Are supplier awards really worth it?
This series of charts illustrates some key results from a study entitled "Impact of Total Quality Management on Financial Performance: Evidence from Quality Award Winners" by professors Kevin B. Hendricks and Vinod R. Singhal. The study, published in August 1998, may be obtained by contacting Professor Singhal at the Georgia Institute of Technology by email at vinod.singhal@mgt.gatech.edu, by phone at 404-894-4908, or by fax at 404-894-6030.
By Elizabeth Baatz -- Purchasing, 11/19/1998
Crystal sculptures, gold-plated trophies, and walls full of plaques proclaiming "Supplier of the Year" adorn the hallways and lobbies of more American corporations than ever. But does the pomp and circumstance that surrounds supplier awards produce real benefits? Or are the awards simply feel-good accolades aimed at producing "warm and fuzzy" feelings for winning suppliers?According to top purchasing executives and award-program planners, supplier awards and the recognition banquets that come with them are far more than just an excuse to sponsor a fancy dinner and hand out a few trinkets to business associates. For many, a supplier awards dinner at the end of the year represents a final step in an intense journey that involves rigorous data collection under the TQM (total quality management) rubric as well as multitudes of meetings with suppliers and purchasing's internal customers. Top purchasers view their awards programs as integral parts of their overall efforts to improve total quality.
Listen to what Robert Rudzki, chief procurement officer at Bethlehem Steel in Bethlehem, Pa., has to say about supplier awards: "Our awards program [started in 1997] is simply part of a continuum in our strategic sourcing process that began a few years earlier." That process saved the company $100 million in costs from 1995 to 1998. "The entire emphasis in our strategic sourcing program is on continuous improvement, and the awards reflect this," Rudzki asserts.
Furthermore, as a three-time winner of General Motor's supplier award, Rudzki says folks at Bethlehem Steel didn't need a lot of convincing to understand the motivational pull that an awards program can provide.
Another example: At Intel in Santa Clara, where arguably one of the most rigorous and hotly contested corporate supplier awards program resides, the Supplier Continuous Quality Improvement (scqi) award has been won by only three companies since 1990. "Once a supplier enters the scqi program [which entails a ISO 9000-type certification process, scorecard metrics, and a strategic improvement plan], they see systemic rewards," says Deirdre O'Connor, materials quality manager for corporate purchasing. So why have an award?
"Human nature requires recognition. When someone busts their hump, we want to recognize that," says O'Connor, who emphasizes that the top Intel award is very difficult to achieve.
GOOD programs pay off
Using awards to provide recognition and motivate suppliers is all well and good, but bottom-line contribution is what separates value-added events from simple fun and games. According to a recent study of 600 publicly traded winners of corporate supplier awards and independent quality awards such as the Baldrige Award and the Shingo Prize, award winners on average do garner measurable, statistically significant gains. In a four-year period after achieving an award, prize-winning companies clearly outperformed a control group of non-winners in a number of accounting measures. For example, operating income among the winners rose 91% while the control group's income rose only 43%. (See charts.)
Still, all award programs are not equal, cautions Vinod R. Singhal, a professor of management at the Georgia Institute of Technology and co-author of the award winners study. "Supplier awards are usually not as tough as the Baldrige," says Singhal. Even so, according to Singhal's analysis, winners of supplier awards outperform the control group by significant amounts, albeit winners of independent awards perform better than everyone. For example, winners of supplier awards managed to grow operating income 33 percentage points higher than companies that did not win awards. Sales also grew 23 percentage points faster for supplier award winners compared to the control group.
"Even when a supplier award is based on subjective analysis, the simple fact that a supplier is getting feedback motivates them to do better," says Singhal. "Initially very subjective in nature, over time you will find supplier awards programs become more objective. Supplier award programs are part of a process."
Works in progress
Indeed, most companies characterize their supplier awards process as a journey that has a long way to go. That's so even in automotive manufacturing, where supplier awards have been a staple in the procurement toolbox since the mid-1980s or even earlier.
For example, General Motors maintains supplier metrics on quality, service, and price to determine its prize winners, and just this past year added a technology metric to the process.
Chrysler, which has awarded several hundred plant-level gold Pentastar awards each year for more than a decade, introduced a more rigorous corporate-level platinum Pentastar award five years ago. The tougher platinum award recognizes less than a dozen top performers. Corporate role model awards for suppliers that excel in one area, such as cost reduction or quality, are also being introduced.
At Honda of America Manufacturing, the supplier award metrics have been recently adjusted to account for the impact that a supplier's glitch might have on consumer satisfaction or safety. Thus a supplier of brakes, for example, is held to a stricter award standard than a supplier of radio knobs. And at Ford Motor the entire supplier recognition program has just undergone a major re-vamping to make the judging less subjective and more objective.
"We wanted to evolve the supplier recognition program into something better," says Gregg Sherrill, director of supplier technical assistance for Ford Motor in Dearborn, Mich. "When the award was not objective, then even internal people would wonder why a particular company won an award." As a result, Ford has worked to put in place a metrics program to drive an awards program that tracks key performance goals. To be considered for a top award, a supplier must qualify first at a "Q1'' level of performance based on joint automotive quality standards similar to ISO 9000. Then the supplier must hit six target metrics which include a delivery rating, cost rating, and parts-per-million rejects of 60 or less.
The end result will be three levels of awards based on the number of targets that have been hit and other factors. "We haven't decided on names for the awards yet," says Sherrill. "But we expect the first of these to be handed out in March 1998."
Making the awards process more objective isn't for the faint of heart, however. Udo Rieder, vice president of purchasing for Delta Airlines in Atlanta, says maintaining data integrity can be a big, big chore. For example, at Delta, supplier metrics track unit pricing this year versus a year ago. But if the color of the part changes, then the part number in the information-systems database changes too and tracking the price change suddenly gets dicey. "If there are enough problems like this, then we have to go in the system and manually fix the data, which can consume a good deal of the buyers' and managers' time," says Rieder. "We want to spend less time gathering data and more time on working to improve performance."
Delta just gave its first supplier awards on October 14, and already Rieder is talking about the challenge of meeting the next generation of cost metrics. "Instead of measuring unit costs, we want to measure total costs." So if a new jet engine blade costs more per unit, but saves the airline money over time via more efficient fuel consumption, "then the supplier should not be penalized in its award scores," says Rieder.
Metrics based on strategy
Devising the appropriate metrics upon which to base the supplier awards is where the rubber meets the road. "The data determine the winners," says Cesar Penaherrera, vice president for Honda Manufacturing of America in Marysville, Ohio. "And the data should coincide with your strategy," he says. "At Honda, the award mirrors our qcddm process of sourcing. [qcddm stands for quality, cost, delivery, development, management.] We have formalized this approach in the last three to four years."
Likewise, Delta's supplier awards program also mirrors its strategy of controlling costs and increasing productivity. "With 61% of our operating costs coming from purchased goods and services, and only 36% of the total costs flowing through purchasing," says Delta's Rieder, "we are trying to develop a performance-based culture under a foundation of solid metrics throughout the entire company." So every month, not just prior to an annual award dinner, all buyers in procurement, all internal customers, and vice presidents get a report with suppliers' scores.
Of course, in the information-systems driven awards programs, suppliers have access to their scores every month too. At Delta, suppliers see their own scores and also a ranking of where they fall relative to similar suppliers. At Ford Motor, many of the metrics used in the awards program are delivered continuously to suppliers through a confidential page on the Internet's World Wide Web.
Purchasing's demands for high quality and low cost may be communicated more quickly via the Web, but old fashioned face-to-face contact also remains a key intangible benefit of running an awards program. Most companies--Bethlehem Steel, Miller Brewing, and Honda to mention a few--make a point of delivering the awards not only to upper management at a fancy banquet, but also to the workers on the shop floor.
"It's one thing for the boss to say that quality is important, but another thing entirely for the customer to come out and say it," says Jerry Schiedt, corporate purchasing director for Miller Brewing Company in Milwaukee. "When we actually visit a plant to present an award to the folks who made the award possible, then we build a relationship with the company and the folks on the floor who do the work to ensure the quality of the products we buy." A little thank you can go a long way to successful partnerships. Adding in a speech and session of autograph signing by Miller Brewing Company spokesman Rusty Wallace, a famous race-car driver, doesn't hurt either, says Schiedt.
Investors see value
Race-car drivers, however, won't convince another constituency that running a supplier awards program is a good idea. The key driver of the trend to corporate America's increasing demand for supplier recognition comes from upper management. And the ultimate driver of the trend for all public companies, of course, is Wall Street. Luckily, says Professor Singhal, Wall Street does recognize the positive link between winning awards and performance.
According to Signhal's study, companies that won awards enjoyed a 114% hike in their stock price over a five-year period. Meanwhile, the Standard and Poor's 500 index rose only 80% over the same period and a portfolio of stocks from industries that match the award winners' jumped only 88%.
Gathering upper-management support for a supplier awards program is a critical first step for anyone who wants to begin a supplier evaluation and awards program, says John MacLean, vice president of purchasing for American Airlines in Fort Worth, Texas. "I came from the automotive world, so I was accustomed to supplier performance measurement systems. The first thing we did: Built a business case for our Supplier Excellence 2000 program, went to 15 key officers of the company and had them sign a document stating that they saw a need for SE2000 and would support the program."
"After gathering management buy-in, we knew that creating a rigorous and meaningful supplier awards program would take time," says Irma Todd, manager of supplier quality for American Airlines. "We started down the road to a supplier award in 1993. The first report card wasn't issued until 1996 and the first awards weren't handed out until 1997."
Even after all the time and money has been invested in developing supplier performance metrics and meaningful awards, corporate supplier awards programs still need more work, says Jeff Trimmer, director of operations and strategy for procurement and supply at Chrysler. "The awards are nice and the supplier can get a big display case of these things," says Trimmer. "But what the supplier really wants to know is 'am I going to get more business from this award?'" Traditionally, the relationship between the amount of business won and the award won has been unclear, although companies like Miller Brewing, Chrysler, and Delta Airlines make big efforts to advertise the winners.
But "a supplier should be able to track the relationship between its performance and its share of the business," says Trimmer. Maybe in the next generation of supplier awards, the link between the sculpture in the trophy case and the supplier's bottom line will become clearer. But then again, as long as Wall Street appreciates the award winners, then at least the public companies are getting the award that the chief executive really desires. m
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
Now Playing:
