Medrad knows how to treat suppliers
Managing relationships is key to Baldrige win
By William Atkinson -- Purchasing, 10/21/2004 2:00:00 AM
Earlier this year, President George W. Bush and U.S. Secretary of Commerce Donald Evans presented the 2003 Malcolm Baldrige National Quality Award (MBNQA) to executives of Medrad, a manufacturer of medical devices and services related to human body imaging procedures based in Indianola, Pa. Medrad is one of seven recipients of the prestigious honor—and the only manufacturing company. While the award's evaluation criteria cover a company's performance from soup-to- nuts, the MBNQA made a special point to emphasize the importance of Medrad's initiatives surrounding supplier relationships and how important they are to the company's overall stellar performance.
Procurement's pivotal
To understand the pivotal role that supplier relationships play in Medrad's success first requires an understanding of the company's basic philosophy related to suppliers. Ever since the 1970s, numerous companies have adopted the program du jour when it comes to suppliers. Through the early 1980s, the focus was on "three bids and a cloud of dust." During the 1980s, companies began borrowing from Japanese management philosophies, which involved working closely with suppliers. In the late 1980s and most of the 1990s, many of these working relationships evolved into meaningful partnerships. By the late 1990s, though, many companies began reverting to the old "three bids and a cloud of dust" approach, especially with the advent of such activities as reverse auctions. As a result, the culture of long-term supplier partnerships became a thing of the past in many companies. They began to pit suppliers against one another once again, throwing loyalty and long-term contracts out the door.
Medrad, however, has essentially ignored these trends. It has adopted a philosophy of long-term, close working relationships with suppliers, and it stays with this approach, regardless of what everyone else is doing. In fact, the only thing that changes at Medrad in terms of supplier relationships is that it continually looks for ways to strengthen and expand its relationships. "We purchase very few commodity items," explains Pete Ochel, executive director of procurement. "Most of what we buy are highly-complex, highly-engineered parts." This necessitates unique, long-term supplier relationships.
Becoming a Medrad supplier in the first place is no easy task though, according to Eddy Guarascio, manager of global procurement. "Suppliers tell us that our selection process is the most rigorous they have ever been through," he explains. To ensure selection of the very best suppliers, the procurement department works very closely with Medrad's supplier quality group, headed up by Gary Molitor, manager of supplier quality. "Besides helping us select suppliers, this group has been very instrumental in working with us to develop and expand many of our other supplier initiatives," says Guarascio.
Once passing muster, new suppliers can expect to be treated with a great deal of respect and to enjoy a high degree of loyalty from Medrad. "We have an extreme sense of loyalty to our suppliers and will work with them as long as we can, because there is a steep learning curve in terms of what they need to know to work with us," explains Guarascio. Adding strength to the growing bonds is the commitment of company president and CEO, John Friel, and the senior vice president of operations, Jim Kessing, who do more than pay lip service to supplier relationships. They participate actively in a number of supplier initiatives, including attending annual supplier conferences.
Supplier initiatives
The foundation of Medrad's supplier relationship strategy is the Supplier Performance Scorecard. For years, the company concentrated its efforts on trying to improve struggling suppliers via weekly review sessions and multiple teleconferences. Despite the company's efforts, it still found itself having to shift work to alternate suppliers, resulting in additional follow-up and increasing costs.
To solve this problem, the company created a Supplier Performance Scorecard initiative, which set clear expectations for suppliers and created a way to easily record and communicate performance results to suppliers. There are four elements to the scorecard:
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Quality is the most important (50 points). Here, Medrad emphasizes concepts such as Six Sigma Quality initiatives and Defect Per Million (DPM) targets. As a result of implementing this metric, Medrad has been able to certify a number of components as "dock to stock," eliminating incoming inspection.
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Ontime delivery (30 points). The score is based on date reliability (20 points) and quantity reliability (10 points). Since introducing this, late and incomplete deliveries have been significantly reduced.
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Price (10 points). Here, Medrad compares its "standard price" with the supplier's "order price as invoiced." This metric discourages suppliers from adjusting prices upward during the fiscal year, except as necessary and as a result of mutual agreements. Currently, the company is modifying this metric to include rewards for supplier cost reduction initiatives.
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Service is the only one to be scored subjectively (10 points). Interestingly, suppliers score themselves in this area via an electronic self-survey. The idea is to require suppliers to assess their own strengths and weaknesses. "Initially, suppliers gave themselves lower marks than we would have given them," notes Guarascio. "Over time, though, they became softer on themselves. However, we have veto rights. We discuss their ratings with them and make changes as necessary." The benefit of the approach, though, he says, is that it forces suppliers to consider their own performance. "It gives them more accountability."
Another integral element of Medrad's supplier relationship strategy is the annual Supplier Day Conference. Typically, Medrad invites two representatives from up to 40 of its key suppliers, which, on average, represent about 90% of the company's spend. The company also invites a number of key service providers and development partners on behalf of its human resources, research and development, and facilities departments. Following a welcome and introduction by Friel, the conference provides suppliers with information on new products, supplier quality assessments and initiatives and purchasing initiatives. Then, following breakout sessions and a tour, suppliers participate in recognition activities.
Each year at the conference, the company rolls out a new initiative. One of these was the IDEAs Program, which was developed by the company's buyers as a way to formally solicit cost reduction ideas and record their results. Within the first six months of implementation, Medrad was able to realize savings of over $300,000 as a result of supplier ideas.
While these two initiatives provide the foundation for its supplier relationships, Medrad has introduced a number of other formal activities designed to strengthen relationships with many of its 20 or so most important suppliers. The company finds that these 20 account for about 80% of its spend.
One of these activities is a program of onsite supplier meetings. "Our company culture is team-oriented and collaborative in nature, both internally and with our suppliers," explains Guarascio. "As a result, two years ago, we introduced joint service agreements with about a dozen key suppliers." One feature of these is, with a few of the company's most critical suppliers, the agreements call for formal monthly design reviews. Each quarter and once a year, the meetings are more formal in nature. In fact, during the annual meetings, senior executives at both companies meet to discuss projects and other initiatives of mutual interest. "This provides everyone with a high level view of our relationship and the activities within it," he explains. Medrad also schedules annual, and sometimes quarterly (but not monthly) business reviews with other key suppliers.
Supplier visits are another integral part of the supplier relationship strategy. First, Medrad selects and qualifies new suppliers via site visits by a cross functional team. "Then, we follow up with onsite quality audits of suppliers on our approved supplier list," adds Guarascio. "Third, we conduct site visits of suppliers as necessary."
Another initiative involves design reviews. "We have adopted an early supplier integration program," states Guarascio. "In fact, we start involving the most important suppliers almost from the time we're putting a sketch on a napkin." Medrad schedules a number of these design reviews with suppliers throughout the life of each project.
Medrad and its suppliers also make the most of the time they happen to spend together at national conferences they attend. "Each year, we attend an industry conference and arrange to meet with some of our key suppliers to socialize and get to know each other better," continues Guarascio. "In addition, we send three or four of our engineers and buyers to a couple of other annual trade shows, where they meet with two of our competing injection molding suppliers to discuss ideas and also to attend some of the conference sessions together."
Besides interacting with suppliers at their (the suppliers') locations and at national conferences, Medrad makes the most of the time suppliers spend in its own facilities. Through a program called On-Site Hotel Cubes, the company arranges for representatives from three or four key suppliers to visit and spend one day a week onsite. "We have a couple of locations where they can sit and work," explains Guarascio. These are empty cubicles that are outfitted with desks, phones, computer jacks, and other features.
"They have limited access security badges that allow them into certain other parts of the company," adds Ochel.
One relationship has even expanded to the point where that supplier's representative is onsite at Medrad full-time. "He has been able to offset a lot of work that the procurement department had done by being a liaison with his own company," reports Guarascio.
Results
As a result of introducing and building on these supplier relationship initiatives, Medrad has seen a significant improvement in overall supplier performance, in addition to earlier and more active supplier involvement in its new-product development process. This has allowed Medrad to be able to provide 99.9% on-time deliveries to its customers.
In 2000, approximately 20% of the company's suppliers were considered "Outstanding" (consistently scoring 95% or better on its supplier scorecard). By early 2004, 87% were in that category. And with Medrad's commitment to strengthening relationships even more, it is likely this number will continue to increase over time.
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