Lean Supplier Management

A lean approach to typical elements of supplier management by Craig Cochran Supplier management is one of the most troublesome disciplines within a management system. There's nothing inherently difficult about it, though. Companies make it difficult by instilling the process with lots of unwieldy bureaucracy. The trick is to strip the process down to its essential elements, doing only those activities that add value. Let's take a look at some of the typical elements of supplier management and discuss some lean approaches for each. Selecting suppliers Selecting suppliers is a remarkably easy task. Think about what drives your purchasing decisions when you're using your own money; this same criteria make sense for your company. Here are some common-sense selection factors: Capability: Does the supplier provide the type of product you're seeking? Are all necessary services, warranties, and information provided also? If not, there's no sense in investigating the supplier further. Availability: Can the supplier provide the good or service in the time and location desired? Pricing: Is the price competitive, given the total package of services offered? It's important to note that the lowest price is often not the best deal. Quality: Can the supplier meet your specifications, tolerances and performance requirements? Solvency: Will the supplier still be in business next month? How about next year? This is not necessarily a consideration for commodity items but is generally a requirement when warranties and product follow-up are part of the deal. You don't want to find a padlock on the supplier's door when you're in need of technical assistance.

These are the most basic issues for selecting a supplier, and they are typically verified through research involving sales literature, Web sites, published specifications, discussions with supplier representatives, industry journals, and customer references. Occasionally, the selection criteria may be verified through a trial purchase. This is the case when long term contracts, large product quantities, or extremely critical products are involved. The trial purchase can reveal a great deal about what to expect over the long term. Additional selection criteria can certainly be added, also. If the supplier will truly become a business partner--supplying critical goods and services that have a direct bearing on your own success--then it makes sense to insist upon a formal management system. A formal management system will ensure a degree of customer focus, discipline and problem prevention. If the supplier's management system has been registered by an accredited third party, then this provides one more degree of oversight. From InsideQuality June 2004 Copyright 2004 Craig Cochran Page 1 of 6

Some organizations see fit to introduce even more selection criteria, including many of the following: Environmental performance Minority ownership Diversity of the workforce Safety practices High ethical standards Overall working conditions Use of child labor Harassment and abuse of employees Freedom of association for employees

These criteria are aimed at a category that I will call "public relations and organizational values." It is a very hard category for most organizations to evaluate. The organization is really trying to answer two simple questions: Will the supplier's business practices expose our organization to negative public relations, possibly leading to risk or liability (such as negative media reports, civil lawsuits, or criminal prosecution)? Are the supplier's business practices so contrary to our own values that we cannot in good conscience enter into a relationship with them?

The methods for answering these questions can be very complex. The most obvious method is to personally go on-site, or pay someone to go on-site on your behalf and verify compliance. Either of these options is very expensive. An alternative is to require that the organization implement a management system model that reflects the variables you're most concerned about. Examples include SA8000 (the international social accountability standard), WRAP Certification (Worldwide Responsible Apparel Production Certification) and ISO 14001 (environmental management system). These standards have the advantage of enabling the supplier to adapt its processes and procedures to established guidelines, ultimately allowing assessment and registration by a third-party auditor. The assessment and registration is at the supplier's expense, of course. This arrangement is by far the most efficient, and often the most effective, for organizations who want to introduce additional "risk and values" requirements to their business relationship with a supplier. The bottom line is that organizations should only use supplier selection criteria that they really believe in and that they are prepared to verify. If either of these conditions is not met, then the criteria is a deception to both the supplier and the organization. It's also a waste of time and energy. Verifying products and evaluating suppliers Once you select suppliers, it's necessary to evaluate them. The exact frequency, methods of evaluation and criteria is up to you. It makes sense to match the evaluation to the importance of the product being supplied. In plain language, that means that suppliers of non-critical products won't receive much of an evaluation, but suppliers of critical products will be subjected to a more stringent evaluation. All suppliers will receive some sort of evaluation, though. Likewise, all purchased From InsideQuality June 2004 Page 2 of 6 Copyright 2004 Craig Cochran

products will be verified. Critical products will undergo in-depth verification and less important products will undergo a cursory verification.

The methods of evaluating suppliers are limitless. The key to success, though, is to apply the most practical and timely evaluation possible. Consider how you would evaluate a supplier if you were using your own money; this is how you should structure your supplier evaluation within your company. The most common-sense method of evaluating suppliers is through the verification of the products they supply. Each time a supplier provides a good or service, the product is verified according to predetermined criteria. This verification not only tells you if the product meets requirements, but it also tells you if the supplier has met requirements. It makes no sense to separate the verification of the product from the evaluation of the supplier. What sort of criteria are examined when products are verified? Some of the most typical follow. For goods: Stage One Timeliness. Did the product show up when it was supposed to? Quantity. Did the correct quantity arrive? Identification. Did the correct type of product arrive? Condition. Did the product arrive in the correct condition, with no damage or deterioration? Test/inspection data. Did the product arrive with the necessary test or inspection results, and do the results indicate that the product meets the requirements? (This may not be applicable to all products.)

Stage Two Internal test results. Does the product pass our internal tests or lab analyses? (This may not be applicable to all products.) Performance. Does the product perform satisfactorily in our application? Billing. Did the bill arrive when it was supposed to, and was it accurate?

For services: Stage One Timeliness. Was the service performed when it was supposed to? Effectiveness. Did the service accomplish what it was supposed to? Courtesy. Was the service person courteous? Communication. Was the service person able to communicate effectively?

Stage Two Performance. Does the service continue to perform over time? Page 3 of 6

From InsideQuality June 2004 Copyright 2004 Craig Cochran

Billing. Did the bill arrive when it was supposed to, and was it accurate?

The evaluation of the supplier should be performed as close to the time of good or service delivery as possible. The criteria shown above acknowledges that fact. Stage One of evaluation takes place at the time the goods are received or the service performed. For goods, this evaluation will probably take place in a receiving area or shipping dock. For services, the evaluation will take place wherever the service is being performed. This approach has a number of distinct benefits: Practical. It emphasizes the most practical element of supplier performance, which is the ability to provide a product that meets all requirements Timely. It is happening in real time. No need to rely on memories. Lean. It doesn't involve a lot of bureaucracy or administration. Simply verify that what you've received meets your requirements, and you're done with Stage One.

Most accounting systems already require a verification of this sort. It is a simple control to ensure that the organization doesn't pay for something it never received. Does it serve to also evaluate the supplier? Certainly. This verification is an activity that serves multiple purposes, which is the epitome of lean thinking. The record of Stage One evaluation can take the form of a signature, initials, stamp, or other identifier, along with the date it was performed. The record can be applied to any number of existing records the organization maintains, including the purchase order, packing slip, receiver ticket, or receiving log book. If the organization has an electronic system for receiving goods and services, then that is obviously the place for the record to reside. In either case, simply add the record of verification to something that already exists. In the event that Stage One evaluation indicates a problem, a corrective action request is issued to the supplier. Stage Two evaluation is performed across a broader horizon, as the good or service demonstrates its performance in the intended application. If the organization performs tests on the product, then a portion of the supplier evaluation would involve test records. For the overall performance of the product, however, the indicator of acceptable suppliers would be the absence of problems or satisfactory addressing of problems. The records of this would reside in the corrective action system. If products fail to perform, the organization issues corrective action requests to the supplier. Stage two evaluation is also where the supplier's follow-up and billing are scrutinized. Again, failures are addressed through the corrective action system. Just because a supplier is issued a corrective action request does not necessarily constitute a black mark on its record. How the supplier addresses the corrective action is much more important. Suppliers that thoughtfully investigate the problem, identify the cause, take action to remove the cause, and then report back to the organization are the kind of business partners you want. Of course, there's a certain critical mass of corrective actions an organization can tolerate, even when they're addressed effectively by the supplier. Thoughtful organizations will analyze trends in corrective actions issued to suppliers and, likewise, analyze the quality of the responses. The point is that corrective actions are not necessarily an indicator of a supplier who needs to be replaced. The overall trends are more revealing. Trends in From InsideQuality June 2004 Page 4 of 6 Copyright 2004 Craig Cochran

supplier corrective actions should be a agenda item in business review meetings and other high level discussions involving top managers. It's worth mentioning that ISO 9001:2000 treats evaluation of suppliers and verification of purchased product as two separate subjects. They don't have to be separate subjects, though. Smart organizations will recognize the link between these issues and incorporate it into their supplier management process. The approach I've described is by no means the only way to evaluate suppliers. There are many others. Some make sense, and other would seem to be an waste of time. Here are two of the more popular methods that fall into the waste of time category: Supplier questionnaires. Many organizations evaluate their suppliers by periodically sending them a questionnaire that the supplier is asked to complete and return. The real benefit of this approach is dubious, though. It is very time consuming and bureaucratic. The information received back is often not even relevant or accurate, and too often nobody even reviews the information. Many suppliers neglect to complete such questionnaires, anyway. Subjective ratings. Another approach I've seen is for product users to rate the performance of their suppliers on a periodic basis, typically once a year. The users are provided a rating sheet; then they rely on their memories to provide a meaningful evaluation. The information is neither timely nor reliable.

The auditing of suppliers is occasionally promoted as a technique for evaluating and managing suppliers. When performed correctly, auditing sends a very powerful message to the supplier and can drive significant improvements. It brings with it many obstacles, though: Expense. It is simply very expensive to perform audits. Travel costs alone make this prohibitive to many organizations. Difficulty. Think how difficult it is for your internal auditors to audit your own facility and draw valid conclusions. It is many times more difficult to audit someone else's facility and draw valid conclusions and drive improvements. Only the most experienced and skillful auditors can succeed in supplier audits. Logistics. The logistics of trying to schedule audits is very complex. Agreeing on the date, time, scope and agenda for an audit can take hours of back-andforth communication between the organization and the supplier. Gaining agreement on how corrective actions will be handled is even more complex. Intrusiveness. Suppliers are busy. Just like your organization, they barely have time in the day to take care of the most pressing issues. Being audited only constrains them further. Many suppliers resent this intrusion and will bear it only grudgingly.

If auditing is seen as valuable, then compel the suppliers to develop their own internal auditing functions. Even more desirable is to require that they work toward the development of a formal management system with the ultimate goal of recognition by a third-party registrar. This allows the supplier to be the master of his destiny, and it also lowers the costs and aggravations of supplier management. In cases where the benefits of auditing suppliers outweighs the obstacles, dedicate the From InsideQuality June 2004 Page 5 of 6 Copyright 2004 Craig Cochran

time and energy into making sure it achieves the desired results. Do not approach the task lightly.

Optimizing the supply chain The topics we've discussed are nothing more than basic control. Excellence in supplier management requires a lot more than basic control, though. The organization should be continually working to improve the performance and value of suppliers. A key way to accomplish this is by limiting the overall number of suppliers. The more suppliers that exist, the more the potential for confusion and errors. Having more suppliers than you really need also raises the cost of supplier management, since your efforts are spread across a much larger base and multiplied many times over. Some organizations go so far as to make the number of suppliers a strategic objective, with the goal to continually move the number downward. This is a certainly good idea, within reasonable bounds. Another technique is to enter into long-term contracts with suppliers for all key products. If your company is a large user of widgets, why buy widgets from ten different suppliers? Submit the business to competitive bidding, with due consideration of service factors and limit the number of suppliers to one or two. This enables your organization to establish true partnerships with the suppliers who have been awarded the business. The ultimate result is that your costs are significantly lowered and the suppliers now treat your business as being extremely critical. Your needs, desires, and concerns suddenly get top priority. The only caveat is that this competitive bidding is not based on price alone. As we've already discussed, the best price today is often not the best value over the long term. Consider all variables of the good and service relationship, and you'll probably make the right decisions. About the author Craig Cochran is a project manager with the Center for International Standards & Quality, part of Georgia Techs Economic Development Institute. Hes an RABcertified QMS lead auditor and the author of Customer Satisfaction: Tools, Techniques and Formulas for Success and The Continual Improvement Process: From Strategy to the Bottom Line, both available from Paton Press (www.patonpress.com). Craig can be reached at craig.cochran@edi.gatech.edu.

From InsideQuality June 2004 Copyright 2004 Craig Cochran

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