Ways to measure supplier performance
Supplier development programs and supplier scorecards are an enormous asset in helping buyers rate the effectiveness of their supplier network
By Emily Kay -- Purchasing, 3/3/2005 2:00:00 AM
Kennametal Inc. prides itself on quality products, competitive prices, and on-time delivery. So when a European supplier missed a shipment by weeks and customers bought materials elsewhere, the metalworking manufacturer's procurement chief took action.
Jim Cebula, director of Kennametal's global purchasing and travel, negotiated a consigned inventory contract with the supplier, which, within four months, was able to stock enough products to deliver them on time again. Thanks to its supplier remedial efforts, Kennametal also recovered the business it had lost due to the provider's poor execution
"Since we're in a competitive market, it's very easy for our customers to call our competitor when we don't have inventory available," says Cebula, with $2 billion Kennametal in Latrobe, Pa. "Any time we don't have inventory, it has a direct impact on sales."
Kennametal's supplier produces high-quality products at competitive prices. But trying to manufacture small lots had instead caused "unplanned surprises" in its shipping process, which resulted in untimely deliveries, Cebula notes. "We're a make-to-stock business, so we have to anticipate our customers' demands. Delivery is critical to us."
Kennametal customers include automotive and aerospace manufacturers and construction equipment companies.
Costs of Supply Problems
Examples of suppliers wreaking havoc on manufacturers' operations are rampant. Poor supplier performance accounts for billions of dollars in product recalls and even consumer deaths. In an especially notorious example, Ford Motor Co. lost $3 billion after it recalled more than 13 million defective Bridgestone/Firestone tires running on its vehicles. Experts estimated the faulty tires may have caused as many as 250 deaths.
Such problems, combined with today's dynamic, global business environment, require buyers to evaluate and manage supply partners' efficiencies. Suppliers that fail to meet performance standards can cost manufacturers a bundle in actual expenditure, customer satisfaction, and lost business.
"A supplier could provide the lowest price, give you the right price, and ship on time," says Tim Minahan, senior vice president of supply chain research with Aberdeen Group Inc., a market research firm in Boston, Mass. "But maybe they ship damaged goods, short ship you, or don't have access to automation, so you're processing paper purchase orders and invoices, which adds cost and time to the system."
If suppliers don't meet delivery schedules, manufacturers might have to shut down or reschedule lines, notes Deb Lynch, sourcing and supply management director with The Toro Co., a $1.7 billion, outdoor maintenance products maker in Bloomington, Minn. "That results in sending employees home or having to expedite other parts to build other products. If they're far enough away, you might have to air freight product in and either the supplier or we incur air freight costs."
The costs to recover from supply chain disruptions can run into "several hundreds of thousands of dollars," adds Lynch.
Global Supply Chain
Purchasers can't afford to buy from suppliers that ship substandard products, miss delivery dates, or charge too much because their businesses rely on sourced materials. External suppliers deliver about half of all goods and services to companies, according to an Aberdeen report.
In addition, many large corporations find low-cost supply sources offshore, particularly in Southeast Asia, says Jim Lawton, marketing vice president with Open Ratings Inc., a supply-management software vendor in Waltham, Mass. Purchasing officers increasingly seek to squeeze as many costs of materials out of their budgets as they can, Lawton notes.
To Mike Calder, manager of operational excellence, energy, and materials with $7.4 billion Air Products and Chemicals Inc., increased global sourcing poses risks he must mitigate.
"As we advance into the Far East, our supply chain has become longer, the criticality of materials becomes greater," Calder says. "Choosing the right suppliers is critical to our overall supply chain security."
Essential to Operations
With manufacturers increasingly relying on external suppliers, it's hardly surprising that some 70% of the companies responding to an Aberdeen survey view measuring supplier performance as critical to their operations.
Many manufacturers have established strict supplier performance measurement processes and procedures to ensure external suppliers meet stringent operational requirements.
Allentown, Pa.-based Air Products, which provides gases and chemical products to a variety of industries in 30 countries, spends some 65% of total corporate revenues to purchase raw materials such as energy, natural gas, and chemicals.
With the costs of hydrocarbons increasing, Calder works actively with some 200 strategic suppliers to drive continuous improvements in delivery, quality, price, and overall performance.
"Two of our measurements in the delivery area—on-time delivery and fill rates—have a direct impact on inventory and planning downstream," Calder notes. "If you're not getting your material and what you ordered, that sets up a huge buffering in inventory that will impact your business."
Air Products suppliers undergo monthly measurement reports, while some 35 corporate buyers conduct annual reviews with them. Air Products evaluates suppliers on the level of communications between supplier and manufacturer, progress in continuous improvements, level of account penetration, responsiveness, and overall risk the suppliers pose to the supply chain.
Employing the supplier evaluation module in SAP AG's R/3 enterprise business software and a customized continuous improvement tool, Air Products helps failing suppliers determine reasons for falling short and often implements corrective actions. In one such instance, after a supplier missed several delivery dates, Air Products discovered that an internal order receipt and processing process caused the problems. The company helped the vendor fix the problem in less than two months, says Calder.
Key Competitive Advantage
As companies move beyond trying to squeeze costs out of their supply chains, the performances of their suppliers become critical.
"As firms manage their supply chains for integration and competitive advantage," says CAPS Research, a Tempe, Ariz.-based research firm, "supplier development becomes a key tool in driving superior supply chain performance."
Kennametal, which established formal supplier performance assessment procedures in 2001, recognizes the need for quality providers. "We add value to the product we buy so [our customers know] we have a value-added process," says Cebula. "But without the relationships we have with our suppliers, we would not be able to service our customers."
The company, which spends 35% of revenues to purchase metallurgical raw materials, steel products, and indirect goods, distributes some 400 supplier report cards monthly to strategic suppliers.
The scorecards measure such factors as product quality, which represents 35% of total score; on-time delivery 30%; total cost management 25%; and payment terms 10%. (see below)
Suppliers that fall below target scores for two consecutive months must submit corrective action plans, which Cebula reviews. Those that improve continue to work with Kennametal, which starts looking for alternative sourcing for vendors that keep failing.
Like most companies, Kennametal and Air Products don't expend the same resources on indirect and second-tier providers. "They're not very strategic, so we don't go through the rigor of monthly measurements for those," Cebula notes.
Calder agrees. "We don't want to spend time on low-level suppliers [that have little] impact on the organization," he says.
But Open Rating's Lawton questions that lack of scrutiny of lower-tier suppliers. For 10 years, Lawton managed procurement efforts for a large electronics company for a commodity that required 1,000 sourced parts and components. Concentrating on only those parts that were critical to the unit's performance, Lawton one day ran out of nonstrategic materials.
"You can focus your attention on what's most important, but if you don't have screws, you can't ship the product," says Lawton. "The last thing someone running a materials organization needs is not being able to ship a product because they don't have screws."
Lawton's group expended "a lot of human capital" seeking alternate sources. After much scrambling, "fire fighting," and additional costs, they shipped on time.
Afterward, his group immediately established short-term and long-term supplier performance measurement strategies—which included a focus on its lower-level suppliers.
"If you don't have a part from a supplier…you're not paying attention to," Lawton says, "you're just as unable to ship that product as if it's from a strategic supplier."
Manufacturers and Suppliers Benefit
Manufacturers can attain multiple benefits by measuring supplier performance. Companies that fail to measure most of their suppliers risk "large-scale quality mishaps, service deficiencies, and cost overruns that can eat into bottom-line profits and damage competitive positioning in the market," notes Aberdeen in its research report.
On the other hand, the report concluded, companies that subscribe to such practices can reduce buffer inventory, cut cycle times, and lower the total cost of ownership (TCO) of their supply chains.
Employing Ketera Technologies Inc.'s hosted Ketera Procurement software to control and reduce spending and eliminate maverick spending, Kennametal has improved compliance with strategic contracts from 30% to 70% since 2002, says Cebula. Integrated with SAP R/3 and other legacy systems, the software lets nonprofessional buyers execute contracts with preferred suppliers that meet corporate performance standards.
By sharing data and working with suppliers to attain excellent performance levels, Air Products has lowered supply chain costs by some 4% over 10 years. "You can actually take the costs out of your overall supply chain and drive down the TCO," says Calder.
Suppliers that comply with manufacturers' requirements benefit by obtaining continued business with those companies. They can also gain far more from working with purchasers to improve their performances.
Maintaining itself as a strategic supplier helped Volvo Construction Equipment, North America, earn a three-year extension to an existing three-year contract that Waste Management Inc. (WMI) awarded in 2001, says George Fink, national accounts vice president with Volvo CE, a $35 billion construction equipment manufacturer and supplier in Asheville, N.C.
Volvo CE works on continuous improvements as a supplier to WMI, a waste and environmental services provider in Houston, Texas. WMI evaluates Volvo CE's product, technology, service, support leadership, quality, delivery, leadtime, and total cost performance.
Under the two firms' Partners for Profit program, Fink avers that Volvo CE helps WMI improve costs at the same time that it sells products at a profit and its own dealers make money. Volvo CE has expanded the efforts to its own suppliers.
"A lot of things have trickled down to our suppliers and dealers — the way we provide support and the way we do business," says Fink.
As the importance of external suppliers increases, savvy purchasers expect their sourcing partners to meet rigid performance standards or lose their business. Companies' survival depends on it.
"Future competitiveness will be determined by a company's ability to develop strategies to optimally align and manage an extended network of supplier relationships," asserts Minahan.
Emily Kay is a contributing writer for PURCHASING magazine based in Chelmsford, Mass. She can be reached at mlek@comcast.net.
A sample scoreboard from Kennametal
Your company's performance is scored from zero to ten on four major dimensions, with weighting factors reflecting their relative importance to Kennametal, as follows:
| WEIGHT | CATEGORY | RATING | SCORE | ||
| A supplier whose score falls below 6 for two consecutive months will be required to submit a corrective action plan within 30 days. Kennametal will retain your scores and will compare them to scores from other suppliers as part of its ongoing source selection process. Please review this report carefully and report any questions or comments to your Kennametal buyer. Source: Kennametal Inc. |
|||||
| 35% | PRODUCT QUALITY | 9.3 | QUALITY/COST SCORE KEY | ||
| Absence of Defects | 33.3% | 9 | Excellent | 10 | |
| Conformance to Specs | 33.3% | 9 | Very Good | 9 | |
| Shipping Damage | 33.3% | 10 | Good | 8 | |
| Average | 7 | ||||
| 30% | ON-TIME DELIVERY (Score = percent on time¸ 10) | 90% | 9.0 | Below Average | 6 |
| Poor | 5 | ||||
| 25% | TOTAL COST MGMT | 7.6 | |||
| Price Reductions/Rebates | 36.4% | 7 | TERMS SCORE KEY | ||
| Kanban/Lean Initiatives | 0% | N/A | 3% 10 | 10 | |
| Consigned Inventory | 14.1% | 5 | 2% 10 | 9 | |
| Responsiveness | 14.1% | 10 | 1% 10 | 8 | |
| Leadtime Reduction | 14.1% | 7 | Net 60 | 7.5 | |
| Evaluated Receipt Settlement | 0% | N/A | Net 45 | 7 | |
| Invoice Accuracy | 7.1% | 8 | Net 30 | 5 | |
| Bar Code Shipment | 0% | N/A | C.O.D. | 0 | |
| Accept P-Card | 7.1% | 10 | |||
| No Restocking Fees | 7.1% | 10 | |||
| 10% | PAYMENT TERMS | 5.0 | 5.0 | ||
| YOUR SCORE | 8.4 | ||||
Degree of improvement attributable to the firm's supplier development effort
| Area of Improvement | Estimated % Improvement |
| Source: CAPS Research, "Developing a World-Class Supply Base |
|
| Order cycle-time (from order placement with supplier to receipt of item) | 19% |
| Quality (reduction in parts per million defective, warranty returns,etc) | 24% |
| On-time delivery (ability of supplier to deliver within the buying company's specified delivery window) | 39% |
| Percentage price change for this item (from this supplier) | 3% |
| Shared price reduction (cost savings shared with this supplier) | 7% |
| New product development time (from concept to volume production) | 19% |
| Access to new technologies | 15% |
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