Historically, the relationship between a company and its suppliers sat somewhere along a continuum from a mutually beneficial strategic partnership to an adversarial dynamic in which buyers squeezed suppliers to achieve the lowest possible pricing. However, for the past 30 years or so, the best companies have been embracing an approach first modeled by Toyota Motor Corporation that takes a strategic view of supplier relationships and continuous improvement and leverages the competitive advantages that can only be achieved by working closely with suppliers. These businesses have discovered that engaging suppliers as collaborators—instead of adversaries—enables their supply chains to operate more effectively.
Strategic supplier relationships minimize risk and ensure continuity of supply chain operations. Using a supplier assessment process to vet and certify suppliers helps companies identify partners who can fulfill both of these tasks. Certified suppliers reliably deliver maximized first-time quality levels in a cost-effective manner. Plus, in some cases, certified suppliers provide materials of such consistent quality that they need little, if any, receiving inspection or testing before going into approved stock or even directly into the production process.
A cost-cutting approach
Researchers at the Juran Institute found that the Cost of Poor Quality (COPQ) for manufacturers ranges from 15 to 25 percent of sales. The APICS Dictionary, 15th edition, defines COPQ as “the cost associated with providing poor-quality products or services.” There are four main categories of these costs: internal failure costs, which are associated with defects found before the customer receives the product or service; external failure costs, or those related to defects that are discovered after the customer receives the product or service; appraisal costs, which are incurred to determine the degree of conformity to quality requirements; and prevention costs that result from trying to keep failure and appraisal costs to a minimum. The most visible costs result from scrap, rework, downtime, warranty claims, extra safety stock, and obsolete goods inventory.
Based on the Juran Institute’s estimate, a $1 billion company loses $150 million–$250 million a year as a direct result of poor quality. However, a robust supplier certification process and ongoing supplier quality improvement programs can help reduce COPQ, stabilize manufacturing processes, lessen the cost of goods sold, and improve the company’s gross margin.
But there’s an even bigger payoff that comes from working with certified suppliers. When supply quality and continuity are assured, you can switch your focus from cost shifting to collaborating with your strategic suppliers on programs that create value for both parties. By changing structural processes and interactions, company leaders can create an environment in which they and their suppliers work together to improve forecasting and demand planning to boost on-time delivery performance and avoid stockouts, for example. When all players are in sync, costs are again removed from operations.
By using certified suppliers and vendor-managed inventory, one $17 billion manufacturer was able to save more than $40 million in working capital and automated fulfillment for more than 90 percent of its direct material purchases. In another case, a leading consumer packaged goods company implemented a predictive forecasting system that increased inventory replenishment accuracy from less than 55 percent to greater than 80 percent. This enabled both the buyer and its suppliers to reduce safety stock levels by 20 percent.
Aspiring and evaluating
Supplier certification usually starts with a formal performance evaluation by a cross-functional team to assess a supplier’s strategic fit and capabilities across very specific criteria—such as commodity criticality, performance to a defined quality level, long-term reliability, cost, and innovation. This process helps pinpoint suppliers that can bring the most value and remain competitive in the long term.
Build your list of potential suppliers for certification by conducting a spend assessment to segment and rationalize the right mix and number of suppliers to optimally support your business. Then, ask the following questions regarding each supplier:
- Is this supplier or its products critical to my business?
- Does this supplier have rigorous processes for quality, reliability, and cost containment?
- Is this supplier able to help me innovate and improve my business?
- Does this supplier have corporate social responsibility policies in place—such as for sustainability, anti-corruption, or other ethics—that are in line with my company’s values?
- Will this supplier remain a competitive partner for my business in the future?
The more positive responses a supplier receives, the more important it is to your business and the more beneficial it will be to count that company among your certified suppliers.
Defining the supplier attributes for success will help you develop a vision for your ultimate customer and supplier relationship. It’s also important to define metrics to help measure that success, especially in areas such as product quality defects, production process consistency, delivery performance issues, cost management, and environmental impact. Create performance goals and acceptance criteria that can be mutually attained and that will be beneficial for both of you.
Enhance the value
Certifying suppliers is just the first stage. To truly capitalize on the benefits of supplier certification, you also need a system to carefully manage your suppliers throughout the life of your partnerships with them, building trust and collaborating to create a working relationship that’s lucrative for all involved. A good supplier life cycle management program should include these five best practices:
- Renegotiate contracts regularly. Depending on your industry and the type of commodities purchased, this may happen quarterly, annually, or even as infrequently as every few years. However, for long-term suppliers with whom you have a strategic relationship—particularly for direct materials and critical commodities—it’s a good practice to revisit cost and quality improvement targets at least annually.
- Have a win-win perspective. Your suppliers are business partners. Focusing on what’s going to benefit both parties can drive innovation and competencies that create a competitive edge for everyone. In a collaborative relationship, buyers and suppliers share a long-term commitment to improving each other’s capabilities by openly working together to lower costs and improve efficiencies. By sharing knowledge and expertise, companies can create a continuous improvement mind-set that leads to sustainable, growing revenues.
- Make your business easy to work with. Every company has its own processes and enterprise requirements. Giving suppliers real-time visibility into your needs helps them plan better and adjust to changes when they happen. Synchronizing business processes and information exchange between companies, including dealing with disparate systems and connecting electronically with hundreds or thousands of trading partners, is challenging. By automating more of the day-to-day transactional information, you and your suppliers can spend more time working on the tasks that really matter.
- Help suppliers work more efficiently. When suppliers have visibility into your demand, they are generally more efficient. Collaborative supply programs, such as consignment arrangements, vendor-managed inventory, and demand planning and collaborative forecasting between suppliers and buyers, enable both partners to streamline their work processes and benefit from a more accurate forecast, optimal inventory levels, and greater supply stability. The buyer then gets a smooth supply of product—delivered at the right time—and never has to worry about stockouts. Buyers share their production and inventory data with suppliers, who plan inventory and order fulfillment to ensure continuity of supply based on the buyer’s forecast. This approach helps both the buyer and supplier eliminate excess inventory and run a tighter supply chain.
- Periodically explore alternative suppliers. Trade publications and industry databases and websites are the best places to find suppliers in a particular market. In addition, gathering opinions and standards from internal stakeholders—including members of research and development, purchasing, marketing, sales, and production—can help you define the criteria for supplier selection. Networking with colleagues in other companies and industries is another great way to supplement your research.
Sourcing from—and developing solid relationships with—the right suppliers isn’t just important to your product and service quality. When you consider that externally sourced materials affect the cost, quality, and performance of your products and that suppliers can provide value-added activities, it becomes obvious that ensuring the highest level of supplier quality is a tactical imperative. True strategic partnerships are built on trust and communication. Working with suppliers that have gone through a rigorous certification process and then managing them through ongoing performance and attention is pivotal to your bottom-line success.
Kris Beck is vice president of sourcing product and operations at Elemica, a provider of supply chain operating network and solutions for process industries. She may be contacted at email@example.com.
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