Evaluation programs determine top suppliers
By James Carbone -- Purchasing, 11/18/1999
Supplier evaluation programs have never been more important in the electronics industry. Electronics OEMs are relying on suppliers not only to supply parts, but to develop new technologies that OEMs will need for future products. With new product development time for some equipment being six months or less, and with product life cycles being two years or less for many products, reliance on suppliers will continue to grow.While OEMs are relying on suppliers more, they also are concentrating more business with fewer suppliers. Consider: IBM uses 50 suppliers for 85% of its production requirements; Sun Microsystems uses 40 suppliers for 90% of its production material needs.
The supplier evaluation programs at these two companies are critical in determining which suppliers are kept and which suppliers of new technologies will be added in the future. Most electronics OEMs rate suppliers on quality, delivery, cost, and technology. Some also rate them on service, responsiveness, and leadtime reduction. In most cases the criteria are weighted depending on the commodity the supplier manufactures. With a leading-edge asic chip, technology would be weighted high. With a commodity logic chip, price might have the highest weight.
At IBM, commodity councils have the responsibility for evaluating suppliers and choosing which suppliers will be used and how much business they will receive.
Fewer get more
In recent years, IBM has reduced its number of suppliers, aggregating more business with fewer suppliers. "We don't have a hit list of things to do as far as reducing suppliers," says Andrew Winterbottom, vice president of procurement. "What we have are requirements concerning, technology, delivery, quality, and reliability. We need competitive suppliers who can meet those requirements," he says.
While IBM does not have a hit list, it uses its supplier evaluation criteria to determine which suppliers it needs to work with more closely. Evaluating suppliers accurately is important to IBM because in some cases IBM may only have three suppliers for a commodity. "The question is always which three," says Gene Richter, chief procurement officer. "We have had battles over which ones to use." The evaluation criteria helps IBM decide which suppliers to keep and to determine details of contracts with suppliers, such as how long the agreement should last and how the contract should be structured.
To determine which suppliers to use and how much business to give each, IBM evaluates them on price, quality, delivery, and technology. However, each criterion is weighted differently depending on the commodity that the supplier produces. "We have some things where price is 80% and everything else is 5%, or technology may be 80% and price is not important," says Richter.
In fact, technology often is the determining factor in rating a supplier for quality because computer technology changes so quickly and IBM needs to stay on the leading edge.
"We base the technology rating on what's going on in the supplier's lab," says Richter. "Is the supplier going to be the first to be qualified on a 1gigabit DRAM, or the last? Does the supplier offer a full breadth of memory products or only one narrow niche? Is the supplier going to be the leader in the next generation in new technology? It can be very subjective. It's hard to sort the top three, but it's easy to tell the top three from the bottom three," says Richter.
By carefully evaluating a supplier's technology prowess, IBM can identify new suppliers and develop them. By doing so, IBM can guarantee that during times of shortages it will get its share of parts from the supplier it has invested in.
Determining direction
Technology is obviously important to Sun Microsystems because its workstations and network servers often use leading-edge semiconductors and other components. A supplier's strategic direction and technology development are scrutinized closely, says Eddie Reynolds, director of supplier management for volume products. Sun needs to know if a supplier is going in the same technological direction as Sun because of the speed at which technology changes. "We need to know they will support us in the future," he says.
While suppliers need to be in lockstep with Sun in technology development, they must also perform to some critical "customer deliverables," such as cost, quality, and availability.
To measure those deliverables, Sun has changed its supplier scorecard, tailoring it to specific product groups. "We have aligned scorecard criteria by cost, quality, availability, and time-to-market requirements by product groups," says Reynolds. The reason for this is some criteria are more crucial to some product group than others. "For example, at the high end of product space, quality may have higher weighting than the volume products group, which has more sensitivity to cost," says Reynolds. High-end products would be network servers; volume products might be lower-cost workstations.
Suppliers are evaluated quarterly, with purchasers in the product groups determining how much weight each criterion receives. A perfect score would add up to 100.
While some product groups may weigh quality higher than others may, a supplier who has quality problems risks losing business with Sun. With quality, any defective part that has a "customer impact" is taken very seriously. If a supplier's part has a field failure--meaning a customer computer fails because of a defective part--the supplier can lose up to 50% of his rating for a quarter.
Suppliers who deliver high-quality parts and perform well overall on the scorecard are awarded more business. "We tie scorecard performance to future business awards," says Reynolds. "They keep business and they get future business awards," says Reynolds. In fact, Sun has used its supplier evaluation program to concentrate more business with fewer suppliers. It rates only about 40 suppliers per quarter. However, those suppliers receive 90%-95% of Sun's business. Five years ago the same business was spread over several hundred suppliers.
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