Targeting a more resilient, cost-effective supply chain, many manufacturers are looking to reduce the number of their suppliers and optimize inventory holdings. But how do you know which vendors most effectively deliver "on-time, in-full" deliveries against orders? Or which suppliers deliver consistently high quality goods as measured by the number of rejects?
Supplier performance management works best as both a daily operational process and a periodic review. However, most manufacturers miss that "right-time" analysis, relying on after-the-fact reports that are delayed and siloed within one department or for one supplier. Only full transparency within the organization and with external suppliers can provide a company with a true assessment of supplier performance and work with suppliers to improve overall supply chain performance.
A New Approach
In the past, supplier management was conducted as a periodic review using static information, typically a scorecard that examined primarily financial and contractual obligations. However, ongoing supplier evaluation, against criteria that include qualitative and quantitative aspects of performance, should be part of a holistic approach to supplier management and supply chain optimization.
To be effective, supply chain and supplier performance management must continuously examine the complete value stream that, in most companies, will span multiple internal and external entities. This continuous performance improvement approach requires:
- Extracting relevant performance information from all entities involved in the supply chain;
- Ensuring that performance information is up to date and presented in a timely manner to everyone involved in managing the supply chain; and,
- Delivering actionable performance information by making it interactive, providing context and enabling intuitive analysis for better, faster decision making.
Critical metrics — related to cost, on-time delivery, quality of goods and services, shipping and logistics, and inventory — should be used for two distinct purposes: periodic reviews of supplier performance and continuous performance improvement of the overall supply chain.
Regular Supplier Review
This combination of periodic and continuous performance reviews is necessary to effectively evaluate and rank suppliers. By doing this, companies can reduce the number of suppliers to as few as possible while still maintaining high-quality supply for all components and alternate suppliers for critical components to provide redundancy of supply. The review period will vary depending on the supply frequency as well as on whether there have been supply, pricing or quality issues.
Ideally, suppliers will have ongoing access to the same information used to evaluate their performance. Software-as-a-service (SaaS) is well-suited to enabling multiple people from different organizations to access consistent, relevant, authorized information. SaaS solutions can provide ubiquitous access to data across the Internet, while no company has to allow employees from external organizations behind their firewall. Allowing suppliers to regularly view authorized information ensures they know how they are being measured and allows them to correct problems.
Additionally, using an interactive approach to the review, facilitated by an interactive performance dashboard, enables participants to collaboratively examine and understand performance, identify opportunity areas for improvement and determine new goals and objectives. For example, if there has been an issue in meeting on-time deliveries, the supplier and the manufacturer could interactively drill into details (such as component type, location, shipping method, lead times, etc.) to determine if there is a consistent cause and then work together to determine if a change in process within the manufacturer, supplier or even a third party could eliminate the issue.
Case Study: Vendor Measurement and Ranking
As part of an overall supply chain optimization initiative, an Australian manufacturer needed to reduce their total number of vendors. The manufacturer turned to the performance management platform from my company, myDIALS, in order to measure and rank vendors.
The focus of the initiative is on managing supplier deliveries, both from internal divisions as well as external suppliers. This includes continuously improving supplier performance, and hence supply chain effectiveness; and periodically reviewing and ranking suppliers to determine which should be discontinued.
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While the primary user community is within the manufacturer, metrics also are made available directly to their suppliers (suitably restricted to information pertaining to each individual supplier) so they can use the same metrics to monitor and manage their own performance. This also ensures that there are no surprises during the periodic review.
Examples of this manufacturer's performance metrics include:
- Deliveries on time;
- Delivered item and batch quality metrics, including defects per million parts (DPM) and batch non-conformances (NCR);
- Detail on time/late analysis with cause codes;
- Issues and incidents related to transport, quality, stores, demand planning, new items and data deficiencies.
The supply chain management team within the manufacturer receives proactive alerts highlighting overdue orders as well as orders due in the next five days. They are then able to drill into the performance metrics by supplier and warehouse to determine where the issues lie. They can also determine the impact to specific product lines and customers and therefore do risk assessment and work directly with their suppliers and customers to mitigate the impact of supply chain issues.
The five-day look ahead allows them to proactively manage suppliers to ensure deliveries will be met and, if there are potential issues, to determine alternative supply or work with suppliers to explore ways to avoid the potential issues.
The manufacturer also is able to look at trends over time as well as aggregates and averages related to issues, non-conformance, late deliveries, quality problems and so on. This information is used during supplier reviews to determine whether a particular supplier is achieving its goals, and, if not, whether it is improving or if the supplier's quality of service is stable or deteriorating.
Initial analysis showed that as the financial crises grew, vendors that had excess capacity and wanted to receive quick payment were delivering supplies early and counting these as on-time deliveries. However, this meant that the manufacturer was paying for the products early, increasing inventory holdings and taking up warehouse space. The manufacturer identified this practice, pinpointed the associated suppliers and then reset expectations and acceptance criteria for deliveries.
Continuous Supply Chain Optimization
Beyond regular supplier review, the same performance information can be used internally and within suppliers in a supply chain optimization initiative. Continuous supply chain improvement requires a closed-loop performance improvement model as outlined in the illustration at right.
To achieve continuous improvement for supply chain optimization, companies must fully understand and characterize issues, find the root cause and determine the appropriate corrective action. This process requires:
1. Determining appropriate goals or targets for key performance metrics and monitoring results against these targets.
2. Setting up a system of proactive alerts on variances from targets.
3. Reviewing trends over time, variances from goal or period-over-period comparisons (for example, has a supplier regularly failed to meet required delivery times over a quarter, or is this issue an anomaly?).
4. Using control charts to identify abnormalities or systemic issues that will affect future results (for example, variation of quality statistics between deliveries), as well as Pareto charts to identify the most significant contributors to a particular issue or trend (such as quality rejects by component type, location or supplier).
5. Looking at cost and quality implications of moving supply for a particular component from one supplier to another if there is a cost differential (for example, what is the impact on shipping costs if we use a different carrier that offers faster delivery but at a higher cost?).
6. Performing several "what-if" scenario analyses to monitor the impact of changes, derive the expected results and then implement the scenario with the best outcome.
This performance improvement loop requires the continuous availability of right-time performance information, the ability to interact with it to filter and obtain more detail, contextual information to help understanding, collaborative capabilities to allow people to share their knowledge and "every person" analytics in order to ascertain the impact of potential actions.
Supplier performance management is a critical component in optimizing a supply chain. This is best performed not just as a periodic review process using static, scorecard type data, but as part of an overall continuous improvement approach to supply chain optimization. Using appropriate performance measures internally to drive daily supply chain performance, and sharing these measures with suppliers, will naturally align performance understanding, enabling a collaborative approach to supplier management.
These same performance measures can be used interactively during supplier reviews to identify issues as well as opportunities for performance improvement. Suppliers can proactively manage their performance to achieve goals and objectives, and common measures can be used across suppliers as part of their ranking when a company is looking to reduce its total number of suppliers.
About the Author: Wayne Morris is CEO of myDIALS, which delivers SaaS-based operational performance management solutions to the manufacturing, oil and gas, utilities, healthcare, financial services, government and mining industries. More information at www.mydials.com.
