Procurement & Materials

Management - Supplier
Arvind Tiwari
Guest Faculty IIFT

Overview
Supplier
Need for new
Evaluation importance
Identification
Evaluation
Selection
Performance
Development

Supplier Evaluation - Need

Need for a new supplier
Current supplier(s) for that product not
performing well
More capacity required
Strategy - Current supplier cant be loaded beyond
existing business
Current supplier cannot / not willing to invest
Extra capacity required faster than current supplier can
add capacity

Supplier Evaluation - Need

Need for a new supplier
New products to be introduced require
Parts which cannot be produced by current supplier(s)
New technology not available in the current base

New plant in another location so need to look at

suppliers in the vicinity
Commercial reasons need to bring in
competition as current supplier not flexible

Supplier Evaluation - Importance

One of the most important reasons of stress in
supply chain is choice of supplier
Well begun is half done
Wrong choice can
Cost a lot of time, money & energy
Cause serious disruptions in the supply chain and
therefore business

Not easy to change suppliers mid course

Supplier Identification

Internet
Trade directories
News
Intro letters
References
Trade fairs

Supplier Evaluation - Process

Supplier Data Sheet
Very comprehensive
Information relating to

Facilities
Operations
Customers
Suppliers
Financials
Certifications
Compliances
Capacity and Spare capacity
etc

Supplier Evaluation - Process

Information review
Criteria for first level acceptance are pre-decided
and usually part of Purchase Policy
There is a threshold for each category of
information
First level of filtering happens based on this
information
Borderline case sometimes allowed to the next
stage based on organisation need
Those who qualify move to next stage

Supplier Evaluation - Process

Supplier signs NDA
Preliminary discussion
With Supplier senior management
Gives a first hand feel of the suppliers approach and
interest in the business on offer
Helps understand the cultural fit and possibility of long
term association
Any doubts on the SDS are sometimes cleared at this stage
Sometimes a quick commercial check is done at this stage
to confirm suitability
Unless there is a clear lack of fit , sets stage for visit

Supplier Evaluation - Process

Supplier visit
Structured audit
Information provided in SDS is verified
Critical evaluation of the

Management
Machinery and Equipment
Systems Documentation & Records
Personnel Qualifications , Experience , Capability ,
Attitude
Processes
Products
Compliances

Supplier Evaluation - Process

Supplier Visit / Audit Report gives scores for each activity
reviewed
Scorecard has pre assigned weightages for each category
being evaluated
Category scores are multiplied by the weights and added to
arrive at the total score
Based on it the Supplier is
Acceptable
Not Acceptable
Can be accepted after improvements

Suppliers in the 2nd and 3rd category usually commit to

improvements within a specified timeframe
A re-audit is scheduled post improvement to accept or
reject a supplier

Supplier Evaluation - Issues

Supplier does not qualify but there are no
other viable options due to
Cost
Distance
Capacity
Interest
Compliance

Supplier Evaluation - Issues

Supplier can be acceptable after
improvements. Has issues with
Machinery & Equipment
Utilities
Systems
Personnel
Financials
Compliance
Interest

Supplier Evaluation - Issues

Supplier qualifies but
Does not have capacity
Is smaller than required
Is a one man show
Is too large
Business on offer is very small compared to
suppliers business
Business on offer is very large compared to
suppliers business

Supplier Evaluation - Issues

Developed Supplier v/s Supplier to be
developed
Developed Supplier advantages
Established systems and processes
Predictable high quality output
Adherence to delivery plans
Inhouse design and development capability
Well maintained facilities

Supplier Evaluation - Issues

Developed Supplier possible disadvantages
High cost
Not keen to produce smaller volumes
Lack of importance accorded to this business

In production scheduling
Accommodating changes in schedule or design
In new product development
In personnel involvement and interaction

Supplier Performance
Supplier Performance is usually measured on
these parameters
Quality
Incoming
Warranty

Cost
Product cost

Delivery
Schedule v/s supply

Supplier Performance
Supplier Performance parameters
Development
Product changes
New product programmes
Speed and accuracy

Response
New initiatives
VA/VE

Sustainability initiatives

Supplier Performance
Performance measurement should be
objective
Process should be transparent
Parameters should be simple , easily
measurable where possible through the ERP
Periodic at least once a quarter
Results should be communicated formally

Supplier Performance
Incentives for improvement and penalty for
poor performance
Should happen only on sustained
improvement or poor performance
Award system should be known to suppliers
and should be implemented as planned
Should be consolidated across all divisions and
informed across all divisions to avoid
conflicting signals

Supplier Performance
Appropriate weightages are assigned to the
parameters
Weightages should reflect the organisation
strategy and focus area
The weighted score is then used to rank all the
suppliers for overall performance
Individual section scores can be used for
category ranking and award

Supplier Performance
Introducing a new supplier and exiting an
existing supplier consume a lot of time and
effort
Companies therefore work closely with
suppliers to develop them wherever there is
possibility of positive results
Supplier performance scores become the basis
for shortlisting suppliers for development

Supplier Development - Prerequisites

Commodities for which suppliers have to be developed
have been shortlisted based on the purchase strategy
Number of suppliers identified to be developed is
limited
Dedicated resources available with customer for the
purpose
Supplier

Has potential for substantial business

Has potential to improve
Views customer as important to its business and future
Is interested in improving with customer help
Top management is committed to the process
Trusts the customer

Supplier Development
It is a medium term process
Should have
A set of clearly defined and measurable objectives
A timeframe and milestones
A regular review
Incentive (and penalty) to the supplier
Dedicated team from customer and supplier

Supplier Development
Typical objectives
Quality
Through improvements in process , equipment
maintenance , tooling , poka yoke etc

Delivery
Through improvements in planning, productivity ,
capacity utilisation, quality etc

Cost
Through improvements in Quality, Productivity etc.

Supplier Development -Quality

Finished Product Quality depends primarily on
Supplier Quality
Quality is not checked , it is produced
Focus has to be on process capability than on
quality checks at various stages
Due to this Procurement gets deeply involved
in Supplier Quality

Supplier Development - Quality

Impact of Poor Quality
Reduces supplier capacity
rejection at various stages
Increase in cycle time due to checks introduced

Adds cost due to

checks at various stages
rejection at various stages

Increases inventory
Supply quantity may vary due to shrinkage
Probability of rejection requires backup

Supplier Development - Quality

Impact of Poor Quality
Disrupts and therefore reduces customer
production due to quality issues discovered during
Assembly
Testing

Reduces customer satisfaction due to sub optimal

performance or failure in use

COPQ Cost of Poor Quality

Supplier Development - Quality

Procurement Quality team known as Supplier
Quality (SQE) work closely with Supplier
Senior management
Production and Quality staff
Associates where necessary
Tier 2 suppliers suppliers suppliers
3rd party inspection / certification agencies

Supplier Development - Quality

Roadmap with
Responsibility
Milestones
Timeline
Resources
Investments
Review frequency
Is agreed with Supplier management

Supplier Development - Quality

Work is done parallely on two fronts
Containment
Correction

Containment
Essential to ensure no defects leave supplier
premises
This may be done through additional 100%
inspection or third party inspection

Supplier Development - Quality

Correction
Thorough analysis of the type of defects
Pareto to focus on maximum
Root cause analysis to identify possible causes
Action plan to eliminate the causes
Causes could be

Machines
Material
Men
Method
Measurement

Supplier Development - Quality

Some of the causes may be eliminated in the
short term through
Change in method
Training of manpower
Regular calibration of measuring equipment

Others like procurement of

Machines with the required process capability
Correct Tooling
Material form the right source
May take time and also has commercial implications

Supplier Development - Quality

Maintaining the quality after improvement is
equally if not more important
In a lot of cases when the customer SQE
reduce intervention and monitoring the
performance slips again
Reasons may be
Supplier attitude
Cost
Manpower
Material

Supplier Development - Delivery

Procurement team does initial analysis of delivery
performance
Reasons for poor performance and root cause
analysed
Time bound targets for improvement are agreed
with the supplier
Procurement personnel work closely with
supplier team to help execute the plan
Periodic review to ensure progress as planned
Commitment from supplier to continue after
program completion

Supplier Development - Delivery

Reasons for poor delivery performance
Customer supplier interface poor
communication
Capacity
Equipment
Tooling
Process e.g. layout

Quality handled by the SQE team

Planning
RM availability
Financial issues

Supplier Development - Cost

Objective is to bring down cost to supplier so that
it can be shared with customer
Procurement team analyses supplier cost details
Agrees to time bound programme with supplier
Reasons for high cost
Inefficient process
Low productivity - Excess manpower
Unskilled / Untrained manpower
High rejection

Supplier Development - Cost

Reasons
Inefficient purchase
High inventory
Power consumption
Wastage

Supplier has to trust the customer and see the

potential benefits to share detailed information.
Benefits are shared
Helps supplier save costs for the rest of the
business which need not be shared

Supplier Motivation
Procurement addresses it with
Incentives
Awards
Share of business
New products

Penalties
Loss of business
No new business
Exit

Supplier Development - Issues

The soft issues
Trust
Culture
People
Attitude