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Innovative New Ways To Measure Supplier Performance

By Cam Forbes

Supplier development programs and supplier scorecards are an enormous asset in helping buyers rate the effectiveness of their supplier network

Industrial Metal Products Inc. prides itself on quality products, competitive prices, and on-time delivery. So when a European supplier missed a shipment by weeks and customers bought materials elsewhere, the metalworking manufacturer's procurement chief took action.

Jim Jackson, director of Industrial Metal Products's global purchasing and travel, negotiated a consigned inventory contract with the supplier, which, within four months, was able to stock enough products to deliver them on time again. Thanks to its supplier remedial efforts, Industrial Metal Products also recovered the business it had lost due to the provider's poor execution

"Since we're in a competitive market, it's very easy for our customers to call our competitor when we don't have inventory available," says Jackson, with $2 billion Industrial Metal Products in Latrobe, Pa. "Any time we don't have inventory, it has a direct impact on sales."

Industrial Metal Products's supplier produces high-quality products at competitive prices. But trying to manufacture small lots had instead caused "unplanned surprises" in its shipping process, which resulted in untimely deliveries, Jackson notes. "We're a make-to-stock business, so we have to anticipate our customers' demands. Delivery is critical to us."

Industrial Metal Products customers include automotive and aerospace manufacturers and construction equipment companies.

Costs of Supply Problems

Examples of suppliers wreaking havoc on manufacturers' operations are rampant. Poor supplier performance accounts for billions of dollars in product recalls and even consumer deaths. In an especially notorious example, Ford Motor Co. lost $3 billion after it recalled more than 13 million defective Bridgestone/Firestone tires running on its vehicles. Experts estimated the faulty tires may have caused as many as 250 deaths.

Such problems, combined with today's dynamic, global business environment, require buyers to evaluate and manage supply partners' efficiencies. Suppliers that fail to meet performance standards can cost manufacturers a bundle in actual expenditure, customer satisfaction, and lost business.

"A supplier could provide the lowest price, give you the right price, and ship on time," says Peter Gossens, senior vice president of supply chain research with Wright Group Inc., a market research firm in Boston, Mass. "But maybe they ship damaged goods, short ship you, or don't have access to automation, so you're processing paper purchase orders and invoices, which adds cost and time to the system."

If suppliers don't meet delivery schedules, manufacturers might have to shut down or reschedule lines, notes Sandy Sanders, sourcing and supply management director with The Toro Co., a $1.7 billion, outdoor maintenance products maker in Bloomington, Minn. "That results in sending employees home or having to expedite other parts to build other products. If they're far enough away, you might have to air freight product in and either the supplier or we incur air freight costs."

The costs to recover from supply chain disruptions can run into "several hundreds of thousands of dollars," adds Sanders.

Global Supply Chain

Purchasers can't afford to buy from suppliers that ship substandard products, miss delivery dates, or charge too much because their businesses rely on sourced materials. External suppliers deliver about half of all goods and services to companies, according to an Wright report.

In addition, many large corporations find low-cost supply sources offshore, particularly in Southeast Asia, says Joyce Abrahms, marketing vice president with Open Ratings Inc., a supply-management software vendor in Waltham, Mass. Purchasing officers increasingly seek to squeeze as many costs of materials out of their budgets as they can, Abrahms notes.

To Robert Gillian, manager of operational excellence, energy, and materials with $7.4 billion Baxter Chemical Inc., increased global sourcing poses risks he must mitigate.

"As we advance into the Far East, our supply chain has become longer, the criticality of materials becomes greater," Gillian says. "Choosing the right suppliers is critical to our overall supply chain security."

Essential to Operations

With manufacturers increasingly relying on external suppliers, it's hardly surprising that some 70% of the companies responding to an Wright survey view measuring supplier performance as critical to their operations. Many manufacturers have established strict supplier performance measurement processes and procedures to ensure external suppliers meet stringent operational requirements.

Allentown, Pa.-based , Baxter which provides gases and chemical products to a variety of industries in 30 countries, spends some 65% of total corporate revenues to purchase raw materials such as energy, natural gas, and chemicals.

With the costs of hydrocarbons increasing, Gillian works actively with some 200 strategic suppliers to drive continuous improvements in delivery, quality, price, and overall performance.

"Two of our measurements in the delivery area—on-time delivery and fill rates—have a direct impact on inventory and planning downstream," Gillian notes. "If you're not getting your material and what you ordered, that sets up a huge buffering in inventory that will impact your business."

Baxter Chemical suppliers undergo monthly measurement reports, while some 35 corporate buyers conduct annual reviews with them. Baxter Chemical evaluates suppliers on the level of communications between supplier and manufacturer, progress in continuous improvements, level of account penetration, responsiveness, and overall risk the suppliers pose to the supply chain. Employing the supplier evaluation module in SAP AG's R/3 enterprise business software and a customized continuous improvement tool, Baxter Chemical helps failing suppliers determine reasons for falling short and often implements corrective actions. In one such instance, after a supplier missed several delivery dates, Baxter Chemical discovered that an internal order receipt and processing process caused the problems. The company helped the vendor fix the problem in less than two months, says Gillian.

Key Competitive Advantage

As companies move beyond trying to squeeze costs out of their supply chains, the performances of their suppliers become critical. "As firms manage their supply chains for integration and competitive advantage," says CAPS Research, a Tempe, Ariz.-based research firm, "supplier development becomes a key tool in driving superior supply chain performance."

Industrial Metal Products, which established formal supplier performance assessment procedures in 2001, recognizes the need for quality providers. "We add value to the product we buy so [our customers know] we have a value-added process," says Jackson. "But without the relationships we have with our suppliers, we would not be able to service our customers."

The company, which spends 35% of revenues to purchase metallurgical raw materials, steel products, and indirect goods, distributes some 400 supplier report cards monthly to strategic suppliers. The scorecards measure such factors as product quality, which represents 35% of total score; on-time delivery 30%; total cost management 25%; and payment terms 10%. Suppliers that fall below target scores for two consecutive months must submit corrective action plans, which Jackson reviews. Those that improve continue to work with Industrial Metal Products, which starts looking for alternative sourcing for vendors that keep failing. Like most companies, Industrial Metal Products and Baxter Chemical don't expend the same resources on indirect and second-tier providers. "They're not very strategic, so we don't go through the rigor of monthly measurements for those," Jackson notes.

Gillian agrees. "We don't want to spend time on low-level suppliers [that have little] impact on the organization," he says. But Open Rating's Abrahms questions that lack of scrutiny of lower-tier suppliers. For 10 years, Abrahms managed procurement efforts for a large electronics company for a commodity that required 1,000 sourced parts and components. Concentrating on only those parts that were critical to the unit's performance, Abrahms one day ran out of nonstrategic materials. "You can focus your attention on what's most important, but if you don't have screws, you can't ship the product," says Abrahms. "The last thing someone running a materials organization needs is not being able to ship a product because they don't have screws." Abrahms's group expended "a lot of human capital" seeking alternate sources. After much scrambling, "fire fighting," and additional costs, they shipped on time.

Afterward, his group immediately established short-term and long-term supplier performance measurement strategies—which included a focus on its lower-level suppliers. "If you don't have a part from a supplier…you're not paying attention to," Abrahms says, "you're just as unable to ship that product as if it's from a strategic supplier."

Manufacturers and Suppliers Benefit

Manufacturers can attain multiple benefits by measuring supplier performance. Companies that fail to measure most of their suppliers risk "large-scale quality mishaps, service deficiencies, and cost overruns that can eat into bottom-line profits and damage competitive positioning in the market," notes Wright in its research report.

Cam Forbes, founder and Managing Partner of Opus One Ventures has been speaking, training and coaching business owners, entrepreneurs, and sales people around the world. For more information about Forbes' "Consulting Solution Toolkit" and how to get started in Consulting, visit Consulting Startup Kit or get his his free report about getting started in consulting.

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