Managing Suppliers For Continuous Improvement: White Paper

White Paper
Managing Suppliers for Continuous Improvement

Dr. George L. Harris, C.P.M., CPCM
President
[email protected]
Summary
Suppliers are the backbone of industry today, representing 60-70% of manufacturing or

service operations cost. As supplier cost, quality and delivery improves, so will the
customer’s products and services. Few organizations, however, have effective supplier
improvement processes. Little to no primary research is available for companies to
benchmark their own processes. The benefit of this paper is to provide a model for use
by manufacturers and service providers to evaluate, assess, improve, monitor, and
develop their supply base over the long term. A set of criteria will be provided which
represents the best practices in the literature and from company research projects. Best
practices will be presented from the automotive, electronics, and industrial equipment
sectors. This model can be used immediately to improve supplier results.
Key Words
Supplier Assessment
Supplier Improvement
Supply Management
Introduction
In many manufacturing and service companies, purchases from suppliers can range
from 50-80% of manufacturing costs. The ability of the customer and supplier to control
purchase costs has an enormous impact on the return to shareholder value and
profitability. Supplier-provided product also becomes the most critical quality and
delivery issue due to the impact on final assembly and administrative quality. Quality
costs for inadequate supplier performance in managing defects and deliveries has been
found in some companies to approach over 10% of purchase costs. Other costs
associated with poor delivery and responsiveness can greatly add to the cost of doing
business with suppliers. We will include cost of quality examples from a major aircraft
engine manufacturer who developed a cost component based on the level of PPM
achieved by the supplier and from a major computer company that developed a cost of
quality formula for the percentage of acceptable products received. A third example will
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© Copyright 2009 Calyptus Consulting Group, Inc.
be provided from Texas Instruments who developed a cost of quality factor based on
the chart of accounts. Due to the enormous influence that supplier quality performance
has on corporate profitability and efficiency, companies must evaluate their continuous
improvement processes and systems so that supplier improvement can create greater
value for shareholders and suppliers in its supply management processes. Best
practices should be benchmarked, and new and revised systems and processes should
be put in place for supplier excellence.
Companies, in fact, have developed supplier improvement programs, using company-

specific assessment tools, which include budgeted resources, continuous improvement
efforts, and supplier specific goals.
The Honda Story
Companies such as Honda of America have devoted the resources and organizational
focus to improve its suppliers. Over 80% of their manufacturing cost is comprised of
supplier direct costs and their administrative time and costs in managing the supply
base. Its Best Practices (BP) program has achieved world-class supplier performance in
quality and delivery performance. For instance, last year over 50% of their suppliers
supplied defect-free products and an equal percentage achieved 100% on-time delivery.
Any companies would cherish this type of performance. How did Honda accomplish this
feat?
Honda developed a concise process of managing the supplier over the long term. They
received their suppliers’ unequivocal agreement to provide the resources and
commitment necessary to work with Honda to reduce total costs. They train their
suppliers on the BP process. Over 200 supply management people work directly with
their 400 suppliers on improving products and processes. In one case, engineers were
sent to a supplier for over 7 months on a full-time basis to work together for
improvement.
Further, there is the need to develop a highly structured and aligned process to manage
the people, data, organizations, and time expenditures associated with a continuous
improvement initiative. We will describe the various elements of the Honda system and
identify the key reasons for their success.
A Fortune 200 Example
Here is an evolving scenario from one of our customers. They are an international
company with plants in 20 countries. Over 3400 suppliers support their manufacturing
operations. Examples of the supplied product include sheet metal, plastics, raw steel,
cabling, and printed circuit boards. Purchasing responsibilities are decentralized to each
plant in three regions. Purchase volume is over $1.5 Billion annually. Quality assurance
is performed on the line, although some source inspection is done at new or critical
suppliers with quality problems. Supplier quality data is not available and there are
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inconsistent methods of tracking and measuring suppliers. Little feedback was provided
to suppliers on their performance, and only 1% of the suppliers have been assessed at
a certified-capable level. We will describe how this company has structured a worldwide
supplier improvement program on a consistent basis using standardized approaches,
measures, and processes. We will review the basis of the improvement plan and
indicate how this company is managing supplier performance and improvement across
the globe. One of the key aspects of their success is the development and deployment
of a supplier improvement tool that is used to diagnose supplier performance against 14
quality system elements. Suppliers are rated on a scale of Level 1 through 4, with Level
2 being the lowest acceptable score, Level 3 being the “certified level” and Level 4
being world class status. This company develops improvement plans with the supplier
to move from one level to another. The goal of this initiative is to reach Level 3 in all of
its 500 suppliers worldwide by 2002. We will describe the tool and process used, along
with results achieved to date and lessons learned.
These are both real scenarios. We will add additional examples from Boeing, Intel, and
Foxboro Company. We will also provide examples from companies who are trying to
improve the supply base and are failing due to a myriad of factors. Most of these
companies will be referenced by industry, not by name. The supplier development
systems that have produced significant supplier improvement have five common
elements:
1. An excellent Continuous Improvement Tool

2. A method to provide interim maturity evaluations of the suppliers’ quality
systems
3. Long term goals which are shared with suppliers
4. Trained evaluators and CI professionals
5. Dedicated, budgeted resources for supplier development
It is possible to provide a model which can be used to develop a world class supplier
development program using ideas from best practices across many industries. This
model can be used to develop and define the supplier improvement process, establish
effective goals, assess supplier capability and performance, and improve the supply
base over the long term. The balance of this paper describes this model.
Outline of the Model
This model has three features: Assessment, Analysis, and Action Planning. Each will be
addressed in turn.
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Assessment
The organization must evaluate their current supplier management process and
determine the following:
Commodities Purchased
Quality Level Achieved
Cost of Quality - Examples to calculate supplier cost of quality will be
provided
How Current Suppliers were chosen
Quality Surveys used and the Results
Number of Suppliers who are certified (shipping directly from their
production line to the customer’s production area without incoming
inspection)
Current Resources Devoted to Improving the Suppliers in those
commodities
Note: This is a data-gathering step. Most companies have some of the data already but
must perform some first hand research on processes used, internal and external costs,
personnel levels, and the current status of the supply base.
Analysis
Once the above data is developed, the company should analyze the results. The first
hand quality results should be compared against industry and best practice
benchmarks. The tools used to evaluate supplier quality systems must be evaluated for
completeness, accuracy, and improvement orientation. The supplier development
activities must be assessed. The extent of supplier improvement in quality,
responsiveness, and delivery must be assessed. Suppliers should be asked to critique
the supplier development process and suggest improvements. Internal staff such as
manufacturing, quality, supply management, engineering, production control, receiving,
and finance should be asked to comment on their satisfaction with the supplier
improvement process and results. The bottom line is to evaluate whether the current
system is motivating the company and its suppliers to improve.
This is an important issue to consider because suppliers typically receive many audits
from its customers (1-2 months) and from ISO auditors, and from governmental bodies.
The company’s system has to be viewed by the supplier as something to pursue,
producing cost savings and quality improvement that cannot be attained through
separate means. Otherwise, the company might as well use the ISO, QS, VDR, TS, or
AS standards to assess the supplier’s quality system. But the fact that most Fortune
1000 companies have their own unique surveys demonstrates that company-specific
quality and business surveys will continue to be used. Based on our experience and
work with supply management groups, we have observed that the following criteria can
be used to assess supplier capability and gain supplier acceptance of the customer’s
improvement process:
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Management Responsibility Material Control
Quality System Control of Test Equipment and
5S System Gauges
Continuous Improvement Training Packaging, Handling,
Storing, and Transporting
Corrective and Preventive Action
New Product Introduction
Customer Satisfaction
Inspection Planning and Process
Design Control
Safety and Environment
Drawing Control
Lean Manufacturing System
Process Control
On Time Delivery Process
Supply Management
Once the analysis phase is completed, the company is ready to develop action plans to
address the deficiencies noted and the problems with its current system.
Action Planning
The company is now in a position to develop an action plan, when implemented, will
provide the company and supplier with a value-added system capable of producing vast
improvements in the supply base. Based on our experience, actions typically are
needed as follows:
Development of a new diagnostic tool
Training of Auditors, CI staff, and Suppliers

Alignment of resources
Renewed improvement goals
Prioritization of suppliers for improvement
Benchmarking to develop best practices
Piloting of the new process
Introduction of the tool in the supplier selection process
We will also provide a brief case study that provides an overview of the current situation
with a supplier in the electronics industry from a supplier improvement standpoint. We
will demonstrate how the model can be used to enhance the company’s current process
and provide the basis for substantial supplier improvement.
Conclusion
Few companies have an effective, structured and value-added supplier improvement

process. This is primarily due to the lack of a process of ensuring ongoing supplier
improvement that includes the resources required to accomplish the needed
improvement. By using a structured process, companies will have a more consistent
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way of determining the status or maturity of the supplier’s quality system and to develop
an organized plan for improvement, which potentially could be for suppliers to reach
specific world-class benchmarks. The proper resources should be applied and long term
goals should be set, along with supplier input. The entire process should be evaluated
for completeness and output quality.
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