Business Intelligence Blog from arcplan
28Jul/110

5 Steps to Better Supplier Quality

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We work with a number of manufacturing companies around the world that need help staying on top of everything from daily production metrics (like machine utilization and on-time delivery) to complex financial calculations to ensure profitability. But as a business intelligence software provider, one of the most important processes we've been tasked with is helping our clients manage supplier quality.

Managing the performance of your suppliers is crucial for controlling costs and improving the quality of your outputs. Experts say that the cost of poor supplier quality may equal more than 10% of an organization's revenue, so keeping that number under industry standards is simply a smart financial decision. But how do you embark on this journey?

1) Start with a subset of your suppliers.
One company may have potentially hundreds or thousands of suppliers, so determining a subset to begin measuring is imperative. You can roll out your supplier scorecards to every supplier in the future, but for now, let's get it right with just a few. I suggest ranking your suppliers by how much impact they have on your product. The most critical suppliers that you can't continue operations without are the ones that you rely on most heavily, so these are a good place to start. In the middle of the list are suppliers who directly impact your product, but you could seek alternatives if the need arises. At the bottom are suppliers that have no direct impact on your product.

2) Set expectations with your suppliers.
Your suppliers may know they have some poor processes that are straining their relationship with you and would relish the chance to improve them. Let your suppliers know that you're beginning to track metrics that will help establish what needs improvement. This first step – just being honest – goes a long way toward building mutual trust and should force both sides to become invested in the success of the partnership. It is important that both parties communicate and document performance expectations, and have a mutual understanding of those expectations going forward.

3) Determine your metrics for success.
Your management team is probably already measuring a number of things that can be incorporated into your list of metrics. Your finance team is tracking costs; you may have six sigma principles in place to track defective parts per million; and your logistics system probably has metrics related to on-time delivery. I bet you're even collecting a wealth of data in spreadsheets for monthly reporting. Gather these existing metrics along with any new information you identify as being important – this is the start of your Supplier Scorecards. Here are some sample metrics to consider and how they will help you:

  • Tracking the total money spent with a supplier can help you get a better outcome when negotiating prices in the future. Can you achieve a unit price reduction based on the total spent with the supplier per year?
  • Keeping tabs on shipping costs can force you to think about consolidating suppliers or ordering more efficiently to keep costs under control.
  • Measuring the number of Corrective Action Requests (CAR) can help you pinpoint problem areas to suppliers and the cost associated with these issues. The supplier can then take their own corrective action to reduce this number.

4) Implement Supplier Scorecards & Quality Dashboards.
Your organization may already have a business intelligence system in place that allows for easy reporting and the creation of scorecards and dashboards. Make the case for expanding its use to the supply chain quality managers so quality, cost, and time metrics can be aggregated for an overview of supplier performance. The ideal BI system will pull data from the various ERP, logistics, and transactional systems in use at your organization and allow you to create Supplier Scorecards and Quality Dashboards to track trends and use as leverage in future negotiations. Plant managers and your supplier quality team should have a granular view of supplier performance so they can make better decisions that impact the bottom line. Executives should have a summary view and be able to drill down into specific metrics for more details.

5) Report on your findings and take action.
Your suppliers should want to know how they are performing. Share your scorecards with them so they are engaged in their performance tracking and can self-monitor. Consider giving them a monthly or quarterly progress report so they know how they're doing on a frequent basis. Use the data you collect to make better purchasing decisions and get a leg up in price negotiations by presenting your suppliers with facts about their performance. Eliminate sub-par suppliers and the time wasted dealing with them.

If you get this far successfully, you can begin tracking additional suppliers. The keys to this process are: communication, the right metrics, and good technology. Supplier quality determines your own!

To read a case study on one of arcplan’s manufacturing customers and learn how they saved $250,000 per supplier per year, click here. Have questions or comments? We’d love to hear from you!

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