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.

I once worked in quality improvement capacity as Director of TQM for a distribution company for whom the term supply management was a new concept. Purchasing in particular felt that it had no clout or influence over suppliers. The rest of the company saw purchasing as the price choppers and the whipping boy for stock outs. I was facilitating an improvement project with this group and we quickly ran up against resistance from other departments who thought that purchasing problems needed to be solved by purchasing alone and who weren’t interested in owning their contributions to problems. This was, of course, not entirely the case. In this company, Sales was the king to whom all others had to defer.  Not to minimize the importance of sales, since they were the revenue generators. But they often created unnecessary waste and cost (and fire drills for purchasing) due to their focus on making their numbers.  This resistance to working with purchasing rather than dictating to them turned out to be a bigger problem than recalcitrant suppliers. At one of our meetings, I jokingly described the way something was done as “Mickey Mouse”. One of the purchasing staffed replied that of course it was, as they were working for a Mickey Mouse company. After a few days, mouse ears and white gloves popped up all over purchasing on the tops of monitors and filing cabinets. I had struck a sensitive spot, and we had stumbled upon an inadvertent team-building tool.

However, continuous improvement meant working counter to a culture that had existed in this company since its inception and was very challenging. In this family-owned business, the staff was getting mixed messages. On the one hand, they were told that they were “empowered” to improve things. On the other hand, the empowerment went only so far before it could be squelched by the owner who, although he wanted his company to improve, felt that deep down, improvement was for everyone but him.

-Sherry R. Gordon

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.

Companies have typically viewed suppliers as a source of cost that needs to be reduced, as supplier costs directly impact the bottom line. And it’s a given that procurement is always under pressure to fulfill the cost reduction mission. But in the process of viewing suppliers as big dollar signs that need to be squeezed, firms neglect some significant opportunities to derive value from suppliers in addition to reducing costs. Here are 6 ways that suppliers can add value.

• Contribute to product and process innovation. Using suppliers as a source of new technology in areas that complement a customer firm’s own competencies is a way derive value from suppliers. Working jointly with suppliers to develop new technologies expands the capabilities of internal new product development functions. Because IP is at stake, this type of collaboration is based on a good customer-supplier relationship and requires both trust and legal agreements. At Boeing, for example, working with product development suppliers is considered critical to its future.

• Help customer firms enter new markets. Because of their location or type of product or service, suppliers can help provide an entrée to new markets and new customers for a customer firm.

• Provide incremental revenue and profits. Suppliers can help their customers enhance products and product features that will generate additional revenue.

• Help improve end-customer satisfaction. As suppliers’ order-to-delivery velocity increases, their customer will benefit in several ways. Since purchasing lead time depends on supplier cycle time, improved velocity at suppliers provides competitive advantage in a customer firm’s own market responsiveness.

• Free up inventory dollars and improve cash flow. Improving supplier cycle time velocity exposes many other issues such as excess inventory and quality problems. As purchased part lead times and quality problems decrease, the customer firm will need to keep less inventory as safety stock. Cycle time reduction may require supplier development projects with key suppliers. At first the supplier may reap more benefits, but ultimately the customer will benefit from improved supplier performance and faster supplier cycle times and responsiveness.

• Contribute to business process and practice innovations. Jointly solve problems with suppliers and share ideas and best practices. Suppliers may provide solutions to problems that a customer firm has no capability to solve alone. Some customer firms are so entrenched in the mindset of managing suppliers as a one-way flow of information and expertise that they forget that suppliers may have valuable practices or processes worth adopting.

When trying to prove to senior management that supplier relationship management is more than just goodness or the right thing to do, companies should play the value card. The opportunities for making money through additional supplier value can be greater than focusing only on cost reduction. Saving money is essential. But as the saying goes, you can’t save your way to success.

With supplier bankruptcies a daily occurrence, to say that the topic of supplier risk has become hot is an understatement. The challenge is what to do about it.  Someone recently asked me whether there are any KPIs you can use to measure supplier risk. There are, but developing those KPIs is a business process that goes beyond just thinking them up and slapping them onto a scorecard. Because of high concerns about supplier risk, some have begun to use the term KRIs (key risk indicators) instead of KPIs (key performance indicators).

The first thing you need to do is to define what supplier risk means to you and your company. What risks are you concerned about? Which categories of your suppliers have the potential to create risk? An article in Supply Management, “Beyond Low Prices,” advises doing some thinking around what some of your key supply risks are and get risk management plans and contingency plans in place. This can be as simple as brainstorming the likely risks with others in your firm (including those outside of procurement or finance), the probability of the risks occurring and then focusing on those that you have identified as having a higher probability of occurrence.

A small number of risk-related KPIs can be identified to supplement most firms’ cost-related KPIs, according to a recent report published by Oliver Wyman, Capturing the Upside of Purchasing – Related Risks.  According to the report, many companies start out with more qualitative risks and progress to more quantitative risks as the management of risk becomes more cross-functional and shared throughout the firm and identification of, collaboration and communication with key suppliers increases.

So what KPIs might a firm use to get at supplier risk? Here are a few examples: 

• Operational risks: the percentage of single-source suppliers for whom contingency plans are in place; quality metrics to uncover the risks of poor quality; supplier cycle time and on-time delivery
• Control effectiveness: controls that have been bypassed, such as dollars spent on non-approved suppliers or spend under/not under management.
• Cost related – supplier and commodity price increases; cash flow at risk from supplier problems
• IT/data risk: percent of suppliers using encrypted data transfer

As can be seen by some of these examples, these supplier risks are not under the purview of just one function in the customer firms. And at the end of the day, when all heads turn to procurement about the subject of supplier risk, procurement must work to elevate the conversation of risk to the executive level to include other functions and avoid the mission-impossible position of taking on the entire burden.

-Sherry Gordon

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.

A colleague of mine, Sandra Gauvin, an expert in the quality field and writer of the Current Quality blog and newsletter, recently brought to my attention a new disturbing trend in supplier evaluation: suppliers who charge their customers to for the privilege of conducting an on-site audit. In this scenario, a customer contacts a supplier requesting an audit. The customer receives a reply something to the effect of:

“You can purchase our audit report.  The audit was conducted by Acme Audit Company (an independent consulting firm).  The report costs 4.000€ and the advantage is that you can receive it soon.   Or you can conduct an on-site audit of our facility but you will have to pay an audit fee of 10.000€ per day.  However, we have no available audit slots in 2009. 

We don’t have the availabilities yet for 2010, but we can place you on our waiting list. We would then propose an audit date, when we receive these availabilities.”

So if you’re the customer, what do you do? You’re between the proverbial rock and a hard place. There are consortia that negotiate with suppliers regarding audits and can prevail upon suppliers not to charge if enough members of the consortia use a particular supplier. An example of this is Rx-360, an international pharmaceutical supply chain consortium. Otherwise, depending on your industry and whether you have any leverage over the supplier, you may need to buy the independent audit report.

This particular situation is occurring in the pharmaceutical and biotech industry because of the requirement to conduct on-site audits of suppliers for compliance to FDA standards and GMP practices. Some suppliers, even small companies, have to host 50 or more customer site visits a year, despite their already maintaining ISO 9001:2000 or AS9100B registration. From the supplier’s point of view, such visits are costly and time-consuming. So why not charge? Suppliers would rather spend the time improving their processes than hosting customer audits. Some suppliers feel that some customers may not be auditing for valid reasons, but just to “check the boxes” or to get to spend a day out of the office. Charging can be a means of vetting out only the most serious customers.

Is charging customers for audits likely to spread beyond this industry? Also, what does charging customers for audits say about the customer-supplier relationship?  The value of audits that customers have to pay to conduct? For those industries where on-site audits are required, this is a means of capitalizing on that requirement and allowing the supplier to recoup its expenses for multiple site visits. Switching to other qualified suppliers is not so easy in pharma and biotech, given the rigorous industry standards. If companies are looking to develop mutually beneficial relationships with their suppliers, what does charging for an audit do to that relationship? I am interested to know if charging for audits conforms with  the ISM Principles and Standards of Ethical Supply Management Conduct.

Does requiring a payment for a customer audit constitute an attempt to influence the outcome of the audit or the outcome of relationship with the supplier? That is, if you have to pay to play, are you going to forgo auditing altogether, letting the supplier off the hook? Or will you be inclined toward a positive audit outcome because of the need to pay to learn the information to work with a supplier? Would paying over $13,000 to audit a supplier have any influence on your findings? Or how about the ethics of independent consultants charging you to view the supplier’s audit or else getting no audit information at all?

I’d be interested to hear readers’ reactions to this trend.

Back to Sherry’s website.

I was reading the recent blog post at the Spendmatters:   Beyond Shedding the Deadweight in Procurement and Operations. Instead of just cutting headcount, particularly in procurement, Jason Busch suggests other ways to approach cost reduction. Among the suggestions are: driving better efficiency by fully using software solutions in the Procure-to-Pay cycle; using third parties to help you outsource and cut spend; and last, cutting inventory as much as possible and working with critical suppliers to help them reduce their cost structures.  I’d like to add lean to list, both as a continuous improvement toolset and as a way of thinking. Companies should be deploying lean thinking and lean enterprise practices to help remove waste in the entire company. Waste is defined as creating no value and as something that a customer would not want to pay for.

OK, so you’ve heard a lot about lean and maybe your company has a lean initiative going on. Many people still think lean something you do only on the factory floor and it doesn’t pertain to them if they work in an office. No, it’s not just for manufacturing wonks. Or else I hear, “Yeah, we’re lean. We’ve cut everything to the bone.”  That’s lean and mean or lean anorexic, not the real meaning of Lean Enterprise.  Lean and mean is a cost-cutting exercise and is not real Lean, which is a systematic elimination of non-value added activities (i.e., that do not add value to the customer or that the customer would not want to pay for). Cutting 10% across the company is a desperation mentality, value-add and customers be damned, like amputating your own limb. Desperate measure for desperate times.

So what about lean in relation to all things procurement and suppliers? Lean thinking, tools and culture afford the opportunity to reduce and eliminate the sources and causes of waste and cost that come from doing things the way they’ve always been done. It means not just helping suppliers improve their operations and cost structures, but also addressing one’s own internal process inefficiencies that often adversely impact suppliers’ ability to meet customer requirements.

Traditional procurement maintains a big supply base, a short-term focus and is internally driven. Lean procurement is system-oriented with a focus on total cost and internal and external customers. The traditional mentality is to get a better price (’cause that’s what we’re measured on), but potentially pay later in quality, delivery and service issues. Now is the time to look at the supply base and decide based on best value, including performance, which suppliers to focus precious resources on and whom to disengage. Procurement can adopt lean practices such as value stream mapping to identify non-value added activities. It can look at internal workflows and at those involving suppliers. Visual systems (5S) in the office can be used to improve the procurement and supply management work environment so that people don’t waste time looking for things or even waste space. Procurement can identify not only the problems, the root causes of the problems. It can uncover:  Where are the bottlenecks? How much do people have to wait for the next step in the process or for resources due to work imbalances and bottlenecks? And who manages the waiting, which is in itself only additional waste? Procurement should work in concert with other functions to expose and eliminate hidden cost drivers such as: customer complaints, long lead times, systems issues, quotation errors, incoming inspection, expediting, excessive paperwork, poor controls, poor communications, poor supplier quality, etc. Or, eliminate the extra steps and waste in what can be called the inter- and intra-company circle of waste – that is, the waste that occurs in the business processes pertaining to and between customers and suppliers or in the white spaces.

But most importantly, in addition to working on important supplier performance improvement and development projects, procurement can adopt a continuous improvement/lean mentality and culture within its own function both as a model to its suppliers and as an important step to do its part to help restore the entire company to financial health.