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

On June 17th, 2010 at midnight, someone got by PR Newswire’s vetting process and issued a fake press release about cereal maker General Mills. The press release falsely claimed that President Obama was launching an investigation into General Mill’s supply chain. The press released was confirmed to be a hoax and immediately retracted. The Wall Street Journal reported that investors and shorted sellers have previously used false rumors as a means to manipulate stock prices. But it is still unclear how this hoax actually occured or who did it.

Several aspects of this situation are interesting. One is the use of a false rumor about a major corporation’s supply chain as a means of harming that corporation. This event illustrates how important the integrity and functioning of supply chains have become to the overall success of a company. But what’s even more interesting is how universal the understanding of a supply chain’s importance has become. Until the last few years, when various supply chain events such as food, drug, and consumer products contamination and other failures became widely known,  supply chains were a weird term that only some manufacturing and purchasing geeks cared about. If you mentioned that you were involved in supply chain management at a cocktail party, people would nod politely, glaze over and change the subject. The general public’s personal interest has increased at least in terms of awareness about how a tainted product might make its way to them or their children. Now the public knows that somehow supply chains make the world go round.  They are recognized as providing an essential, competitive advantage and their failure as causing disastrous results for consumers and corporations alike —  plus a public relations nightmare for corporations.

-Sherry R. Gordon

Davis Ballistracchi recently penned an insightful piece for Quality Digest, Why Did Total Quality Management Fail? One of the key reasons is management. They talk the talk, but don’t walk the walk. They sit on the sidelines, cheering employees on, but nothing changes because management doesn’t change. Management blocks the change rather than enabling it.

This piece took me back to my days as the Director of TQM for an office products distributor that was acquired by Staples. The president and owner of the company had read a lot about TQM and decided that TQM was going to be the path to delighting customers and making more money. I was hired to make the transformation. My first challenge was that very few of the employees had ever worked on a team before and had no team skills or meeting skills. So we had to start at square one in teaching basic skills before we could ever get to problem solving and continuous improvement. Employees became energized and the company was buzzing with excitement as employee-initiated change began to occur. We accomplished many good, even innovative things.

However, we hit the wall. Why? Because the president would not change his behavior. He would put on his green cardigan sweater (always a sign of trouble) and head out to the warehouse with a clipboard. There he would find problems, take notes, and order the associates around like small children. He would undo the accomplishments of the associates and “critique” them in a belittling way. He called it giving them feedback.

There was an “emperor’s new clothes” mentality at the company in relation to the president. No one dared to be honest with him, as the consequences would be ugly.  The Deming principle, “Drive out fear” was definitely absent, as the atmosphere of fear around the president was palpable.  To the horror of my fellow management team members, I would tell the emperor about the lack of clothing and the about the need for management to model and lead the change.

In all of his readings about TQM success stories, the president never noticed that change meant everyone, including him. And this man did not wish to change.

The end of my tenure at the company came in an interesting, but predictable way. The exasperated president told me that he was upset because I was not doing my job. The problem? I was foisting the responsibility for quality onto all the employees instead of implementing it myself. While he thought he was informing about my dereliction of duty, in fact, he was paying me the highest possible compliment. I had managed to make quality everyone’s, not the quality function’s job. Sadly, everyone’s job but his.

I left the company shortly after that conversation, to, believe it or not, tearful goodbyes from employees. Employees knew that it was the end of empowerment and change. Back to familiar same old, same old command and control management.

I learned several things: the importance of change starting at the top and also the difficulty of bringing about change from within. A leader who gives lip service to change but doesn’t truly embrace change ensures that change does not occur. An internal change agent rapidly loses his or her outsider status. I became an insider and was less able to bring about the change. I had been shoveling sand against the tide and experienced my own “lessons learned”.

-Sherry R. Gordon

Some people are heaving sighs of relief that Chrysler is emerging from bankruptcy in the arms of Fiat and that GM is officially in bankruptcy soon to emerge as leaner and meaner entities. However, many are left holding the proverbial bag. Who are they? The unsecured creditors who are lining up to salvage whatever they can from this mess. Two key groups of creditors are particularly important. 

The first group consists of first-tier suppliers. The Chrysler list, for example, reads like a who’s who of the top tier automotive supplier firms: Visteon (owed $25.6M), Cummins Engine (owed $43.9M), Johnson Controls ($50.3M), Ohio Module Manufacturing ($70.3M). The GM list, where the total amounts owed to unsecured creditors is far higher, exceeding $50B, and includes some of the same suppliers as well as many others.

The second group of unsecured creditors includes all the people who have product liability lawsuits pending against these two automakers. People in the midst of product these lawsuits have now joined the ranks of unsecured creditors, lining up alongside the first-tier suppliers who are owed billions of dollars. But in comparison with the first-tier suppliers, these creditors consist of the “little people”. The New York Times profiled someone who lost both legs in a Jeep Wrangler accident and who is in the midst of a product liability lawsuit against Chrysler. With Chrysler’s bankruptcy and sale to Fiat, he is finding that his chances of getting much money from the lawsuit are poor. The bankruptcies are also freezing lemon law cases as well. Consumer advocacy groups are claiming that more people will be injured by defective vehicles because “a critical public-safety protection that has been used to reduce the number of Americans hurt or killed from defective Chrysler and General Motors vehicles,” namely “the public’s right to hold these companies accountable,” has been stripped away, according to Joanne Doroshow, executive director of the Center for Justice & Democracy.

The choices here are between ugly and uglier. Those who have auto safety-related injuries are not the only ones impacted. The suppliers holding unsecured Chrysler and GM debt also stand to severely impact the lives of their own employees and the employees at their suppliers should they be unable to collect their money. Whether public safety is at risk because of the carmakers’ ability to circumvent safety procedures is not clear as the newly-reorganized companies keep the good assets and ditch the bad ones. If the auto companies attempt to and are able to skirt legitimate claims, the tarnish will remain on their new images and fresh starts and impede future success. It makes you wonder whom the bailout is helping. Or whether it is just buying time for those affected by the U.S. automotive industry to retool themselves, rather than retooling the industry itself.

The failures at Peanut Corporation of America are tragedy in every way. This supplier failed to meet both regulatory and customer requirements. Its customers failed either to uncover or report the failures, and people died as a result. Now a healthy, everyday product is suspect, and faith in the U.S. food processing industry has been shaken by tainted product. Food contamination isn’t just a Chinese problem any more. According to Lora Cecere, an analyst at AMR Research and a food supply chain expert, food safety has ranked low in the U.S. as a supply risk concern (12th out of 15 in AMR surveys). However, in China it is ranked second. The peanut scare has been a wakeup call and confidence buster about U.S. food safety.

This situation illustrates an order-of-magnitude regulatory failure, compounded by lack of state inspection resources and lack of oversight. It also illustrates a worst-case scenario of supplier risk and abdication of responsibilities.

Why did this failure occur? In quality terms, the food industry relies more on inspection than prevention (and even inspections don’t always occur or are poorly done). And it is well known that quality inspection is far more expensive and far less reliable an approach than problem prevention. Preventive versus reactive is basic when it comes to quality.

While inspection is important in the food industry, preventive actions need to be institutionalized and enforced to avoid food contamination in the first place. Inspection, in fact, should focus on assessing preventive measures in the area of quality and safety. Do we want to know how many contaminated batches of food are found? Or worse, do we want the food industry to leave quality control in the hands (or stomachs) of the customer? Or would do we want verification that that all food safety rules and cleanliness standards are in fact followed to prevent contamination?

And when supplier evaluations and inspections are outsourced to third parties, how do customer firms assess those third parties and ensure that they are not, in fact, just the foxes guarding the chickens? The complexities of the supply chain no longer allow a reliance on good intentions or lackadaisical supply chain management practices downsized in the name of cost. Since second and third-tier suppliers, often invisible or barely visible to the customer, can adversely impact our food supply, understanding their operations and performance becomes essential. Food contamination falls into the category of supply risks that can be prevented (preferably) or mitigated. They are not an unavoidable natural disaster. Not only should companies consider these risks in their sourcing strategies, but they should also have robust supplier assessment systems, including regular site visits to higher risk suppliers, to prevent the occurrence of such failures. The costs of food contamination in illnesses and deaths, lawsuits, brand damage, consumer confidence – and even company bankruptcies and job loss – are far higher than the basic sourcing and supplier management activities needed to prevent them.

In an effort to flow lean to suppliers, firms are often internally focused. They are concerned with how suppliers can support their needs and tend not to view the situation from a systems perspective. Often it is about what suppliers need to do to satisfy their customers — which is certainly an essential ingredient.  However, firms tend to focus on the invidual parts (sometimes quite literally) rather than on the whole. For example, in an effort to improve material flow in the supply chain, inventory becomes the customer’s sole focus. Meanwhile, customers may forget about the interactions among firms and the relationships that can either support or hinder progress in becoming lean throughout the extended enterprise.

Often it is the “white spaces” (I adapt this term from the classic book, Improving Performance: How to Manage the White Space in the Organization Chart) or intereactions and relationships between firms that are the least visible and least addressed, yet have great potential for harboring hidden cost drivers and for holding the keys to becoming lean. Without a functioning relationship, how can a customer begin to ask a supplier to embark on changes that may be disruptive to the supplier in the short term? On what basis would a supplier want to adopt lean practices without the promise of WIIFM (what’s in it for me)? Making substantive changes just to retain a customer’s business is not always sufficient motivation for a supplier. Without a reasonable relationship in place and a two-way flow of information between customer and supplier, the supplier’s response may be lip service without any real change. The relationship is the “soft stuff” and the inventory is the “hard stuff.” And as they say in change management and organizational development circles, the hard stuff is easy and the soft stuff is the hard stuff.

From the title, you might have visited this blog to learn more about sub-tier supplier management. Not today. For April Fools’ Day, I’m deviating from the serious and sometimes deadly boring business of supply chain and lean to talk about the trend of business networking on Linked In.  Linked In has mushroomed since I first joined several years ago. Today I’m profiling, or rather poking fun of, some of the types of people you may run into on Linked In.

Blowhards– post answers to every question, link to you so that they can send you newsletters and spam. It’s all about them – all hot air, all the time. Is this bus dev 2.0? Once you connect to a blow hard, it’s like catching the flu. Stay connected just to marvel at their chutzpah and at how much time they are willing to waste to spread their self-centered germs. Get a life.

Networking Enthusiasts – are trying to win the prize for having the most links. They see Linked In as a business popularity contest and a competitive sport. They link to hundreds and hundreds of people. Do they actually know all of these folks? Wow. They must have some social life. If you link to these people, your network will instantly grow into the millions. It would be interesting to check to see how many of their connections are actually still living.

Groupies– these folks like to join Linked In groups and collect the badges of the different groups that they join. They are the boy scouts and girl scouts of the Internet. The groups they join may never be active or add any particular value, but those merit badges sure look cool. Watch out for blowhards in these groups, who may join them to pontificate about how great they are.

The Weakest Link – someone told them about Linked In and invited them to join, but they never got further than a couple of connections of the people who invite them. And they’ve forgotten their password by now, anyway.

Area 51– are the people who ask you to link, but then keep their network top secret and don’t allow you to see it.  It’s OK for them to see your network, but not theirs. And I’m talking about people you actually know, not strangers. Do they think you’re going to harrass their connections or run away with their clients? Sheesh.

Trophy Linkers– are very selective about whom they link with. Only CEOs and VPs please. OK, and maybe a few famous sports figures, too. Don’t want their network to be just “ordinaire”.

Intergalactic Travellers – These are people come in from outer space like aliens and find you, but you can’t figure out how they know you. It’s because they actually don’t know you. These people are not necessarily the compulsive collectors with zillions of people in their network. They just decide that you’re someone they’d like in their network, so they write to you on the pretext that either you knew them when you were a grunt 3 or 4 jobs ago or that you currently work for the same company as they do (huh?). Haven’t figured these folks out yet.

Linking Maniacs – These are people who think that joining one networking site or even two is not enough. So they invite you to join lots of other networks that they are in. I’m not sure what you do with networks on top of your networks. Does anyone besides recruiters actually have time to participate in them all and get something out of all of these networks? I get tired just thinking about them.

Genuine Colleagues – are just regular people on Linked In who are discovering old connections and are linking to their associates and former associates to get or stay in touch or see where it will lead.  

OK, people, you have a million connections in your network. Now what?

The wastes that are part of lean thinking are well-documented, waste being defined as anything that doesn’t add value to the customer or that a customer would not be willing to pay for. The classic seven wastes in lean thinking include: unnecessary transport, inventory, wasted motion, waiting, overproduction, overprocessing and producing defective products/services. How do these wastes manifest themselves in the supply chain? What are the causes and effects? Who is responsible for them?

Much of the waste and cost in the supply chain is attributable to business practices and processes at both customers and their suppliers. For example, a customer firm’s frequent schedule changes may unintentionally cause a chain of events that increase waste in the supply chain. Frequent schedule and order changes, particularly those that are less than lead time, may compel a supplier to carry excess inventory, may cause shortages and increase lead times as the supplier scrambles to cope with unexpected changes. The effects can become magnified and create a self-induced volatility. Schedule and order changes can increase overall cycle times at both customer and supplier, with the customer ordering earlier because of increased purchased part lead times, while continually making changes mid-cycle and keeping just-in-case inventory of its own. The situation can snowball into shortages, expediting and increasingly longer lead times. Supplier quality problems can create other cost drivers ranging from rework, shortages, and expediting at both customers and suppliers, as well as warranty returns, customer complaints and increased volume at call centers.

You need to find these cost drivers in order to eliminate them. Management typically pays more attention to visible costs than invisible costs, even though the latter are quite real, often risky, and are robbing the bottom line like invisible bandits. While no business likes rework, returns and complaints, firms continue to do things as they’ve always done them and institutionalize these invisible costs as a part of doing business. They may address them every so often, but the gremlins of the status quo always manage to put things back to the way they were before.

Next: Addressing hidden supply chain cost drivers

The term “lean supply chain” is bandied about by many to the point where the term is becoming a bit generic or even meaningless. Just like the lean enterprise, the lean supply chain is easy to understand, but harder to deploy — and, in many cases, is more consultant-speak than anything. But that doesn’t make a lean supply chain any less desirable for companies to pursue. A study by a research team from Accenture, INSEAD and Stanford University showed a statistical correlation between companies with a successful supply chain strategy and significant financial success.

What really is a lean supply chain and how do you develop one?  Lean supply chains have been approached from many angles. Sometimes, from a logistics and transportation or the “planes, trains and automobiles perspective”: how do you keep goods and services flowing in a smooth, uninterrupted and cost-effective fashion from suppliers to customer firms to end customers? Another is the buckets of inventory perspective: how do you keep minimal, but sufficient inventory in the supply chain pipeline in order to provide good service levels without disruptions? A third approach is lean procurement: how can procurement scale and improve its processes to minimize transactions, reduce total cost, and work with the best possible suppliers who meet its requirements? Another approach is adopting lean within both customer and supplier firms: how can each business work to eliminate waste while adding value to its customers?

I am planning to write a few posts to this blog about lean supply chains including more thoughts on such aspects as what are the hidden cost drivers in the supply chain and how to find them as well as ways to reduce supplier risks.