Mar
24
Introduction to supplier management
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In most organizations procurement is divided into two distinct activities. These are usually known as tactical or strategic, tactical will usually deal with raising orders, expediting suppliers and dealing with queries. The strategic role will typically relate to supplier management.
While supplier management can often be cross-functional (for example during contract negotiations there maybe a requirement for commercial/legal support) – the procurement team will usually lead the task. So what sort of typical activities do you see with supplier management? Here are a few examples:
Relationship management / partnering
Perhaps the key task in supplier management is managing the relationship between the supplier and the buying organization – this activity varies depending on a number of factors e.g.
• Value of spend
• Complexity/criticality of relationships
• Supplier performance
Most companies will have 100’s of suppliers and it would be impractical to levy the same level of management resource on all. Therefore the focus will typically be on those suppliers where there are problems or there is a need for a strategic relationship to be developed or maintained.
Performance measurement
Another common aspect of supplier management is performance measurement. The types of measures tracked can vary hugely from company to company (see our article on QCD measures) but the theme is the same – is the supplier achieving what they promised. While the individuals themselves may not be the ones that gather the data and calculate schedule delivery adherence – the supplier management team will normally be responsible for reporting the results and establishing initiatives to deliver improvements.
Supplier rationalization
Many organizations see their supplier base grow over the years – where the growth has been organic you might find that you have many suppliers for the same commodity or product. Supplier rationalization is the activity whereby the numbers of suppliers is reduced and a prime supplier (or suppliers) is selected – this is usually achieved by moving specific suppliers onto contract where they become the preferred supplier or by competing suppliers against a capability list – supplier rationalization will usually result in one of three courses of action.
• Develop/grow the use of the supplier
• Maintain the use of supplier with existing business but do not award new business
• Exit the supplier
Supplier development
Supplier development will typically involve working with the supplier to align them with the buying company’s objectives. Often the development can be capability based where the R&D team from the buying organization may develop close ties with the supply chain to ensure readiness of materials and products. For others it might be more process based where inventory or transactional efficiencies may be targeted. Whatever the task – the outcome is usually to align the supplying business output with that of the buying organizations requirements.
Negotiation
Where new contracts are required or where contracts are expiring and require renegotiating the role of the strategic team will be to co-ordinate and in many cases carry out negotiation. Not all suppliers will require detailed negotiation it will depend on the circumstances. The role of the procurement team will be to gather a list of requirements from the business (note this could be requirements in the form of parts needed, cost requirements, volumes, commercial requirements etc) and work with the supplier to reach an agreement.
Benchmarking
Benchmarking is the process of comparing processes and performance metrics from either supplier to supplier – or from buying organization to industry. Benchmarking is an important step often used to integrate best practice into an organization. In supply chain it can be very useful when carrying out a supply chain rationalization program when you want to determine which suppliers will be exited and which suppliers will be retained.
Ethics management
Organizations are under increasingly difficult and complex compliancy and ethics requirements (e.g. Sarbanes-Oxley). In the last few years supply chain departments have had to increase their resources and focus on related programs. This might be typically led by supply chain executives but will flow down to all staff – there will often be regular audits or reviews to ensure compliance.
Mar
23
Measuring Purchasing Performance
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The old saying is that you can’t manage what you don’t know. Performance Indicators for any business are critical in evaluating success against corporate goals and targets whilst highlighting key issues that need addressing.
One of the major problems within supply chain is that there are so many things that you could measure, indeed you can argue that in supply chain, KPI opportunities are virtually limitless. The key trick is ensuring that what you measure is a key determinant in the success of your business (and preferably directly linked to your business strategy and targets). This can take time in both deciding upon which measures to use and also in gathering accurate and meaningful data.
Once you’ve agreed upon your measures consider how you will publish them for example you can utilize reporting summaries like traffic light reporting systems (commonly called a RAG) or even a reporting dashboard to ensure that you measure by exception, focus on what’s going wrong in the business and how you can address it.
The Role of QCD in supply chain
QCD stands for Quality Cost and Delivery and represents the holy trinity of measures. QCD, which is a common reporting methodology used in manufacturing businesses , can not only help drive internal improvements but also drive focus and improvement on customer satisfaction – as QCD measures will typically target areas that the customer sees or feels the impact of.
Quality
Quality is often measured in terms of rejected goods or defects – for example if a supplier delivered 100 items on time in the month then great! But if the quality was poor and only 20 of them were usable then not so great. Many organizations will choose to employ a DPPM score (Defective Parts per Million) or simply calculate quality as a percentage of overall deliveries as a not right first time (NRFT) score.
Cost
Cost can be measured in a variety of ways from the cost of the part i.e. monitoring the cost trend of a given commodity over time through to measuring productivity and transactional costs. It’s often argued that productivity is a difficult nut to crack as the actual time taken to raise a purchase order might be minimal compared to the time taken to source the supplier or provide key technical information. However it’s worth persevering as understanding your transactional cost can drive key changes in your processes and organization behaviour.
Delivery
Delivery Schedule Adherence (DSA) is one of the most common supply chain metrics. It specifically measures “did the item you ordered get delivered on the day/time it was supposed to be delivered on in exactly the right quantity”. Some organizations accept a tolerance threshold – for example seven days early or seven days late. For other organizations (and automotive is a good example here) it can be measured at a more granular level.
DSA can have a direct impact on the customer, where suppliers deliver late – this can impact the manufacturing process which in turn can affect when the items can be shipped.