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Several years ago I penned a rant for Spend Matters about tool heads. What are tool heads? I define them as those people who focus on the tools of continuous improvement such as lean tools and Six Sigma tools rather than on the big picture of what the organization is trying to accomplish and the people who need to accomplish the transformation. Tool heads love the tools of continuous improvement, as these are tangible and readily deployed: SWOT, histograms, value stream mapping, andons, SMED, etc. They are concrete and not abstract. They are effective and dramatic at transforming chunks of a business. Tool heads can get mired in the tools and focus on the trivial many instead of the vital few, often missing the big picture. Tool heads are rarely strategic thinkers. Many individual problems may get solved, but the overall issues don’t get addressed. Small processes may get optimized, but the overall business process may be sub-optimized. Culture and behaviors stay the same, as applying tools doesn’t address cultural and behavioral issues. However, tools are often simpler to use than bringing about real transformation, as they can be deployed in spite of the people whom they impact. Tool heads are more comfortable working with continuous improvement tools than with the folks who are impacted.
Tool heads are the folks who set up desert islands of excellence. As pilot projects in an overall enterprise improvement process, islands of excellence can help spark and inspire a successful improvement initiative. But too frequently they turn into desert islands of excellence when they become detached from the firm’s mainland of mediocrity and never spark real change or just optimize one chunk of the business, leaving the rest suboptimized. One of the most common manifestations of this phenomenon is putting in a “lean” cell on the manufacturing floor. A standalone cell is the beginning, not the ultimate goal. If all the processes surrounding the cell, particularly administrative and supply chain components, are not linked up and also optimized, you end up with a lean cell that is a desert island and limited in its overall impact to the organization. The rest of the company conducts business as usual, and looks at the cell as “we do lean manufacturing.” And many firms really do believe that they are implementing lean as soon as the first cell is online, even if it’s just a desert island. Real change is limited, and the tool heads have done their job.
Implementing change begins and ends with people. And that fact hasn’t changed.
-Sherry R. Gordon
Author of:
Book: Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results
CloudDVD: Supplier Evaluation and Performance Management
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I enjoyed Tara Parker-Pope’s recent Well column in the New York Times: Getting Doctors to Think About Costs by Pauline Chen, M.D. Dr. Chen opined about how doctors have been typically unaware of how much various procedures, such as CT scans and MRIs, cost when they order them and even whether they are always necessary. She wrote about a non-profit organization, Costs of Care, that is trying to address this issue and help make medical trainees more aware of costs. The article has a link to an educational video, Hotel Hôpital, which illustrates the opacity of costs to the patient with a hotel stay that is billed in the same way as a hospital stay.
I experience my own version of Hotel Hôpital at a dentist visit a few years ago. Maybe I should call the experience “Hotel Dentaire”. I was visitng the dentist for a 6-month checkup. He had found a cracked filling, which he repaired during the visit. On my way out, I got my pricey surprise. And, I was asked to pay on the spot. I didn’t happen to have my credit card with me and asked the dentist’s staff whether they could bill me. The reason I was unprepared was because up until that visit, they had always billed me. The staff said no, that I had to pay right then. I had been seeing this dentist for many years, had referred many friends, and was surprised at this sudden, rigidly deployed policy. I asked whether, as I long-time patient, they could give me a little consideration as they had in the past and bill me. I would pay them promptly. They grudgingly agreed, since I had no payment means with me at the time. Then, not only did I get a bill, but I received an unpleasant letter from the dentist as well. He said that when he goes to the store, he has to pay for items right away and who did I think I was not to pay on the spot after the service. Maybe he hadn’t noticed that, unlike dentists, retailers by law have to affix prices to items in stores and not surprise customers at the checkout. I’m not sure why my dentist got so angry with me, but I decided that I had to find a new dentist. In retrospect, I realized that the dentist had recently taken his son into his practice. Many dental schools are now teaching practice management. Cash on the barrelhead is part of that. I can fully understand the need to monitor cash flow and administrative costs. But hopefully dentists can also pleasantly communicate with patients and afford them a little notice and slack during transitions to new monetary policies. I had thought I was a valued customer/patient. But I guess my infraction left me in the trash heap of deadbeat patients.
When I saw the Hotel Hopital video, exaggerated as it seemed for a hotel, I could totally relate to the unpleasantly-surprised hotel guest in the video. Typically, insured patients have no idea how much any medical procedures cost since they never see the bill (unless they are uninsured). This has led to people feeling that they don’t have to worry about how much procedures costs, since they are never asked to pay out of pocket.
The medical system in the U.S. is suffering from a huge lack of transparency. However, I’m not sure whether instilling cost consciousness in physicians about the whole medical system is going to reduce the ordering of unnecessary tests and procedures as long as they have to be in CYA mode to avoid lawsuits.
-Sherry R. Gordon
Author of:
Book: Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results
CloudDVD: Supplier Evaluation and Performance Management
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Horrifying and upsetting, this article about the contract warehouses of online retailers, I Was a Warehouse Wage Slave is a compelling if not grisly read. Mother Jones reporter Mac McClelland goes undercover in a warehouse by applying for and getting an actual job as a picker. The conditions are what one might expect in a low-cost country: dangerously uncomfortable temperatures, workplace hazards such as uncontrolled static electric shocks in picking areas, non-ergonomic conditions for picking that has workers taking 800 mg of ibuprofen to survive, required 10-hour days or longer, and more. One instance of being absent for any reason the first week of work and you’re fired, but you can get in the queue to work there again. Minimum wage. No raises. No benefits. You’re told daily how poorly you’re doing and not meeting your goals. You’re a temp warehouse worker. You’re an important reason why places like Amazon can offer free shipping and WalMart can offer low prices. And how they can beat the competition of local businesses in your community. It’s not just having low cost suppliers. It’s using temporary worker agencies who supply you with low-cost workers. The contract warehouses with sweatshop conditions don’t actually belong to the companies with household names. And the workers are contractors, so they aren’t actually Amazon or Staples employees.
Why aren’t these contract warehouses subject to more scrutiny? First, the employees are all temps supplied by temp agencies. They don’t work for Amazon. But every time you click “Place your order” on Amazon, some temp worker is out of the gate at one of these warehouses, on the run (averaging 12 miles per day of speed walking on concrete floors) to pick your product and trying meet challenging productivity goals to keep his or her job.
Why would anyone willingly work for such wages and under these conditions? Simply, they have no other options for surviving economically and feeding their families.
So while Americans worry, and rightfully so, about the conditions at Foxconn in China or at factories in other low-cost countries, perhaps they should think about the supply chain right here in the U.S. And while we can’t resist getting a bargain and may engage in “showrooming” (shopping a bricks and mortar store, then buying online instead), we never consider those other Americans on an economic hamster wheel, falling behind as they run in place.
I couldn’t help but think that a contract warehouse would make a good episode of Undercover Boss. But a contract warehouse is part of the hidden supply chain where workers don’t work directly for the name-brand companies – by design, of course – to avoid as we say in the supply risk world, reputational risk.
-Sherry R. Gordon
Author of:
Book: Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results
CloudDVD: Supplier Evaluation and Performance Management
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When setting up a supplier performance management (SPM) process, procurement and supplier managers have often asked me which suppliers they should evaluate. Should they focus primarily on the suppliers with whom they spend the most money? Should they try to measure a large portion of their supply base? There is no quick answer other than this. But keep in mind that by measuring only those suppliers with whom you spend the most money, you may be missing some important opportunities and some potential risks. This process is called supplier segmentation. Segmentation is defined by ISM (Institute for Supply Management) as: “The strategic analysis of each supplier to determine the extent to which the supplier contributes to the core competence and competitive advantage of the buying organization.” In this case, one is segmenting the supply base for performance management — those suppliers who merit supplier evaluation and performance management resources and those who do not need to be measured.
Here are four steps to segmenting your supply base for performance management:
1. Based upon your firm’s strategies, identify the types of supplier relationships that are most important. Yes, amount of spend is important. But other types of suppliers may be important for additional reasons such as, for example, sole source, single source, strategic, small businesses, minority and women-owned businesses, etc.
2. Review your supplier performance expectations, particularly in regard to supporting your company’s goals and objectives and what your function need to accomplish. Identify suppliers who will be important in helping you meet these goals and objectives.
3. Look at high-priority or strategically important categories of suppliers. Suppliers can then be segmented according to the strategic value of the relationship, and the investment of resources can be aligned with that value.
4. Identify top spend in high-priority and strategic categories as well as strategically important low-spend suppliers. You may wish to track those suppliers’ performance more closely. Here are a few examples of the types of suppliers to consider in an SPM process:
- Suppliers who have exhibited poor performance (even if not yet formally measured) such as late deliveries, poor customer responsiveness, and poor quality? Can or have these suppliers adversely affected your business?
- Suppliers located in politically or geographically unstable areas of the world or who demonstrate other potential risks
- Suppliers with whom improved communications about performance and mutually beneficial improvements would be valuable
- Suppliers who are currently working with your company collaboratively on product development or have the potential to do so
- High-potential suppliers who could be developed to become high performers and add more value to the business
- New suppliers who have not yet established a performance track record
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Sometimes it pays to state the obvious. Here are some insights into managing supplier relationships and supplier performance that you may have heard. Maybe you don’t even agree. But to me, they are essential to understanding how to improve supplier performance.
1. Treat supplier like peers, not subordinates. As it turns out, customer firms don’t always know best. And customers don’t have all the answers. While it’s true that the supplier gets paid to work for the customer, kind of a boss-subordinate situation, customers can miss quite a lot of value by not rethinking the notion of suppliers as being there only to do what they ask or to “be seen but not heard”. Suppliers can often add value in the form of ideas, best practices, and ways to save money and resources. A good relationship that fosters a two-way flow of information will help ensure that this value is captured.
2. Supplier scorecards don’t improve supplier performance. Taking action based upon scorecards does. While there is usually an initial performance improvement bump after scorecards are implemented, this improvement isn’t sustainable without action. Scorecards capture data. Data needs to be actionable and acted upon. Collecting data for the sake of a scorecard is not productive. Find and address the root causes of performance issues that scorecards raise.
3. The size of the scorecard is in inverse proportion to its effectiveness. Less is more. It takes time and resources to track and follow up on large scorecards. Focusing on the vital few is more effective. Quality of KPIs trumps quantity. Start small and expand slowly, but don’t let the number of KPIs on scorecards get out of hand.
4. It’s the customer, stupid, to paraphrase President Bill Clinton’s “it’s the economy, stupid“. The customer firm is responsible for >50% of supplier performance issues: poor planning, sloppy communications, changing requirements, and many more. Customers need to get their own house in order and make sure that their own internal business processes that impact the supplier are functioning well in order to ensure that they are part of the solution and not part of the problem for their suppliers.
5. Supplier performance is reflected not just by how suppliers are measured, but by how procurement is measured. This is the result of the old saw, “You manage what you measure.” If, for example, procurement is measured on PPV (Purchased Price Variance), then they may be incented to use the lowest-price supplier who may not be the lowest-cost supplier. The result may be supplier quality, delivery, customer service, warranty problems, you name it.
-Sherry R. Gordon
Author of:
Book: Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results
CloudDVD: Supplier Evaluation and Performance Management
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Value Chain Group has just authored a streaming online video, also known as a cloudDVD, entitled: Supplier Evaluation and Performance Management. Users can purchase this cloudDVD by visiting the Value Chain Group CloudDVD Store. The store’s catalog is provided by Retrieve Technologies, which has developed a cloud-based training system that leverages modern technology.
In this video, I give an overview of the key components of a good business process for evaluating suppliers and managing their performance. This educational cloudDVD provides an 80 minute overview, outlining best practices for measuring and improving supplier performance and providing real-life company examples. I provide valuable information on how to develop effective metrics and KPIs for effective supplier scorecards. Known for her highly-regarded book, Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results , I have authored this streaming online educational video as an adjunct product to the book that contains additional materials and real-world examples. If you liked the book, you’ll like the movie and find it a good supplement.
Click here if you’d like to read a press release.
-Sherry R. Gordon
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I wrote about ideas for avoiding a supplier price increases in last two posts: 9 Ways to Fight a Supplier Price Increase and Supplier price increases — get creative. Avoiding price increases isn’t purely a matter of “just say no”, which doesn’t usually work unless you’re a big gorilla customer with a lot of market clout or are only game in town, so to speak. The rest of us will need to put aside the baseball bat and try other approaches. Realizing that not all suggested approaches are available to every organization or are applicable to every supplier, I’ll suggest a few more approaches that could be effective in staving off a price increase.
Not sure if acronym WIIFM (What’s in it for me) is used much any more, but it’s a powerful way of thinking about your suppliers by putting yourself in your supplier’s shoes. It can give you a better shot at working out a compromise. One WIIFM approach is to see if increasing the quantity you procure from a supplier would allow them to avoid increasing their price to you. If the supplier gets more of your business, then they may be more amenable to holding the line on pricing.
Another WIIFM approach is improving payment terms to the supplier. One of the most coveted customer behaviors is favorable supplier payment terms. It engenders loyalty and solidifies relationships. And, in some cases, improved payment terms will allow the supplier to avoid or delay passing along a price increase.
All the creativity and kumbaya in the world sometimes just won’t cut it. A price increase is sometimes unavoidable due to many circumstances and market conditions. So what else is left to do? You can try to get the supplier to delay the timing of the price increase and extend the life the current pricing. Or, many companies seriously consider and analyze make v.s buy: would it be worth bringing the manufacture of a product or the delivery of a service in-house? Organizations may consider doing the detailed analysis to decide on the costs and benefits of having their own staff and facilities perform supplier work. Make vs. buy decisions should not be taken lightly. Both strategic and operational variables need to be carefully considered.
The bottom line is that supplier price increases require a considered response. With key, strategic and critical suppliers, it is important to maintain a strong relationship and to work through price increase requests thoughtfully and often creatively.
-Sherry R. Gordon
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In my last post, 9 Ways to Fight a Supplier Price Increase, I listed approaches to handling a supplier price increase. These involved pushing back. These days, commodity prices may be at the heart of increases. They can be volatile and unpredictable and offer little room for black and white approaches. Besides using hedging, a technique that only someone who really knows what they’re doing should attempt, other ways to tackle increases can be considered. Sometimes it takes a collaborative effort between customer and supplier to figure out how to avoid the price increase and even to reduce the price by reducing underlying costs. It isn’t done by threatening or bludgeoning the supplier into submission. Here are 5 approaches for a buyer who is faced with a price increase. Not all are appropriate to every situation, but can be considered, depending upon the circumstances.
- Use competition. This is useful only under some circumstances. If you’ve got a supplier with a highly value-added product or service or one who is sole source, this may not be feasible. If the product or service falls more into the leverage category (rather than strategic or bottleneck), you may be able to hold a sourcing event using software or else use an alternative source whom you’ve wanted to try. Competition can be a useful tool if used cautiously and wisely with suppliers who provide products and services that are more readily available in the marketplace.
- Alternative materials/services. Perhaps the supplier can use a different, less costly material to make the product. Or for a service supplier, a less costly service will meet your requirements than the current one that you are buying. Being creative about alternatives may save you money.
- Value analysis/value engineering. Have you and the supplier done a value analysis of the product? If not, the supplier in particular, may be able to come up with creative ways to make the product more cheaply and potentially improve it at the same time. This can result in mutual benefit to both customer and supplier. Many suppliers, who know their product better than their customers do, are willing and even eager to do a value analysis but are rarely asked.
- Longer-term agreement/contract. Some suppliers are willing to give their customers a better price in return for a longer-term contract. Extending the contract period can give a supplier the predictability and stability to offer a product or service at a more favorable price.
- Packaging and transportation. Can anything be done to reduce the amount of packaging or make it less costly? Can transportation costs be reduced? Are customers paying inbound transportation markups? For example, many suppliers make a profit on outbound transportation to the customer by not passing along their savings to their customers.
In Part 2, we’ll look at 5 additional ways to handle supplier prices increases.
Sherry R. Gordon
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Back in the day when I was running New England Suppliers Institute, a regional non-profit industry organization that worked to improve performance by improving the customer supplier relationship via lean enterprise, supplier development, education, and networking, one of our board members was the procurement manager at a semiconductor equipment manufacturer. He used to give an excellent and very popular presentation about how companies both large and small could fight a supplier price increase. This talk was very popular and its principles still hold true today:
1. View a price increase notification as a proposal that is still open to discussion. It’s not a done deal until it’s accepted.
2. Question the price increase.
3. Don’t accept a price increase verbally.
4. Never accept a form letter or a “dear customer” letter.
5. Request a written, detailed explanation from the supplier about why they are asking for the price increase. This should be a written explanation that is:
–specific to the product that your company buys
–includes all data relevant to the price increase
–and, is signed by the supplier’s senior management
6. Do your own homework. Don’t rely solely on what the supplier tells you. Become an expert in the categories you buy.
7. Be imaginative and creative (more about ways to do that in a future post).
8. For commodities that significantly impact product cost, involve other functions that can help you prepare for a negotiation. For example, can engineering find a substitute product?
9. Negotiate, negotiate, negotiate.
Consider, however, that your response to a requested price increase needs to be realistic and consistent with your organization’s relationship and history with the supplier as well as with current market conditions. Disregarding, for example, overall commodity price increases in the market could aggravate the supplier and lead to negative consequences. The concessions you exact today can come back to bite you in the future in the form of hidden costs.
Sherry R. Gordon
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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:
- 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.
- 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.
- 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.
- 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.
- 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
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