How to: Narrow your supplier list
By Purchasing Staff -- Purchasing, 7/14/2007 11:24:00 AM
This is the fourth installment in our series on how purchasing staffs at a variety of companies organize their strategic-sourcing activities. Other installments in the series ran in the March 1, May 3 and June 14 issues of Purchasing, and you can find them on Purchasing.com.
This series is more of a conversation than a tutorial, and we want you to join the conversation. Send your comments to pteague@reedbusiness.com, and write “strategic sourcing” in the subject line.
Get the information firsthand
When it comes time for Latin America sourcing manager Roy Calderón of H.B. Fuller to narrow down his list of suppliers, he prefers first-hand information. And whenever possible, that means touring supplier plants and interacting with the supplier’s staff.
“I have a technical and manufacturing background, so I first try to understand the logistical and manufacturing capabilities of a supplier, as well as their quality assurance process and systems,” says Calderón. What he sees at a supplier’s plant helps him determine how much the St. Paul, Minn.-based H.B. Fuller can expect from that supplier in the way of consistent quality.
Calderón makes a point to scrutinize both a plant’s infrastructure as well as its production staff. “Morale and work environment is hard to put into hard numbers or dollars, but it needs to be part of a supplier’s intelligence profile,” he says. Though he can’t visit every single one of his suppliers, he makes a point to visit at least his top 10 suppliers in his region.
When visiting a supplier, Calderón looks for any signs in the facilities that might signal supply problems down the line—if a machine looks like it might wear out or if the plant seems like it’s falling apart, he takes notice. Production line pacing is another indicator of a supplier’s health that he inspects. If a supplier is too busy and overloaded, it might not be responsive enough to any order changes. If it is too relaxed, it might not be economically viable for much longer. Neither extreme is encouraging, Calderón says.
Another crucial component of supplier health is the attitude of employees on the plant floor. Calderón wants to see if they seem motivated or happy. He’ll speak with employees about nontechnical topics, even just to ask them how they’re doing, and gauge their reaction. If the workers seem to be proud of their work, it’s more likely that supplier will provide a consistently high quality product.
While some suppliers might want to keep Calderón in the board room offices, he insists on the broader picture. “If all I see are fancy offices and the suppliers aren’t willing to show me their manufacturing process and let me talk to their employees, that’s a big question mark,” he says.
— Maria Varmazis
 “If all I see are fancy offices and the suppliers aren’t willing to show me their manufacturing process and let me talk to their employees, that’s a big question mark.” –Roy Calderon |
 When we get to the point when most companies would re-engage their sourcing process, for us that would be a conversation with the supplier on establishing new targets around value improvement and TCO improvement, –Cotteleer |
 Procurement can’t know everything so it’s key that they go to their stakeholders and find out their needs before sending an RFI to suppliers. –Laszlo |
 “To make sure that suppliers provide comparable proposals, we clearly state the objectives of the event and ask for a detailed cost breakdown of the proposals submitted.” –Linville  “What we have found is suppliers will narrow themselves down.” —Michael Riley |
Compare apples to apples
During the request for proposal (RFP) process at Sara Lee, the procurement operation uses a template to ensure suppliers base their responses on similar criteria. Procurement sends the RFP to suppliers identified during a request for information (RFI) process. This list could number as few as two to three suppliers or as many as six to eight, depending upon spend category.
“We try to be as prescriptive as possible and enforce compliance to the RFP template,” says David Cotteleer, vice president of procurement and co-pack/co-manufactured at Sara Lee in Neenah, Wis. “If a supplier sends an incomplete template or presents information in a different format, we work with the supplier to get the information into the standard template. It’s the only way we can do an apples-to-apples comparison.” Cotteleer leads procurement for contract-manufactured products, transportation, facilities, MRO (maintenance, repair, operations) and capital equipment.
But just because the supplier delivers its information in the template doesn’t necessarily mean it’s in a format that’s comparable with information from other suppliers, so procurement reviews all responses and conducts follow-up sessions with suppliers.
Cotteleer says it can get particularly tricky in places where procurement asks suppliers about cost structure. “Different companies allocate overhead differently so we really need to make sure that when we review the cost model that we sit down with the supplier and understand how it characterizes costs.”
He makes it clear that having to come up with a short list of suppliers is not an every day occurrence for procurement at Sara Lee. Typically, when a spend category that’s been under contract comes up for review, procurement’s preference is to stay with the existing supplier.
To select that supplier, procurement goes through a robust strategic sourcing process, identifies an industry leader, contracts with the supplier and manages a performance-based relationship with the supplier. “When we get to the point when most companies would re-engage their sourcing process, for us that would be a conversation with the supplier on establishing new targets around value improvement and TCO improvement,” says Cotteleer.
Sara Lee procurement visits potential suppliers of direct materials, especially if the supplier provides raw materials or ingredients that go into the pastries and food items it makes because the buy requires certain food safety and quality assurance review processes. For indirect materials, procurement will at least meet face-to-face so that the supplier can present its responses to the RFP.
Presentation of information in the RFP marks the end of the formal supplier evaluation process for procurement at Sara Lee. A cross-functional strategic sourcing team led by procurement determines scoring and weighting criteria, evaluates RFP responses and selects front runner and back-up suppliers. The team then negotiates with the primary candidate.
—Susan Avery
Get stakeholders involved
Cutting down to a shortlist of suppliers is not only about reviewing a list of supplier metrics—it’s about matching up the needs of internal stakeholders with what the suppliers bring to the table.
Art Laszlo, director of strategic sourcing at recreational products maker Brunswick Corp. in Lake Forest, Ill., typically sends two requests for information (RFIs) out when looking to narrow down a list of suppliers prior to a bidding event. The first RFI goes to a list of internal stakeholders asking them what they are looking for from a supplier and the second RFI is later sent to a broad list of suppliers to find out if they meet the requirements outlined by the internal stakeholders.
“Procurement can’t know everything so it’s key that they go to their stakeholders and find out their needs before sending an RFI to suppliers,” Laszlo points out. “We use the stakeholders’ input from the internal RFI to build the RFI for the suppliers on a wide variety of nonprice factors prior to the RFQ stage.”
All of the questions on the supplier RFI are weighted by the internal stakeholders. When suppliers’ responses come back in, each supplier is given an overall grade based on how they answered each weighted question. It’s all done through an electronic prioritization matrix in Brunswick’s Iasta e-sourcing tool.
This e-RFI process can be used prior to either an online bidding event such as an e-auction or a more traditional sealed bid event.
Laszlo has two caveats for buyers at the RFI stage. First and foremost make sure the right person at the supplier is answering the questions with the right level of information on an RFI. “We recently had an incumbent supplier come through the RFI process ranked very low,” he says. “We reviewed it and saw they had not even answered many of the questions on the RFI. It turned out they had a junior salesperson that had only been with the company a few months responding to RFI and he didn’t know the answers. They almost lost the chance to bid on their contract because of it.”
Laszlo’s second warning for buyers is to make sure they communicate with suppliers after the RFI—notably with the losing suppliers on why they did not get invited to the RFQ. “That is a great way to improve the competition within a given supply base,” he points out. “If you can tell them where they should improve you might have several more qualified suppliers the next time you run that event.”
—David Hannon
Take a hands-on approach
New suppliers to Hillenbrand Industries must pass an evaluation process conducted by a cross-functional team of personnel from engineering, purchasing, quality and marketing. “Suppliers are selected based on a number of tools aimed at determining their capabilities and effectiveness,” says John Linville, director of procurement and value engineering for the Batesville, Ind., company. “That’s why you can say supply base rationalization is a result, not the objective, of our evaluation process.”
Chosen suppliers will service Hillenbrand’s chief operating subsidiary, Batesville Casket, a leading funeral service supply company. But the potential suppliers don’t walk into the process blind since necessary information is made available to them by the Hillenbrand/Batesville team.
“We segregate our spend into key commodities and conduct an in-depth spend analysis,” says Linville. “For large-volume purchasing and items critical to our business or quality, we conduct a formal RFP process. We begin by identifying key internal and external stakeholders; documenting business requirements, opportunities and challenges. We also identify the key cost components/drivers and diagram the value chain.”
The team also uses Porter’s Five Forces tool to identify its buying power and necessary supplier requirements. This market analysis was developed by Michael E. Porter, the Bishop William Lawrence University Professor at Harvard Business School.
Potential suppliers are sent a questionnaire to provide necessary information for comparison to their competition. Hillenbrand’s team also uses Dun & Bradstreet credit reports to gain insight into risk and stability and perform extensive industry research (Securities and Exchange Commission filings, news reports, and other public documents) to uncover any issues not outlined in the questionnaire.
“To make sure that suppliers provide comparable proposals, we clearly state the objectives of the event and ask for a detailed cost breakdown of the proposals submitted,” says Linville. Detailed specifications are provided by procurement to ensure consistent product and potential suppliers are required to submit samples.
“If it is determined that a potential supplier has the capability to meet our requirements with consistent quality, and has met our criteria for pre-approval, we conduct a supplier visit with the cross-functional team to gain insight and evaluate their operations,” notes Linville. A supplier visit is necessary to ensure that the answers to the questionnaire and the insight gathered to that point are accurate and reliable.
But, even before the visit, each team member investigates the potential supplier. “We look specifically for such signs of continuous improvement as visual quality measurements, quality control, go/no-go gauges, inventory control and job instructions,” says Linville. “If possible, we try to meet with the supplier’s executive management team to discuss strategy and the direction of the business. At some point in the process we will gather a list of current and past customers for follow up.”
All suppliers—new and old—are challenged to provide year-over-year cost improvements. “We meet regularly with our suppliers to discuss their performance based on supplier scorecards and cost results to solicit ideas for improvement,” says Linville.
—Tom Stundza
Communicate the requirements
At Sun Microsystems, many suppliers may be considered for business, but few are chosen.
Michael Riley, senior supply base development manager, says that Sun tends to use the same suppliers it has used in the past, but occasionally a supplier must be added for cost, quality or technology reasons.
After Sun develops a short list of potential new suppliers, it may send out a request for proposal which will include the technical and business requirements that Sun needs from suppliers.
A review of the documents by potential new suppliers often results in some suppliers dropping out of consideration. “What we have found is suppliers will narrow themselves down,” says Riley. “One or two will fall out. One will be weak. Another one will say this is not our cup of tea. They may be tailored to the PC market and we are high-end server-centric. You end up with ones in the middle—the sweet spot. The ones we can begin discussions with in earnest to see if these guys will fit in,” says Riley.
In some cases, Santa Clara, Calif.-based Sun, will visit potential new suppliers to check out their technical and business capabilities. “We make a visit if there is a significant amount of business involved or if there is high risk,” says Riley. High risk could mean that there are few sources for the part.
By visiting suppliers, Sun wants to make sure the supplier cannot only manufacture quality parts, but that the supplier knows how the part will be used.
“They need to understand the applications it will be used in, how it works, how it fits in with what we are doing,” says Riley. “It is not just about the supplier making the part to spec and shipping it on time.”
For the most part, Sun will not choose new suppliers through reverse auctions. The company uses reverse auctions for suppliers it has already done business with.
—Jim Carbone
How to: Identify Available Suppliers
06/13/2007How to: Monitor Supplier Performance
12/12/2007
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