Smaller companies often do not believe that they can do much about evaluating and managing supplier performance. The oft-repeated phrase is, “We can’t because we’re small.” However, I’ve found the reverse is true in many cases: We can because we’re small. Smaller firms have an ability to be agile and move quickly, unimpeded by the size and bureaucracy of larger companies.

Smaller firms who do not pay attention to important suppliers can suffer consequences such as not being able to satisfy their own customers and losing business. Another way to view this challenge is: what are the risks of doing nothing? Most approaches and software solutions in supplier performance management (SPM) are oriented toward larger companies. Smaller firms typically do not have the budget or the bandwidth to implement a comprehensive SPM process. Often small companies buy from supplier firms who are far larger than they are and whose attention seems fruitless to try to get.  What, if anything, can a small firm do?

Here are 5 ways small companies can evaluate and manage supplier performance:

1. Determine who your most important and strategic suppliers are. You want to focus on the vital few, not all suppliers. Focus your efforts on those suppliers who could potentially impact or even cripple your business from a performance failure, such as late deliveries, poor quality, or general lack of responsiveness.
2. Develop relationships with important suppliers, even your larger ones. There is no silver bullet for improving the performance of a much larger supplier firm. However, good relationships with several contacts at a larger firm help open the lines of communication to solve problems and can help you develop internal advocates for your company when problems arise. For more information on this subject, see my previous blog post on this subject.
3. Make it easy for your suppliers to do business with you. Some approaches include making sure that suppliers understand your requirements (exactly what you need and when) and communicating any problems that may impact their ability to do a good job for you (e.g., schedule changes, financial issues, etc.). And if you cause a supplier problem, find out why. Then make the changes necessary in your firm to prevent a recurrence.
4. Track and share supplier performance with suppliers. If you are small and can’t buy a supplier performance management solution, there are alternatives. If your enterprise management system has a supplier scorecard function, use it to track several rudimentary KPIs (Key Performance Indicators). If not, try an inexpensive or free approach such as: Tracking your top 10 suppliers using a spreadsheet.  Or, use a simple supplier performance evaluation template, such the ones available for free at SupplierEvaluations.com or here.
5. Communicate with key suppliers: your goals, your requirements, your performance expectations, performance feedback, and generally about ways to solve mutual problems.

Putting SPM and supplier relationships onto your firm’s agenda is vital to the health of a business of any size. Here’s another recent article on the subject, “Working with Vendors” by Eric P. Bloom.

-Sherry R. Gordon, Author of Supplier Evaluation and Performance Excellence

A few weeks ago I was attending a meeting of my local ISM chapter. I was speaking with the purchasing manager for a local college about supply risk and mentioned the risk track and the session at the ISM Conference in San Diego in April, “Understanding and Choosing Supply Risk Solutions: Software, Content and Analytics” that Jason Busch (Editor, Spend Matters) and I are giving on April 28th. He replied that he didn’t have the budget to attend the conference nor did he have the resources even to think about buying a supply risk software solution. Was there anything someone in his situation can do? I told him that there are still things a smaller organization can do to address supply risk, even if they can’t buy a software solution. The key: know your suppliers.

Here are some of my suggestions about the most important things small businesses can do to reduce supply risk are:

• Make sure you have a good process for selecting suppliers
• Determine who your critical suppliers are
• Develop closer business relationships with those suppliers and get to know them
• Understand their business issues and challenges
• Measure and understand their performance

For a small business, none of the above requires fancy software. And none of those items cost anything other than time. Sure, it would be easier to have a supplier performance management system to measure supplier performance. Being small can (and should) mean fewer suppliers to get to know and track. Just the vital few; that is, the 20% of suppliers who have the most impact on your business. Understanding their performance can be done with a few simple metrics and even using Excel spreadsheets to track them. Or simple survey tools on the Web to ask your internal stakeholders about how suppliers are doing. Understanding supplier performance is probably the best and most underrated way to prevent supply risk.

Being a smaller business can give the advantage of not being stuck in an airless silo and not knowing what’s going on in the other silos or the rest of the business. You may have to wear more hats and therefore have a broader perspective on the business than your large-company compatriots. And as long as you don’t let suppliers turn into an airless silo unto themselves, then you can reduce the chances of a risk buildup that can explode unexpectedly.

-Sherry R. Gordon

Looks like it’s really all over for NUMMI, the Toyota/GM joint auto manufacturing venture in Fremont, CA. Last summer, I wrote a post about the strong possibility of Toyota’s closing the plant (NUMMI: Things Are Looking Gloomy). The plant was losing money. Located in a high-wage area, even potential UAW concessions didn’t seem like enough to allow the plant to continue. And now Toyota has decided to close the plant in April as a result of GM’s pulling out of the joint venture when it filed for bankruptcy. Toyota couldn’t do it alone.

Besides the loss of 4700 jobs at the NUMMI plant, the toll on suppliers will be even greater, according to a December 24th Wall Street Journal article (subscription required). According to Bruce Kern, executive director of the East Bay Economic Development Alliance, tens of thousands of people work for first and second-tier suppliers to the plant. His organization is working on finding new business for some of these suppliers. While Toyota plans to continue use the top 25 suppliers, this still leaves many suppliers without their key customer. Many suppliers have had nearly total dependence on the auto industry and have not diversified. It looks like another blow to the California economy from this closing, one that will reverberate through the NUMMI supply chain.

While another WSJ article describes many suppliers to Detroit automakers as surviving the downturn better than expected, though perhaps not well-poised financially for any big ramp-ups, these suppliers appear to be in potentially worse shape. Many of the NUMMI suppliers are small businesses that have not gotten the credit and considerations that saved some of their larger Detroit brethren from bankruptcy. Of course, the threat of the NUMMI closure and its economic impact has been hanging over the supply chain for quite some time. It appears that some of the suppliers have faced the problem head-on as soon as the automotive downturn started and have been proactively pursuing other business opportunities to stay afloat. But how many of the suppliers did not? And how many can get enough new business to survive?

Because NUMMI was focussed on using lean manufacturing principles and practices that were flowed down to its supply base, there should theoretically be quite a few well-run suppliers who could be suppliers of choice for other industries, should they have the capabilities to make the transition to supplying products that take advantage of their core competencies. A few things are working against them, however. Not to make too many gross generalizations, but many manufactures are better at operations than sales. Customer diversification for a small company identified with the automotive industry is a huge challenge. Lean companies will have an advantage in eliminating waste, doing more with less and being suppliers of choice. Lean can help spur growth and give competitive advantage, but only when there are growth opportunities to take advantage of. Lean suppliers may be able to survive longer than their peers, but only if they find enough business to keep them afloat and new customers to enable them to thrive.

-Sherry R. Gordon

While American auto suppliers have not been directly bailed out, many have survived due to the bailout of their customers, GM and Chrysler.  No so for small Italian suppliers.  According to a WSJ article, the Italian auto industry has not received government bailout money. So the auto supply chain, comprised of much smaller suppliers than the American auto industry, is seriously hurting. As the worldwide recession has reduced auto sales and the euro has strengthened against other currencies, small Italian factories are smarting from drastically reduced sales. Interestingly, instead of blaming the government, they are blaming the banks for not extending them credit as they used to. An underground movement of sorts, using social networking and blogging, has arisen to address this crisis and put pressure on banks to allow these suppliers to continue to overdraw their accounts to receive credit needed to survive. The political pressure has supposedly caused some easing of credit among banks for these factories.

The comparison with the American auto industry is interesting. The situation here may not appear as dire, but it is still just as problemmatic as the situation for the small Italian suppliers.  Bank credit continues to be a problem for small companies here though some of the larger suppliers got a government “lifeline” of $5B in credit. And now with smaller banks going belly up in record numbers due to risky loans, banks are still unwilling to loosen up their credit for an industry whose future seems uncertain as they risk suffering the same fate as the less fortunate or savvy and now defunct banks. Auto suppliers need credit to fill customer orders and grow. Yet, the safety of betting on such suppliers in a troubled industry is uncertain.

There is one interesting difference between small American versus small Italian auto suppliers. Some Italian suppliers, like many of their European counterparts, have been stashing money in Swiss banks. So they may need to get the money out to repay the banks for previous credit. To encourage this financial repatriation, some European governments are offering a tax amnesty.  Small American auto suppliers, as far as I can tell, don’t have a stash of cash, either taxed or untaxed,  to tap into.

-Sherry R. Gordon

I read today’s WSJ article about how customers are using their suppliers to improve their own cash flow: Big Firms Are Quick to Collect, Slow to Pay  and thought, same old, same old. I addressed this phenomenon in an early blog post: Another Kind of Banker – Your Supplier?  This situation has been going on at many large firms for years, but currently seems to be at its worst. Big firms demand rapid payment from the firms who owe them money and at the same time string out payments to their smaller suppliers for months. It’s the underground banking system. And larger firms seem to get away with this behavior with impunity. Well maybe not quite. And at what cost?

In addition to the financial strain and potential breakdowns of suppliers put under financial duress, using suppliers as banks is a time-honored business practice with a short-term view. But this time the chutzpah of some of the customers has grown to the point where they’re stringing out the payments for long as 120 days. The ethics of this approach are poor.

Considering that in this current economy, smaller companies are unable to get the bank credit of the larger companies who are following this cash generation approach are able to obtain, the potential results are dangerous. These larger businesses won’t have their smaller suppliers to kick around any more. One reason is that the cash crunch has or will put many of them out of business. Or, in the inevitable “what goes around, comes around” cycle of business, the surviving suppliers will never work with these customers again. Memories of poor treatment, forced concessions, and being squeezed are long among suppliers. Even as smaller suppliers continue to work with these deadbeat customers now in order to get paid, supplier service levels and responsiveness will slow out of necessity. The corollary is that memories of good treatment are equally long. Those customers who treated suppliers fairly during bad times will create long-term loyalty and a willingness from suppliers to give concessions in order to continue the relationship.

Supply managers and buyers have always had the challenge not just of finding suppliers but finding suppliers who are both high-performing and “best value”. Numerous supplier evaluation and supplier performance management software solutions are now available, where ten years ago very few options existed. Most options that I’m aware of are either SaaS (software as a service) or licensed software solutions that are typically targeted at medium to large-size companies. The choices for software solutions for evaluating suppliers have certainly increased since the days when I was in the supplier evaluation software business. In fact, the whole supplier information and supplier performance management solutions market has heated up as companies are becoming more concerned about the impact of supply risk and supplier performance issues.  For a further description of this market, you can read an analysis that appeared on the Spend Matters blog.

However, some challenges still remain: finding good offshore suppliers and providing small to medium-size businesses with affordable, yet effective supplier evaluation options.  While there are options for finding offshore suppliers or suppliers from developing countries, there are none that I’m aware of that give buyers a good, cost-effective way to know how good these sources really are. 

I thought I would alert readers to a new site for finding and evaluating suppliers – SupplierEvaluations.com. It is based upon a social networking, B2B approach where a community of buyers and supply managers, using an evaluation template and process provided by the site, evaluates suppliers and shares the evaluations with other members of the community. Supplierevaluations.com expects to be operational by mid-September. Users can sign up now to participate when the site goes live.

I recently wrote a post for the Spend Matters blog, “12 Reasons Why Supplier Scorecards Fail” (updated, with one additional reason than my original post  on this site in December 2008). There were some insightful comments, including one about the customer’s role in supplier performance success. Rob Handfield made a pertinent comment that it is often the customer who causes supplier performance problems and that customers should ask their suppliers to score their performance. This was the conclusion of a study that Dr. Handfield presented at the 2009 ISM Conference.  Some of the twelve customer competencies Dr. Handfield cited in the presentation were: ease of doing business, timely payments, communications, forecast accuracy and customer service (on the customer side).

When I began running the New England Suppliers Institute, a non-profit organization partially funded by Air Force ManTech through the TRP (Technology Reinvestment Program), the original mission was to improve the competencies of the supply base in New England so that manufacturers would be able to choose more local suppliers and thus help strengthen manufacturing base and the New England economy. But we ran into a snag. The customer companies also needed to improve their competencies as customers in order to get better performance out of their suppliers. We found poor practices rampant: less than lead-time orders being the rule rather than the exception, lack of communication about the simplest of processes (or no knowledge of whom to contact at the customer to resolve problems), goods that sat on the customer’s dock for days waiting to be accepted while at the same time dinging the supplier for a late delivery, long accounts payable cycles that threatened to put suppliers out of business. The list goes on. Then one day, one of our board members said, “It’s the customer, stupid.” (paraphrasing Bill Clinton’s campaign slogan, “It’s the economy, stupid.”). When our board members from customer companies were asked what percent of supplier performance problems were attributable to customer issues, they all agreed that the number was more than fifty percent. Needless to say, the supplier board members strongly agreed.

For suppliers to succeed, we realized that change had to occur on both sides of the customer-supplier equation, that it was not just a matter of getting suppliers to do a better job. Out of this realization we developed a process called the Supply Chain Management Improvement Process, designed to evaluate customer competencies in supply management from a process, system, and enabling behavior viewpoint and based upon a robust business model. Also, I wrote an e-book on the subject entitled, Improving Company Performance Through Supply Chain Management Practices. (Lionheart Publishing, 1999). And, we modified the mission of the New England Supplier Institute to include “improving business relationships between customers and suppliers” rather than focusing solely on supplier development and improving supplier operations. It was clear that supplier performance could not reach its potential without changes on the customer side of the equation.

I was recently interviewed by business columnist Jamie Herzlich over at Newsday for an article she recently wrote, “Small Business: Choosing the Right Supplier.” (May 14, 2009)  Many businesses are struggling with the challenge of how to choose the right suppliers. According to Ms. Herzlich, many business owners are unaware of what to look for in a supplier beyond just getting the lowest price. To summarize the key points in the article, businesses are advised to:

1. Look at total cost instead of choosing the supplier with the lowest price, as it is important to balance other important elements such as quality, delivery, and service.

 2. First determine your business’ requirements. This will help you figure out whether a supplier can meet your requirements. If your company has to meet stringent customer standards, then so will your suppliers in order for your company to be successful.

 3. Consider making a site visit to a supplier to see their facility firsthand, meet their management, and help increase your knowledge of and comfort level with the supplier.

 4. In some cases, using a distributor may be a good option for small companies, particularly those who want to buy in smaller quantities than buying directly from manufacturers will permit. This will help keep one’s inventories lower.

 5. Keep the lines of communications open and develop good relationships with suppliers to help work through changes and problems as they occur.