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:
In our previous post in this series, we talked about the ingredients needed to create a fact-based culture among your internal supply chain teams and your external constituents (suppliers). Today we’re giving you the goods – sample metrics for your Quality Dashboards and Supplier Scorecards.
There are three critical performance drivers in the supply chain – Cost, Quality, and Time – all of which must be objectively managed. Some lend themselves to quantifiable metrics while others are more qualitative. In either case, supplier quality teams need a dashboard and scorecard(s) that makes all required information accessible and easy to consume. Let’s talk a bit more about cost metrics.
As much as 60% of the cost of production is purchased material content and 67% of the cost of poor quality is in the non-materials cost. With the proportionately large amount of money being spent on business processes that support production, both the cost of parts and processes must be managed with metrics such as:
Last time, we presented the challenges that quality managers face when trying to measure supplier performance. Today, we’re outlining how to create a supply chain culture based on facts.
Removing “supply chain” from the equation, how can any company expect to make decisions without the right data? arcplan’s view of business intelligence is that everyone should have access to the data they need to make performance-driving decisions. Without access to this type of data, decisions are often made using anecdotal evidence or data from individual locations, and not based on an aggregate view of quality.
If a fact-based culture is to be established between your internal teams and external suppliers, you need 3 ingredients: