Supplier Performance Management - Part 2

A mini-case study on one manufacturer that integrates supplier scorecard data with operational and planning data from across their business units. They have not only been able to improve supplier performance, but have found other benefits as well.

In Part One of this article, we discussed managing suppliers in a diversified multi-division company, corrective actions, reverse ratings, and scorecard with “teeth”. In Part Two here we explore integrated supplier management.

Integrated Supplier Management System — Beyond Scorecards

When supplier scorecard data is combined with operational and planning data, it can create something greater than the sum of the parts. This is what a diversified international manufacturer, whom we will call “MultiManufacturing Inc.” did when they created their integrated supplier management system, which we will refer to as “SingleSource.”

Several years ago, MultiManufacturing Inc. launched a major project to build a centralized tool to select and manage suppliers, as well as provide performance feedback to the suppliers. SingleSource is now used at 130 manufacturing and procurement sites globally. On a weekly basis, SingleSource pulls a wide variety of comprehensive data (see sidebar “Example Data Feeds into MultiManufacturing Inc.’s SingleSource”) for both direct and indirect goods from eight different data feeds (ERP, MRP, factory management systems, etc.) and organizes that data into a common data structure.

Example Data Feeds into MultiManufacturing Inc.’s SingleSource

Receipt transactions — from all 130 sites
Quality data — such as reject rates for parts and components received
Open POs — all the part numbers for POs that have not yet been received
Forecasts — all parts on forecast, by month for 24 months.
Forecasts by supplier, by part, by part family
Accounts Payable — invoices paid for current plus previous 2 years — then archived to allow offline queries for “ancient” records
Part master data
Supplier master — detailed list of all suppliers, organized in 52 different categories (e.g. sheet metal, molded plastic, etc.):
- – Name of buyer
- – DUNS number
- – Contact information
- – Cross reference information, such as different internal vendor numbers for different sites
- – Total spend for specific suppliers including expediting transportation, non-recurring engineering charges, etc.
- – Supplier performance in quality, delivery, savings

Pinpointing Improvement Opportunities

MultiManufacturing Inc.’s scorecards show supplier quality and delivery performance by site. They recently added the capability to score suppliers differently by business unit. This helps suppliers to see exactly where they need to put their resources in order to improve.

To eliminate redundancy and fragmentation in the rating process, MultiManufacturing Inc. audits its suppliers only once a year, across all divisions. (If audits were done by individual business units, each supplier would receive several audits per year.) The results of these supplier assessments and audits are shared across the corporation. The suppliers are assessed on items such as their internal quality systems and their special process capabilities.

Easy Accessibility to Supplier Performance Data

MultiManufacturing Inc. realized that they needed to make their supplier performance information easily accessible to those who needed it. As part of their solution, they developed an online, web-based, training-on-demand package that reduced the lengthy training sessions employees normally faced in learning how to access the performance information. On an as-needed basis, employees can learn how to use the system in short 2-3 minute chunks of training.

MultiManufacturing Inc. also worked on making access to other key supplier information fast and easy. At the push of a button, employees could get a list of the best or worst suppliers, ranked by a formula that includes productivity (price/savings), quality, and delivery performance. In a few seconds they find information that previously would have taken hours to find by searching through spreadsheets. (The cost avoidance from the ranking feature alone was estimated at over a million dollars per year.) Commodity managers could see if they had been rewarding suppliers who were easy to work with, but who performed below par. Having this information readily available changed behavior quickly.

The database also allows deeper slicing and dicing, for example looking at the spend by site, by part number, by commodity, or by business unit. Data can be aggregated at any level from the entire business down to individual sites.

MultiManufacturing Inc. discovered that real improvements happened once they made performance information available quickly and easily to both buyers and suppliers, and then based buying decisions on that data.

Data Hygiene and Data Quality Are Critical

MultiManufacturing Inc. also discovered that well-thought-out performance targets and a system to centralize the data are not enough if there are no reliable sources of data about actual supplier performance. When MultiManufacturing Inc. first launched SingleSource, they brought together representatives from across the business units to decide what information they wanted to share with suppliers. There was no dearth of ideas about what feedback they wanted to give to suppliers, but when they examined what high quality data they actually had available, that list became much smaller. The limitation for many firms in implementing comprehensive integrated supplier management is often the availability of reliable, clean, well-maintained data.

Data Cleansing and Change Management

Finding, cleaning, and maintaining that data constitute some of the hardest work in setting up performance measurement systems. MultiManufacturing Inc. discovered that just telling your divisions “Clean that data” is not enough. There can be a lot of foot-dragging and excuses until management demonstrates firm resolve — “We are going to live by this data, and it is how we will evaluate ourselves and our suppliers, period.”

Suppliers Quickly Identify Bad Data

MultiManufacturing Inc. found that once they started rating suppliers based on the performance metrics in SingleSource, their data quality problems were quickly uncovered. For example, before the launch of SingleSource, buyers would often phone in changes to the suppliers without updating the system. With the new system, if a buyer forgets to update a PO or promised date, the supplier gets a deduction for shipping on the wrong date. The supplier will dispute those charges vigorously: “I shipped when you asked and you’re telling me I’m late (or early)?” In effect, the supplier’s vocal feedback shines a spotlight on data cleanliness and process issues.

Cleaner Data – Major Side Benefit

This project uncovered data accuracy issues that had been on in-house MRP systems for years. People learn to tolerate and work around bad data. But when that data is used in external relationships with financial consequences, you have to fix it. MultiManufacturing Inc.’s scorecard system drove a whole new set of process and data disciplines. This was an unexpected benefit of the system. It has helped drive SOX compliance, created more discipline and accuracy in productivity measurements, and increased the savings realized from contract negotiations.

Innovative Uses of Integrated Supplier Management: Helping Out the CEO

MultiManufacturing Inc. discovered that once you start aggregating performance and other data about suppliers and make it readily available, you find unexpected uses, some of them well beyond the traditional supplier management process. For example, MultiManufacturing Inc.’s CEO was going to speak to a particular senator and wanted to know how much business they were doing in that senator’s state. Using SingleSource, the sourcing group was able to quickly pull together this information, which helped the CEO make a strong case about MultiManufacturing Inc.’s contribution to that state’s economy and local businesses, strengthening his hand in those negotiations.

In summary, some key points to remember when building a supplier performance management system:

Think beyond just creating a scorecard – incorporate operational and planning information; look for and encourage innovative uses of the system.
Invest in the user interface. Easy, rapid access is critical – if it’s hard to use, it won’t be used.
Data cleanliness is key – expect a lot of hard work cleaning up your data, but the benefits of that will go beyond this project.
Use the data to run your business and drive improvement – when suppliers know this data will be used in decisions whether to reward repeat business to them, as well as penalizing poor performance such as missed deliveries, they will take it seriously.

Parts of this report were excerpted from our Report Series on Managing Supplier Performance.

___________________________________________________________________________________________

To view other articles from this issue of the brief, click here.