Executive report of key results of recent research on supplier development strategies and outcomes



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Executive REPORT of KEY results OF recent research on supplier development strategies and outcomes

Prepared by Robert Handfield, Director

Supply Chain Resource Consortium

North Carolina State University

College of Management



http://scrc.ncsu.edu

(843) 814 5494


for
Jon Stegner

Director, Supply Management

Delphi Automotive

Detroit, MI


Executive REPORT of KEY results OF recent research on supplier development strategies and outcomes
Summative overview
This executive summary provides key research results based on recent research on supplier development from the following sources:


  • Daniel Krause, Doctoral Dissertation, Arizona State University (1994)

  • Handfield, Robert and Krause, Daniel, Supplier Development Module Report, Global Procurement and Supply Chain Benchmarking Initiative, Michigan State University (1996)

  • Krause, Daniel and Handfield, Robert “Developing a World-Class Supply Base”, CAPS Research Report, Center for Advanced Purchasing Studies: Tempe, Arizona, 1999.

  • Handfield, Robert, Krause, Daniel, Scannell, Tom, and Monczka, R., “Avoid the Pitfalls in Supplier Development”, Sloan Management Review, vol. 41, no. 2, Winter 2000, pp. 37-49.


Results of this research indicate that:




  • Supplier development strategies can result in significant improvements in supplier performance, including

    • Reducing product defects by 5 - 90%,

    • Improving on-time delivery by 6 – 15%,
    • Reducing order fulfillment cycle time by 30 – 80%,


    • Improving product performance by 10 to 30%

  • Not all supplier development initiatives are successful – in fact, as many as 50% are not successful, due to poor implementation and follow-up.

  • Most firms engage in reactive supplier development approaches (which addresses sporadic problems), as opposed to strategic supplier development approaches (which addresses continuous improvement of the entire supply base)

  • Approaches to supplier development include rewarding performance (“The Carrot”), penalizing poor performance (“The Stick”), on-going detailed assessment and feedback (“Measurement”), and direct involvement in suppliers’ operations (“Hands-On Approach”)

  • Research on which approach is most effective suggests that a combination of approaches may be appropriate under different circumstances, depending on the nature of the supplier, the type of commodity, and the management team at the supplier.


Executive REPORT of KEY results OF recent research on supplier development strategies and outcomes
defining supplier development
Companies now know that suppliers of critical goods and services can provide major competitive benefits, in the form of lower costs, improved quality, on-time delivery, technological innovation, and customer service. As firms seek to globalize their businesses, they must also bring with them a capable supply base that can likewise support these global initiatives into new markets and businesses, as well as drive costs out of the supply chain. In our studies, we employed the following definition:

Supplier development is a bilateral effort by both the buying and supplying organizations to jointly improve the supplier’s performance and/or capabilities in one or more of the following areas: cost, quality, delivery, time-to-market, technology, managerial capability, financial viability and environmental.”

In employing this definition, it is important to identify the hierarchy of strategies that must be established prior to deployment of these practices. As shown in Figure 1, firms often begin the process of continuous improvement through extensive internal training programs to educate company and purchasing personnel in basic TQM principles. Training is often carried out by quality department managers, using two to three day seminars on continuous improvement, customer satisfaction, basic statistics and process capability. These initiatives later mature into a focus on the goal of assessing supplier performance. Organizations at this level realized that in order to improve material quality and performance, a history of supplier performance is necessary for future effective decision-making and sourcing strategy formulation. Key measures of quality include percent acceptable vs. rejected lots, parts per million defective, warranty percentages, reliability, process capability ratios, percent parts rejected, and internal/external customer satisfaction. Practices also included developing a cooperative approach to setting specifications, listing of "problem" suppliers, definition of target quality levels, employing common measurement systems across strategic business units, and pre-qualifying suppliers.

Once assessed, companies often focused on consolidation of volumes with fewer suppliers, in order to eliminate those suppliers incapable of meeting expectations. Supplier databases often pinpointed those suppliers consistently unable to perform, resulting in fewer suppliers getting more of the business. This “first cut” of reducing the supply base is often fairly easy to implement, as non-performance is easy to identify once an assessment system is in place. Almost all of the companies who responded have already gone through several rounds of supply base reduction, and are closing in on optimizing their supply base to an appropriate number of suppliers. Many of these practices were implemented during the 1980s and early 1990s.

The focus of this report is therefore targets those organizations seeking to improve the performance of those suppliers remaining in an optimized supply base.

Results from a large scale survey of over 500 supplier development efforts by Krause (1994) indicates that respondents found that supplier development results (measured as supplier performance before the development effort versus after) included:


  • reductions in incoming defects by 6.2%

  • improvement in on-time delivery by 21%

  • reductions in order to delivery cycle time by 12 days

  • improvement in orders received complete by 8%.

However, results (shown in Figure 3) also suggested that not all of the buyers surveyed were satisfied with the outcomes of their supplier development efforts. Moreover, some supplier development efforts actually resulted in deterioration in the level of satisfaction. This was particularly true with respect to supplier performance in product innovation and ability to reduce total cost. A Supplier Development manager at Chrysler noted that:


Some suppliers do not respond after multiple interventions. Even though they are “saying the right things”, nothing happens. Involvement with suppliers spans between 6 months and 1.5 years on average. 80% of the time, there are significant performance improvements. In 20% of the cases, there are none.)


strategic versus reactive approaches to supplier development

In 1996, another research effort was initiated through the Global Procurement and Supply Chain Benchmarking Initiative, focusing on supplier development best practices. This research studied written responses from 84 companies to questions regarding supplier development practices, as well as responses to a survey.


As shown in Figure 4, companies employed a diverse set of supplier development strategies. Moreover, these approaches can be classified into supplier-specific improvement projects, or efforts to improve the capabilities of the entire supply base. Further, initiatives either focused on product-level or process-level improvements.
Companies reporting in the study were classified as belonging in one of two categories: those firms focusing on Strategic Supplier Development, or Reactive Supplier Development. The former group of companies (n=50) were focused on actively concentrating their efforts on improving the long-term capabilities of suppliers of the most important commodities, while companies with reactive supplier development strategies (n = 34) adopted an ad hoc response to eliminating supplier deficiencies.
As can be seen in Figure 5, companies employing a strategic approach to supplier development often focused on improving capabilities of the entire supply base, and then “funneled” these efforts into supplier-specific improvements. On the other hand, reactive companies typically “reacted” to major deficiencies that arose as a result of a “crisis” situation, (described by one manager as a “burning platform”!)


Figure 6 shows some of the other major differences between reactive and strategic supplier development approaches. Moreover, strategic supplier development approaches focus on allocating resources for supplier improvement, with an objective of continuously improving the supply base in the long term. This process is undertaken by an executive-level assessment of critical commodities and suppliers, followed by a focused improvement carried out by a commodity or development team.


Respondents were asked (using an open ended question) to identify the five most important circumstances, events, or requirements that would be classified as drivers for supplier development. Figure 7 shows the percent of respondents within a specific classification (strategic or reactive) that identified the associated driver. For example, 16 of the 50 firms classified as “strategic” identified the goal of developing a strategic partnership as a key driver of their development efforts. The “Diff” column represents the difference between the two groups.
Figure 7 - COMPETITIVE PRIORITIES


Driver

Strategic (n = 50)

Reactive (n = 34)

Diff.

Strategic Partnership

32 %

15 %

17 %


Technology

34 %

24 %

10 %

Amount or Criticality of Business

10 %

3 %

7 %

Standardization

4 %

3 %

1 %

Price/Cost

64 %

65 %

- 1 %

Lead Time/Delivery/Process Reduction

34 %

35 %

- 1 %

Competitive Advantage

2 %

3 %

- 1 %

Minority/Small Supplier Development

6 %

9 %

- 3 %

Volume/Quantity/Capacity

10 %

18 %

- 8 %

Quality

62 %

79 %


- 17%

Supplier Service / Support

6 %

24 %

- 18 %

Customer Service / Feedback

14 %

38 %

- 24 %

By examining the upper and lower quartiles of the differences between strategic and reactive companies’ key drivers (shaded areas), the differences in the focus of their development efforts emerge. Firms employing a strategic approach to development are more likely to be driven by the proactive need for strategic partnering, technology development, and a focused effort to improve performance of high volume critical commodities that have a major impact on the business. Reactive firms are more likely to be applying “remedial” approaches for suppliers that represent an immediate crisis or “burning platform”.


Figure 8 - SCOPE OF SUPPLIER DEVELOPMENT STRATEGIES


Number of suppliers currently involved development programs

Strategic (n = 47)

Reactive (n = 34)


Diff.

0 to 5

10.6 %

17.6 %

- 7.0 %

6 to 10

8.5 %

8.8 %

- 0.3 %

11 to 15

6.4 %

17.6 %

- 11.2 %

16 to 20

6.4 %

0.0 %

6.4 %

21 to 25

10.6 %

8.8 %

1.8 %

26 to 30

4.3 %

11.9 %

- 7.6 %

31 to 50


8.5 %

8.8 %

- 0.3 %

50 and up

44.7 %

26.5 %

18.2 %

Total

100 %

100 %



Respondents also identified the total number of suppliers currently involved in development programs by choosing the category that best described their situation. Figure 8 indicates that strategic companies became involved in the development of a wider segment of the supply base, (in a majority of cases, fifty or more suppliers.) Reactive companies generally focused on a smaller group of suppliers. These summary statistics lead us to believe that reactive companies are in some cases still in the process of “rightsizing” their supply base, in eliminating poorly performing suppliers.


A manager at Chrysler noted the following:

Supplier Development has been talked about for a number of years at Chrysler, but in my opinion, this was largely “lip service”. Only recently has the company actually implemented development as a formal activity. Up to now, 80-90% of supplier development has been reactive in nature, and 10-20% strategic. Chrysler’s objective is to reverse this ratio, so that 60% is strategic and 40% reactive. This can be achieved by anticipating (proactively) problems before they occur by getting involved in Advanced Quality Processes early in the new product development cycle.

strategic supplier development process
As noted earlier, the primary differentiator between the strategic and reactive approach is a focus on identifying critical commodities and suppliers requiring development, with the driver being a strategic intent to improve the overall performance of the supply base. The following section describes the process model that we developed to describe activities used by leading edge companies in deploying a proactive, strategic approach to supplier development.

In the process shown in Figure 9, we differentiate between executive level and commodity team level decisions. The initial steps in the process (Steps 1 and 2) are typically carried out by an executive-level team, and are often driven by a corporate-level procurement / supply strategic plan. The remaining steps, involving specific commodity and supplier development approaches, are typically formulated, implemented, and monitored by a cross-functional commodity team, and often involve dedicated supplier development personnel. For further details on the steps involved in this process, refer to the GEBN Supplier Development Module Report


results of strategic supplier development process
Once a development project has been initiated, progress must be monitored and tracked over time. Moreover, an on-going exchange of information is needed to maintain momentum of such projects. This can be achieved by creating visible milestones for objectives, updating progress, and in turn creating new or revised objectives based on progress to date. Project planning may require modifications to the original plan, additional resources, information, or priorities depending on events.

Both strategic and reactive firms used formal supplier certification/supplier recognition programs in their development efforts. Approximately 69 % of the strategic firms and 73% of the reactive firms use formal supplier certification/supplier recognition programs. However, the results in Figure 10 show that strategic companies achieved higher performance relative to prior performance levels for their most successful development initiative, and were better able to identify suppliers requiring improvement in areas such as cycle time, quality, total cost, delivery, customer services, responsiveness, and other areas.

Note that in all cases strategic firms more achieve a wider range of benefits more frequently than reactive firms. This may indicate that strategic firms are focusing development efforts across the supply base and are better at actively identifying, with supplier involvement, all of the issues that need to be addressed using a systematic approach.
Figure 10 - SUPPLIER PERFORMANCE


Performance Area

Strategic (n = 50)

Reactive (n = 34)

Diff.

Order fulfillment cycle time

74 %

50 %

24 %

Inventory turns

66 %

47 %

19 %

Inventory obsolescence

50 %

32 %

18 %

Logistics performance

56 %

38 %

18 %


Process productivity

62 %

44 %

18 %

New product/process/service development time

64 %

47 %

17 %

Quality

90 %

76 %

14 %

Product/service cost

88 %

74 %

14 %

Employee satisfaction

38 %

24 %

14 %

On-time delivery performance

84 %

71 %

13 %

Total supply chain costs

68 %

56 %

12 %

Customer satisfaction

64 %


53 %

11 %

Technology continuity

44 %

35 %

9 %

Leading companies have successfully maintained momentum through a variety of mechanisms, including supplier participation on supplier councils, internal and external newsletters, and communication of key results via supplier performance reports.




HARD ReSULTS
The reporting of specific results of supplier development initiatives was somewhat limited, due to the broad scope of these activities and the difficulty of identifying specific improvements associated development. The following sets of hard results were reported:
Quality


  • 90% reduction in defects in 3 years

  • 30% improvement in incoming acceptance rating in one year

  • 4% improvement in meeting specifications

  • 30% Scrap reduction

  • Cpk improvement from .65 to > 1.00

  • 80% to 90% improvement of PPM defective

  • Improvement in quality rating from 99.72% to 99.84% in 4 years

  • 100% avoidance of process shutdowns

  • 24,000 PPM reduced to 2700 PPM


Delivery


  • 7% Stock availability improvement
  • 100% on time delivery (several companies)


  • 94% of line items filled within lead-time

  • 26%% improvement of on-time delivery

  • 6% on time delivery improvement

  • 15% improvement of on time delivery


Cost


  • $3 million in 6 months

  • 10% reduction in price and freight cost

  • $1million to $2 million cost avoidance

  • 16% reduction in previous purchase prices

  • 5% price/productivity improvement

  • 8% improvement in total cost

  • 35% improvement in price per unit

  • 11.4% cost savings per year

  • 10% cost reduction


Process Technology


  • 10% improvement in operational terms

  • 30% improvement in concept to customer cycle time over industry average


Cycle Time


  • 28 days of inventory reduced (30 to 2 days)

  • 41% improvement in cycle time (110 days to 65 days)

  • 30% -83% lead-time reduction

SOFT ReSULTS

Additionally, companies reported a number of non-measurable “soft” results occurring due to supplier development initiatives:


Communication and Relationships


  • Growing alertness/awareness on quality and consistency in the supplier’s organization. In some cases, have developed a system with early warning on quality deviations.

  • Faster, quicker decision-making

  • Improved communication with other internal functions

  • Awareness of business objectives, and more trust and acceptance of responsibility to delivery new business processes


  • Supplier clearly understand the business and how their products are used, as well as their impact on our processes

  • Loyalty between partners

  • Establishment of strategic alliances resulting in mutual gains for mutual benefits

  • Suppliers see a benefit in having a group that is helping them improve.

  • Relationships improve which helps in gaining quicker agreement on direction and speeding implementation

  • Process understanding by both programs


Delivery
Globalization

  • Supplier expanding from being a local supplier in one region to a global supplier with a sales increase of 57%


Productivity

  • Better contribution of manufacturing resources per man-hour

  • Reduction in manpower requirements

  • Less than 50% of internal resources required compared to 5 years ago


Environment / Safety

  • Improved safety performance on-site

  • Improved environmental compliance, avoidance of fines, and reduction of hazardous materials storage

  • Reduction of lost time injuries

  • Reduction in hazardous waste disposal


New Product Development

  • Increased number of supplier ideas and suggestions

  • Improved new product launch

  • Technology sharing


Customer Satisfaction


  • Improved customer satisfaction
  • Improved communication between supplier and field personnel that actually use the end product, leading to a better understanding of actual processes and application of service / material


  • Improved relations between buyer’s plants and seller’s customers

  • Enhanced synergy between engineering and procurement groups at both customer and supplier, benefits of transferred resources

  • Good public relations


Supply Chain Management


  • Management of second tier suppliers increased substantially

  • Just-in-time delivery by local warehousing and supplier personnel to company location

  • Greater supplier use and number of orders released via EDI

  • Improved rail car management

  • Improved information sharing

  • Improved product availability

  • More stable supply

  • Improved planning and forecasting and supply chain integration

  • Reduction of inventory buyback and surplus inventory

  • Reduced contract management and improved logistics processes

  • Significant inventory reductions and savings in total cost of goods

  • Greater participation in information systems designed to reduce internal processes and handling costs of purchase orders

  • Evolution of delivery from no real window to a specific day

  • Reduced number of incoming inspections

  • Reduction of delivery delays

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