Want to Improve Your Supply Chain Performance? Start with Your Suppliers!

Companies now know that suppliers of critical goods and services can provide major competitive benefits, in the form of lower costs, improved quality, on-time delivery, technological innovation, and customer service. As firms seek to globalize their businesses, they must also bring with them a capable supply base that can likewise support these global initiatives into new markets and businesses, as well as drive costs out of the supply chain. One strategy that has been employed by many companies including Honda, Daimler Chrysler, John Deere, Toyota, and other manufacturers is to help their supplier improve through a strategy known as “supplier development”. A formal definition for this strategy is:

“Supplier development is a bilateral effort by both the buying and supplying organizations to jointly improve the supplier’s performance and/or capabilities in one or more of the following areas: cost, quality, delivery, time-to-market, technology, managerial capability, financial viability and environmental.”

In employing this definition, it is important to identify the hierarchy of strategies that must be established prior to deployment of these practices. Firms often begin the process of continuous improvement of their processes through extensive internal training programs to educate company and purchasing personnel in basic TQM principles. Training is often carried out by quality department managers, using two to three day seminars on continuous improvement, customer satisfaction, basic statistics and process capability. These initiatives later mature into a focus on the goal of assessing supplier performance. Organizations at this level realized that in order to improve material quality and performance, a history of supplier performance is necessary for future effective decision-making and sourcing strategy formulation. Key measures of quality include percent acceptable vs. rejected lots, parts per million defective, warranty percentages, reliability, process capability ratios, percent parts rejected, and internal/external customer satisfaction. Practices also included developing a cooperative approach to setting specifications, listing of “problem” suppliers, definition of target quality levels, employing common measurement systems across strategic business units, and pre-qualifying suppliers.

Once assessed, companies often focused on consolidation of volumes with fewer suppliers, in order to eliminate those suppliers incapable of meeting expectations. Supplier databases often pinpointed those suppliers consistently unable to perform, resulting in fewer suppliers getting more of the business. This “first cut” of reducing the supply base is often fairly easy to implement, as non-performance is easy to identify once an assessment system is in place. Almost all of the companies who responded have already gone through several rounds of supply base reduction, and are closing in on optimizing their supply base to an appropriate number of suppliers. Many of these practices were implemented during the 1980s and early 1990s.

After seeking these initial improvements, organizations may then move on to improve the performance of those suppliers remaining in an optimized supply base. Companies employed a diverse set of supplier development strategies. Moreover, these approaches can be classified into supplier-specific improvement projects, or efforts to improve the capabilities of the entire supply base. Further, initiatives either focused on product-level or process-level improvements.

In implementing supplier development, our research found that companies belong in one of two categories: those firms focusing on Strategic Supplier Development, or Reactive Supplier Development. The former group of companies are focused on actively concentrating their efforts on improving the long-term capabilities of suppliers of the most important commodities, while companies with reactive supplier development strategies adopted an ad hoc response to eliminating supplier deficiencies.

Companies employing a strategic approach to supplier development often focused on improving capabilities of the entire supply base, and then “funneled” these efforts into supplier-specific improvements. On the other hand, reactive companies typically “reacted” to major deficiencies that arose as a result of a “crisis” situation, (described by one manager as a “burning platform”!)

Moreover, strategic supplier development approaches focus on allocating resources for supplier improvement, with an objective of continuously improving the supply base in the long term. This process is undertaken by an executive-level assessment of critical commodities and suppliers, followed by a focused improvement carried out by a commodity or development team.

Results from a large scale survey of over 500 supplier development efforts by Krause (1994) indicates that respondents found that supplier development results (measured as supplier performance before the development effort versus after) included:

• Reductions in incoming defects by 6.2%
• Improvement in on-time delivery by 21%
• Reductions in order to delivery cycle time by 12 days

• Improvement in orders received complete by 8%.

However, results also suggested that not all of the buyers surveyed were satisfied with the outcomes of their supplier development efforts. Moreover, some supplier development efforts actually resulted in deterioration in the level of satisfaction. This was particularly true with respect to supplier performance in product innovation and ability to reduce total cost. A Supplier Development manager at Chrysler noted that:

“Some suppliers do not respond after multiple interventions. Even though they are “saying the right things”, nothing happens. Involvement with suppliers spans between 6 months and 1.5 years on average. 80% of the time, there are significant performance improvements. In 20% of the cases, there are none.”

Approaches to supplier development include rewarding performance (“The Carrot”), penalizing poor performance (“The Stick”), on-going detailed assessment and feedback (“Measurement”), and direct involvement in suppliers’ operations (“Hands-On Approach”). Research on which approach is most effective suggests that a combination of approaches may be appropriate under different circumstances, depending on the nature of the supplier, the type of commodity, and the management team at the supplier. One thing is for certain though, as this same manager at Chrysler noted:

“Supplier Development has been talked about for a number of years at Chrysler, but in my opinion, this was largely “lip service”. Only recently has the company actually implemented development as a formal activity. Up to now, 80-90% of supplier development has been reactive in nature, and 10-20% strategic. Chrysler’s objective is to reverse this ratio, so that 60% is strategic and 40% reactive. This can be achieved by anticipating (proactively) problems before they occur by getting involved in Advanced Quality Processes early in the new product development cycle.”