The Case for Supply Chain Quality Management: Part 1 – Why Measuring Supplier Performance is Crucialby Kathleen Rohrecker
Supply chain quality management is something we spend a lot of time thinking about at arcplan. That's because our business intelligence software products align with the needs of supply chain managers, and we've had a lot of success implementing arcplan Enterprise at manufacturing companies that needed to reduce the costs associated with poor supplier quality. In fact, later in this series, we'll post a case study on one such organization that saved $250,000 per year by using arcplan to manage the quality of just one vendor (and then went on to save millions in subsequent years).
But today, we're exploring why measuring supplier performance is so crucial and why many companies come to arcplan to institute this practice. Studies show that companies that closely manage suppliers on average realize more than 25% improvement in key supplier metrics such as on-time delivery, quality and cost. Moreover, experts say that the Cost of Poor Supplier Quality (CoPQ) may account for more than 10% of an organization's revenue. It seems that managing supplier performance is simply a smart financial and risk reduction decision.
Companies that measure and closely monitor supplier quality perform better because doing so delivers numerous benefits. These companies:
- Uncover and remove hidden waste and cost drivers that erode profitability
- Improve their competitive advantage by reducing order cycle times and shrinking inventory on-hand requirements
- Empower purchasing to negotiate with suppliers based on facts
- Form partnerships between suppliers and producers whereby expectations are clear and performance is clearly communicated
- Avoid stock outs, which cause consumers to sample competitors' products and strain your relationship with your customers
- Preserve "preferred partner status" with the producers' upstream customers by assuring that their products do not exceed Defective Parts Per Million (PPM) and Corrective Action thresholds that their customers expect
- Increase enterprise-wide understanding of supplier performance
- Enable suppliers to self-monitor and compete for business
Another important reason to manage supplier quality is that if the supplier's performance is poor, the root cause could also be weaknesses in the producer's own internal processes. Perhaps the team is doing a poor job forecasting production needs, so suppliers are being asked to turn orders around in unreasonably small time intervals. Or perhaps the acceptable range of specifications is too wide or documentation is lacking. It's possible that supplier quality issues are being caused by their own internal processes, so monitoring supplier quality is in fact an indirect way of monitoring the company.
Perhaps the greatest reason to closely manage supplier quality is cost. With the average purchased material content for manufactured goods in the US now in excess of 60% of the total product cost, the supply chain is the single largest source of cost and thus the greatest opportunity for efficiencies. From a financial standpoint, the difference between a good production lot and a bad one can be summarized by how well the individual production run contributes to profitability.
In our next article in this series, we’ll explore the challenges to measuring supplier performance.