Outsourcing is, of course, quite a common practice these days. How many companies have not jumped into outsourcing? I was reading the classic list published by Supply Chain Digest: 40 Risks and Mistakes of Supply Chain Outsourcing and stopped at the first mistake:  Outsourcing undesirable functions versus the ones that provide greatest competitive advantage. This first mistake reminded me of a difficult outsourcing situation that I came across recently. The organization had a problem supplier. This supplier manufactured a key item for this company. However, the supplier constantly delivered late, and and their quality was abysmal. I asked this firm why they were putting up with such poor performance. Had they not asked the supplier to improve? Or tried to help the supplier improve? Why didn’t they find another source? The answer: it’s complicated.

In further questioning, it seemed that the supplier’s management and command and control culture were problemmatic. Associates had no power to change things and no training even to know what to do to improve the quality and delivery. No one really understood concretely and specifically what needed to be done to improve the situation. And with an indifferent management that thought they were managing the bottom line and inadvertently starving manufacturing into anorexia, the situation was bleak. The problem seemed intractable.

My take: start the process of finding a new supplier ASAP. Problem: the supplier is effectively sole source. While technically the supplier is single source and that other suppliers can be found, switching to another source would be a long and costly process.

Now it’s easy, but too late, to opine about how this customer should never have gotten itself into this bind in the first place. Companies need to outsource for the right reasons. Any product or component that is strategic to an organization’s survival, no matter how badly the company does not want to make that product, should not be outsourced unless there are strategic reasons for outsourcing it and there are viable alternative sources. Avoidance instead of strategic outsourcing can lead to unpleasant and unintended consequences. Viable alternatives mean that the switching time and costs are not prohibitive.  However diligent you are, your supplier can start out great and then fall on bad times through mismanagement, a buyout, market conditions or a supply risk black swan event. But it behooves the customer to monitor the supplier closely and not get to the point where supplier poor performance creates a disaster for the customer due to unintended dependence.

-Sherry R. Gordon

Recently a supplier quality manager asked me about a dilemma he was having with the way his manufacturing facility was measuring in-process supplier quality. If they found defects in supplier parts during the manufacturing process, each defective item was tallied as part of the total. That is, each defective part counted against the total quality performance rather than each shipment counting as a whole against the total.  If one shipment was bad and had 25 of the same defects in it, all 25 defects counted against the supplier’s quality performance rather than just counting it as one defective shipment and essentially just one defect. The problem is that his staff is evaluated, in part, on the basis of supplier performance. One supplier quality incident can appear much more serious than it actually is, and it negatively impacts both the supplier’s scores and the performance reviews of the supply management staff that is responsible for managing that supplier.

The supplier quality manager felt that each quality defect should be counted in the overall quality performance score, as each defect is a problem, even if a number of parts have the same defect (and in many cases, a minor defect, which is a whole other issue). His staff feels that this approach is unfair, as one defect is typically addressed as one problem, even if it has occurred multiple times within a shipment. Mostly, however, they seem to be unhappy about the larger impact on their own performance reviews.

What should this company do? One approach is to calculate quality performance as they do now, but take the frequency and severity of quality incidents into account in the performance review. If there is one incident with 25 parts, the staff reasons, it’s much better than 25 incidents involving one part. And the one larger-size incident should have less impact on the performance review compared to multiple incidents with fewer parts. This approach is more subjective at review time and depends on the discretion of the manager. Is this subjectivity unfair? What do you think of each approach?

I would love to hear your views on how this company should handle this measurement challenge.

-Sherry R. Gordon

I’ve discussed previously how supplier performance metrics work best when they are aligned with and support overall corporate goals and strategies and reasons why they can fail. But the challenge remains of how to tell whether you’ve come up with a good metric.  There are many ways to look at a metric to judge how effective it will be. Here are a few basic questions to ask about a metric:

• Does the metric support the expectations you have of your suppliers’ performance?

Firms need to define and communicate performance expectations for suppliers. Then they should measure supplier performance against these expectations. Thus, the metrics need to provide insight into whether performance expectations are being met. For example, if you expect your suppliers to be responsive when problems arise, how do you measure that? You many need to measure more than just the quantity of corrective actions (CARs) you’ve issued to a supplier. The metric may need to be CAR response time and how many CARs are resolved or closed. Or alternatively, track how quickly suppliers resolve performance issues by tracking when identified and when resolved.

• Is the metric based upon reliable and credible data?

Disputes over inaccurate performance data cost time and money and they can result in distractions and misplaced focus. For example, if you measure suppliers for on-time delivery, is your data accurate? Be sure that items are not sitting on the dock for days before they are received. Or, if you measure product or service quality, having a common understanding of the definition and the calculation of the metric is necessary to avoid a distracting focus on the calculation rather than actual quality.

• Is the metric relevant?

If you track a supplier’s inventory turns, what does that tell you? Do they have internal bottlenecks? Do they use poor inventory management practices? You will never really know from tracking their inventory turns. It is preferable to find metrics that provide more insights.

• Is the metric actionable?

Some firms choose measurements simply because they are readily available.  Metrics calculations can expose problems, but cannot always lead to resolving them because it is unclear why a problem is occurring. For example, knowing a supplier’s quality performance is important. But you may need to track additional metrics to understand other dimensions of quality. Knowing why it is getting worse helps the supplier take action. Often underlying business practices will reveal the root causes of problems.

-Sherry R. Gordon

In a recent article in the New Yorker, author John Colapinto describes his adventures with a stealth Michelin Guide restaurant inspector in New York City as she visited some restaurants to see if they met the stringent guidelines to merit the coveted Michelin stars. The Michelin hotel and restaurant guide has enjoyed enormous success in France and many other countries worldwide — except in the U.S.  Back to that point a bit later. Michelin inspectors are careful to guard their identities from the hotels and restaurants they visit in order to ensure objectivity and no special treatment by the restaurant. Many restaurant critics have tried many ways, including  elaborate disguises, to keep their identities a secret, but mostly to no avail. At Michelin, even the company executives have never met the inspectors. 

Michelin inspectors are trained to rate the various aspects of the food and dining experience against a set of explicit standards. They perform a very detailed analysis of the food that compares it to these standards. They look for “quality of the products, mastery in the cooking, technical accuracy, balance of flavors, and creativity of the chef”.  They figure out the precise ingredients contained in sauces. They look for consistency and accuracy. Why, it reminds me of a supplier quality audit, except for the stealth aspect of the quality auditors. There are specific, documented standards, approved by the quality function. A supplier is rated in relation to how well it meets those standards. And in some industries, particularly biotech and pharma, suppliers are monitored to ensure the ongoing reliability of the identity, quality and purity of the materials — only in the case of a restaurant, those materials are food ingredients. The Michelin auditor questions the waitstaff about dishes on the menu to ensure that they are knowledgeable and not bluffing when describing the dishes. Likewise, in a supplier audit, employees are quizzed about their knowledge of the process and expected outputs. Receiving the coveted Michelin stars, like achieving certification from a customer, increases business.

Sounds like a perfect system for determining who gets the Michelin stars. It works well for the French. But so far it hasn’t caught on all that well in the United States. It may just be that when it comes to dining, technical accuracy is less important to Americans. Americans, according to the article, have emotional reactions to a dining experience that may not be measurable according to Michelin standards. In fact, I would venture to say that Americans love restaurants based on the emotional experience and even the entertainment element above the actual objective quality of the restaurant.

To carry the supplier audit analogy further, evaluating suppliers on much more than the cut-and-dried aspects of a quality audit may yield richer results.  This isn’t to say that a quality audit is not important. It is.  However, the qualitative aspects of supplier performance, such as responsiveness to customers, collaboration in new product development, the quality of the relationship, also matter. When supplier metrics are boiled down to the basic quantitative metrics, they can fail to capture some of the value-adding aspects of the customer-supplier relationship and supplier performance.   When a chef creates a special version of a dish for a lactose-intolerant customer, the chef may deviate from the standard. But the value to the customer may bring them back to the restaurant, whether or not the restaurant would be considered a great one by more objective standards.

As they say, it’s food for thought.

-Sherry R. Gordon

Yesterday Toyota announced that it is recalling 110,000 Tundra trucks built in 2000-2003 due to rust on the frames that is causing the spare tire to break off. Toyota is blaming a supplier, Dana Corporation, manufacturer of the cross member that holds the tire to the bottom of the truck, for the problem, and Dana is cooperating in the investigation.  This comes on the heels of a 3.8 million-car recall of Toyota and Lexus cars due to an alleged floor mat problem that is supposed to be causing unexplained acceleration. Of course, Toyota immediately suspected the floor mat supplier.  The actual cause of unexplained acceleration is still not definitively attributable to the floor mats. By the way, as an owner of one of the cars in question, a Toyota Prius, I find it hard to believe that the floor mats are causing any problems. On my car, there is a huge clearance between the floor mat and the gas pedal. No way could the floor mat be causing a problem on my car. I personally believe that there is some other root cause and hope that Toyota can get to the bottom of this one.  

These are dark days for the exemplar of quality and the acclaimed Toyota Production System. Its image is beginning to rust a bit, just like those cross members. In each case, the company suspected a supplier problem. The supplier is typically the whipping boy in automotive recalls, as big automakers do not actually make most of the parts that go into a car. But suppliers build to customer specification. It is the customer’s responsibility to ensure the accuracy and robustness of its specs and the supplier’s responsibility to build to these specs. If the specs are a problem, a good supplier should alert the customer and the customer should be open to listening to the supplier’s concerns.  All the more reason to revisit and tune up the practices of supplier relationship management, supplier qualification and supplier evaluation, collaborative product design, and quality control processes. In theory, Toyota practically invented the concept of lean suppliers, the lean supply chain and supplier development. In practice, something has been going awry.

To paraphrase the Bible, “Toyota, heal thyself.”  Toyota has the tools and the know-how to improve its quality and avoid such quality and supplier glitches and potentially dangerous product failures. They had better reaffirm their commitment to quality and strengthen their resolve to fix underlying problems or suffer a decline like some of their American automaker brethren.

-Sherry R. Gordon

Companies embark on supplier scorecards for many good business reasons. They are concerned about supply risk, supplier quality, supplier responsiveness. They know that they should be measuring, understanding and improving supplier performance and mitigating risks. It’s the right thing to do. But as I’ve mentioned before, companies are often focused on the metrics themselves – the mechanics of obtaining and deploying the metrics on the scorecard. The gathering of metrics and data for supplier scorecards can be challenging and requires a lot of attention and care. Also, with the ever-increasing array of supplier performance management (SPM) software solutions available, it is easy to get caught up in the mechanics of data organizing and collection. Answering questions such as: Which KPIs should we use? Should they be the same across categories? Where will the data come from? How will we get internal users to give us feedback on suppliers? These are all very important questions and need to be addressed.

However, as they focus on the supplier scorecards and gathering the data, many companies neglect something important: creating the supplier evaluation process itself. Firms need to develop a supplier evaluation process, end-to-end, with identified goals, objectives, strategies, participants, roles and responsibilities, etc. in which the supplier scorecard is developed, deployed, acted upon and continuously improved.

The supplier scorecard is the tool that helps measure progress and indicates what problems need to be solved. The scorecard is not the end result. A tool is not a process. The scorecard tool can’t succeed on its own without a process. Companies need to keep in mind that supplier evaluation is a process, not a supplier scorecard.

I was recently following a discussion on Elsmar Cove, a forum for quality professionals (free, but registration is required), on the subject of an approved supplier list (ASL). Someone wanted to know whether having an approved supplier list was a “shall” under ISO standards and whether you had to evaluate every single supplier for the ASL. Now the majority of people who read and contribute to Elsmar Cove are what I would call dyed-in-the-wool quality folks or quality assurance wonks. They tend to be precise and follow all rules and regulations carefully. If ISO says to do something, for example, then you try to follow it to the letter of the law. You don’t want to lose your certification. But sometimes people follow the rules without thinking about the business impact on the organization.

Most the responses to this question about approved supplier lists were about following the ISO rules. No good tips on how to do so, best practices or good resources, or even a discussion about why you might want to develop an ASL other than because it’s an ISO “shall”, as in a thou shalt commandment.

Then someone posted a comment about the crux of the problem: “Supplier management is one of the most troublesome disciplines within a management system.” There you have it. It’s those troublesome supplier management people. This type of statement made me concerned about the lack of strategic thinking going on in quality, not that it isn’t exacerbated by non-strategic thinking in procurement as well. And it reminded me of how quality and procurement can get trapped in their own stovepipes in an organization, optimizing their own functions and sub-optimizing greater organization goals.

While the quality people should rightfully be concerned about ISO requirements and we need these people to help keep us on course with ISO, they should also be thinking about an Approved Supplier List from a business point of view. It isn’t just an arbitrary nuisance required by ISO and done in conjunction with the “troubled” discipline of supplier management. It has a sound business purpose that when conceived of and implemented properly, can help improve the performance of the supply base and keep it aligned with a firm’s performance requirements and expectations.

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.

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.

I was recently interviewed by Nick Zubko, Purchasing Editor at IndustryWeek magazine, for an article on supplier scorecards. The resulting article, “Who’s Keeping Score?”, summarizes the actions needed to ensure supplier scorecards that are meaningful and actionable and is available online and in the February 2009 issue. To summarize the key points, the article explains that companies need to:

1. Develop an evaluation strategy – what information about suppliers do you need and how you are going to get it

2. Get input from multiple functions in the company

3. Keep scorecards simple

4. Communicate with suppliers about scorecards

5. Start small and expand the process, in terms of numbers of metrics and suppliers measured

6. Close the loop and follow up with suppliers

The article also pointed out the collaborative nature of scorecards, both among different functions in one’s company and with suppliers. When well done, supplier scorecards can be part of an overall supply management and continuous improvement program, rather than an interesting assortment of statistics collecting real or cyberspace dust.