In the past 10 years we have seen more changes in the supply chain that are quite possibly greater than any seen in the post-war period. We have seen maturity in quality management systems both at home and abroad, shifts in the competition as new regions with low cost labor appear and compete with traditional suppliers. We have seen fluctuations in commodities and currency exchange rates all impacting how companies procure materials, components, and services.
The speed at which orders fluctuate has increased rapidly as systems within the supply chain are integrated. As a result of these changes and pressures, the ways we manage our suppliers have become much more important to ensure the supply base is both efficient and effective.
In section 7.4 of the ISO 9001:2008 standard states: “The organization shall evaluate and select suppliers based on their ability to supply product in accordance with the organization’s requirements. Criteria for selection, evaluation, and re-evaluation shall be established. Records of the result of evaluations…shall be maintained”.
Traditionally, the generally accepted metrics for evaluating suppliers have been Part Per Million (PPM) calculations as a measure of a suppliers quality, On-Time Delivery (OTD) as a measure of the ability of the supplier to deliver the proper quantity when it is due, and the much talked about (but more difficult to measure) assessment of excessive shipping costs. Other traditional tools in our quality toolkit are arguably supplier corrective actions and on-site audits of the supplier which can both be as much work for the customer as it is for the supplier.
All of these methods are good, but we need to get smarter and change our practices to accommodate the changes we are seeing. We need systems to be much more efficient and effective at managing suppliers as the ISO standard requires. Before investigating some tools that can help us, allow us to point out some observations we have seen and encountered with my customers over the past decade.
The single largest change impacting the management of suppliers has been due to the new “Global Economy” and the development of suppliers in low cost regions (LCRs) such as China, India, or Mexico. Suppliers in these regions have been flocked to because of the labor cost advantages they can provide, however, LCR suppliers can come with some unanticipated risks.
Lead-times tend to be much longer, not only because of transport time, but we need to consider how customs delays can also impact OTD. Typically, LCR suppliers tend to have less mature quality systems in place which obviously lead to quality and consistency issues. Another observation is that suppliers have smaller core competencies in these LCRs because they are simply not as mature in their knowledge and competence; just because a supplier is great at a given product line does not necessarily mean they will be great at other products.
Unfortunately, most MRP and ERP systems that we have encountered are great at doing resource planning, but getting meaningful data out of the systems to help with the management of suppliers requires a great deal of post processing. To effectively and efficiently manage these traditional and new challenges, today there are software tools that provide the following capabilities:
Pre-approval of supplier shipments through the web.
LCR suppliers likely have a longer lead-time induced by geography. Their quality systems and knowledge are limited because they are so new and the costs of having an on-site presence in the region to monitor suppliers are high. So it is imperative to setup predefined receiving characteristics and have suppliers submit them on the web with required approval before shipping the product. This can ensure that you have a good product when it reaches the receiving dock and eliminate major delays that could have occurred if the product was received with quality problems.
Measure the supplier’s ability to ship to you based on their promise date and your need/want date.
Often times the lead-time negotiated with suppliers is not adequate to support some customer orders or changes to them. Therefore, it is important to not only measure a suppliers OTD to the promised or contractual due date, but to also measure their performance to the date (we call it the “Want Date”) needed to fulfill the customer’s due date. This will give us an idea of how well we can meet the commitments to our customers and help us understand what suppliers need development to better meet those commitments.
The ability to look at PPM as a measure of the quality of the product.
Although this is a traditional measurement, it is often not easy to retrieve the data from traditional systems and some systems may be implemented in such a way that not all defects are being logged against a supplier.
Capability for suppliers to respond to corrective actions via the web to remove the burden from the customer.
Traditional supplier corrective action systems require the customer to detect the problem, write it up, send it to the supplier, remind the supplier to respond, review a typically inadequate response, type the information into a tracking system, and conduct the validation/closure. This is a very tedious and non-value add process, there are systems that will automatically notify a supplier, allow them to enter responses, enforce behavior through checklists, send out reminders, and allow the supplier to enter data via the web directly into a tracking system.
The ability to share documents and drawings with supplier through the web.
Sharing documents and drawings can be very costly for customers because they need to email or ship the documents and drawings to suppliers, not only when they are created, but every time they change. Having the capability to allow suppliers to see certain documents from the web at their will can greatly reduce these costs and eliminate the costs of ensuring the supplier gets the most recent version of the file.
The measurement of partial shipments.
Tracking actual shipping costs can be very difficult to capture and often capture in other costs from the supplier. A measurement to also consider is the number of partial shipments for each purchase order line item. This gives an objective assessment of what it takes for a supplier to ship product.
Supplier scorecards showing trending and receiving history.
In order for anyone to react to a problem, they need to understand the problem through metrics. The same holds true for suppliers. We need to provide suppliers with trending of PPM and OTD as well as provide an overall score for a supplier.
Use of Business Intelligence technology for drilling down.
To have an efficient and effective tool, anyone from corporate supply chain managers down to plant managers need to graphically manipulate and drill into data to understand where the problems lie. One individual may be interested in knowing what suppliers have the worst delivery for a specific plant. Another individual may be interested to know which plant has a supply base with the highest PPM. Through the use of today’s OLAP cubes technology can be looked at and drilled into from many different perspectives to give users ability to graph and “move” throughout the data as they need to.
Consider the use of the concept of SPAN.
Another concept to consider employing is the use of SPAN which allows one to make an assessment of the overall distribution of a supplier’s OTD. What this entails is the ability to statistically calculate both the number of days before and number of days after a due date that a supplier has a certain percentage of shipments (say 90%). This is done by calculating the number of days before a due date that the earliest 5% arrive before and the number of days after the due date that the latest 5% arrive after. Span allows us to get a general confidence in the window with respect to the due date at which a certain supplier will provide shipments. In the graphic below SPAN removes the earliest and latest X percent (in this example 5%) to show the days before and after a due date that the majority (e.g. 90%) of the shipments will be received within. Therefore, if SPAN is larger for one supplier than another, it indicates not only that a supplier has a larger fluctuation in the OTD, but also provides a range at which a shipment will likely arrive. Simple OTD percent calculations are enough to understand the “reality” of the customer.
Given the changes in the economy and shifts in sourcing over the past decade, there are risks in the supply-chain to get some of the piece price benefits. The good news is that there are methods to mitigate risks and ways we can employ existing software tools that help us be more efficient and effective in managing the supply chain.