.g. EDI, bar-coding, ERP, CAD/CAE/ CAM etc.) Supplier purchasing strategies, policies and techniques Longer-term relationship potential

Supplier Evaluation and Selection Survey

An effective survey has following characteristics Comprehensive to include all important performance categories Objective where the scoring system defines the meaning of each value on the

measurement scale Reliable wherein different people understand it in the same way as it is well defined Flexible across different types of purchase requirements (products/systems/services

with due weightages to factors/performance categories) Mathematically straightforward

Typical Survey Steps Identify key supplier evaluation categories Weigh each evaluation category for relative importance Identify and weigh subcategories Define scoring system for categories and subcategories Evaluate supplier directly Review evaluation results and make selection decision Review supplier performance continuously

Supplier Performance Measurement System

Includes the methods and systems to collect and provide information to measure, rate/rank supplier performance on a “continuous basis” –for selected suppliers.

Objective (quantitative) measurements such as delivery, quality and supplier cost reduction in absolute as well as comparative terms.

Subjective (qualitative) measurements such as abilities in areas of problem resolution, technology, responsiveness, willingness to work together and product design support etc.

Ratings against selected performance categories in the form of excellent, good, fair or poor as rated by users related to the category.

Weighted point system as discussed earlier Quantification of total cost of doing business with a supplier.

Supply Base optimization

and

vendor development

Objective, activities and elements

• Primary objective is continuous development and performance improvement of suppliers.• Supply base management involves purchasing, engineering, quality assurance and other

concerned departments of purchase organization working together with supplier to achieve a closer working relationship and reaching mutual success goals.

• Two key elements within supplier management, development and improvement are:– Supply base optimization and – Supplier development including strategy for improvement

Supply Base Optimization

• Supply base optimization (also known as supply base rationalization) is the process of identifying how many and which suppliers a purchaser will maintain. It often involves eliminating suppliers who are not capable of achieving purchase performance objectives, either currently or in the near future. (A reduction, however, is not always the end result for every single family of items).

• Advantages could be the improvement in Q,C,D and information sharing :– Because this process identifies the best suppliers in terms of number and quality, the

remaining suppliers are often capable of performing additional tasks that improve performance or add value to the relationship (e.g. Early partnership in NPD or Quality self-certification etc.)

Supply Base Optimization – other advantages

• Buying from world-class suppliers• Use of full-service suppliers (e.g. Yazaki in automotive)• Reduction of supply base risk since with careful selection and development the risks (other than

supply disruption) such as poor quality or price variations and problems associated with large base get reduced in practice.

• Lower supply base maintenance costs.(reduced communications, visits, inspections, joint programmes etc.)

• Lower total cost of products / services since generally the remaining suppliers get higher volume orders hence at discounts.

• Enhanced ability to implement complex purchasing strategies due to close interactions and early supplier involvement at Strategy Formulation stage

Supply Base optimization – Potential Risks

• Purchaser’s fear that supplier can become too dependent on a purchaser for its economic survival

• Absence of competition—thus purchaser loosing benefits of competitive system• Supply disruption• Overaggressive supply reduction, hence problem at ramp-up situations.

Approaches to Supply-Base optimization

• 20 / 80 Rule : identifies those 20% of suppliers receiving the majority of purchase amount or a minority of suppliers causing majority of quality problems

• “Improve or Else” approach : this provides all suppliers, regardless of their performance history a fair ‘chance’ to remain in the supply base. Within a specified time those who meet criteria remain.

• Competency Staircase Approach : Stages of abilities through which suppliers have to get through.

• Triage Approach : Careful evaluation of the performance records of suppliers and placing them into one of three categories :

• Incapable either currently or in the future• Currently not meeting the criteria but demonstrate performance enhancement

potential and • Near-perfect suppliers requiring no improvement assistance

Vendor Development

• Vendor development is an activity undertaken by a purchaser to improve a supplier’s performance and / or capabilities, to meet the purchaser’s short and longer-term supply needs. Variety of activities include assessment, incentives, instigating competition and direct involvement of personnel with supplier activities e.g. Training.

• For direct involvement besides the personnel, the management of both the organizations must be convinced to make it happen beyond mutual understanding that it is beneficial to both.

• Effective Vendor Management calls for commitment of financial and human resources and sharing of timely and accurate information.

– assistance

Deployment of Vendor Development Process

• After scanning the strategies for more than 60 organizations, a group of researchers developed a generic map for deploying a supplier development process (as shown next).

• While many organizations are able to successfully deploy the first four stages of the process, some are less successful in the later four stages.

• Knowledge of some of the barriers and solutions help in this initiative

Typical Process Steps of S.D. Process

1. Identify critical commodities for development.... Portfolio analysis--- items (critical, competitive, cost, commitment etc) (ref. Next slide on portfolio matrix

2. Identify critical suppliers for development.....benchmark and pareto analysis3. Form cross – functional commodity team e.g. Purchasing, engineering, quality ... Etc. As Internal

consensus is very important4. Meet with supplier’s top management team to ensure strategic alignment, measurement

agreements and professionalism commitment5. Identify opportunities and probability for improvement considering Customer requirement,

Technology roadmap, Process mapping6. Define key metrics and cost sharing mechanisms (feasibility, resources and time)7. Reach agreement on key projects and joint resource requirements8. Monitor status of projects and modify strategies as appropriate

The Barriers to Supplier Development

• The barriers to supplier development fall into three categories :– Buying-firm specific barriers– Barriers that focus on the interface between the purchaser and the supplier and– Supplier-firm barriers

– Companies use a variety of approaches to overcome barriers to supplier development. In general these approaches fall into three categories

– Direct involvement .. Hands – on– Incentives and rewards .. The carrot– Warnings and penalties ... The stick

Buying-Firm specific Barriers

• Size of purchase does not justify development investment.– Solution: Standardization (e.g. Philips Screws) and Single Sourcing (e.g. Honda of

America)– No immediate benefit is evident to the buying organizations– Solution : Pursue small wins like Kaizen Events– Importance of commodity purchased does not justify development effort.– Solution: Take a longer-term focus e.g. Solectron looks beyond price into quality and

technology impact and expects designs offering integrated solutions.

Interface Barriers

• Supplier is reluctant to share information on costs and /or processes.– Solution: Create a supplier Ombudsman Position...(e.g. Honda of America—Supplier

Ombudsman deals with soft side of the business e.g. Human issues.– Confidentiality inhibits sharing information– Solution : Confidentiality agreement.. E.g. Motorola is helping suppliers segregate

Motorola’s production from the rest of their operations to prevent competitors from seeing Motorola’s parts.

• Supplier does not trust the buyer’s organization.– Solution: Spell it out...(e.g. Varity Perkins will not run a Kaizen event without a signed

agreement between the company and the supplier. Earlier the company created a perception of switching suppliers on “price” issue. To reverse this perception the co. Revised its purchasing philosophy emphasizing well defined purchasing objectives that go beyond purchase price and builds cooperative relationships with key suppliers.

– Organizational cultures are poorly aligned– Solution: Adapt approach to local conditions. E.g. BMW used a “process consulting”

approach to supplier development in Germany. However in USA the communication of expectations and “Roadmap to Quality” approaches had to be adapted in order create better understanding and alignment.

• Not enough inducements to participate are provides to the supplier.• Solutions:

– Designed in motivation ...(e.g. Solectron has ‘designed-in’ suppliers who got motivated to participate in Supplier Development process.

– Financial incentives : Hyundai Motor company rates performance and has incentives from immediate payment to no new business at two ends of 4 rating levels.

Supplier-Specific Barriers

• Lack of commitment on the part of supplier’s top management.

• Solution : – Implement after commitment : To secure commitment persuade the senior

management of the impact of improvement programmes (e.g. Kaizens). Follow up by ensuring their participation and experiencing in the benefits and then– only after buy-in– implement all across the organization.

• Supplier’s top management agrees to improvement proposals but fails to implement them.• Solution :

– Institute Supplier Champions programme – E.g. At JCI corporation (a supplier to GM, Ford, Chrysler and others) a supplier employee

who understands JCI expectations and has demonstrated competence becomes a supplier champion and disseminates.

• Supplier lacks engineering resources to implement solutions • Solution :

– Direct Support – E.g. Honda of America has 50 out of 310 people working in purchasing department,

working exclusively with suppliers. Honda purchase 80% of the total cost of its car from outside suppliers.

• Supplier lacks required information system to implement solution.

Solution : Direct Electronic Data Interchange support. (EDI)

• Suppliers are not convinced that development will provide benefits.• Solution :

– Let suppliers know where they stand e.g. Increase frequency of supplier performance feedback reports and follow through review / action mechanisms such as PDCA.

• Supplier lacks employee skill base to implement solutions.• Solution :

– Establish training centre e.g. JCI built a training facility dedicated to providing extensive training to their internal groups, suppliers and customers.

– Industry and govt. Cooperation. E.g. Hyundai engineers “living” at suppliers, performing• Supplier lacks employee skill base to implement solutions.• Solution :

– Establish training centre e.g. JCI built a training facility dedicated to providing extensive training to their internal groups, suppliers and customers.

– Industry and govt. Cooperation. E.g. Hyundai engineers “living” at suppliers, performing time motion studies, teaching layout design and improving productivity. Korean government encourages such industrial collaboration through tax benefits.

– Discuss HONDA case.