Supplier service is critical to contract manufacturers
By James Carbone -- Purchasing, 11/18/1999
In many ways, contract manufacturers (CM) evaluate suppliers the same way as their OEM customers do--they measure a supplier's performance on price, quality, delivery, and service. But a major difference is that contract manufacturers weigh the performance criteria differently. Often a contract manufacturer will weigh service with more importance than an OEM because a CM cannot be responsive to its customer needs without the support of suppliers.Unfortunately, service is harder to measure than price, delivery, and quality criteria because it is subjective and its definition can vary from one CM to the next. At contract manufacturer EFTC in Denver, Colo., for example, service includes quoting turnaround time, response to day-to-day questions, and ease of doing business, says John Briant, vice president of materials and logistics. Quoting turnaround time is important, since contract manufacturers are often asked to bid on contracts. To do so they need a lot of quote support from suppliers. How quickly suppliers respond to an RFQ can make or break the CM's bid for business with an OEM.
But measuring service is another matter. EFTC is developing metrics on turnaround time that it will soon implement. Commodity managers and purchasers at EFTC's seven sites will rate suppliers in turnaround on a 1-5 scale, says Briant.
For EFTC another part of service is innovation. It wants suppliers to suggest process improvements to create value for EFTC. "We want to deliver a problem to the supplier and let them help in the solution," says Briant.
Quality is still important
While service, responsiveness, and innovation are important, EFTC stills needs high-quality parts, delivered on time at the right price. In fact, in the next year those criteria may become more important to EFTC because it plans to have more direct relationships with component manufacturers. In recent years, EFTC purchased much of its component requirements from distributors. But EFTC has grown and feels it needs to cultivate relationships with semiconductor manufacturers. "Our largest suppliers happen to be distributors this year, but that will likely change in the year 2000," says Briant.
Its supplier-evaluation program will be important as EFTC moves to more direct relationships with component suppliers. It will use the program to make sure suppliers "keep up with us and we keep up with them."
EFTC says that as it uses more direct suppliers, it will use a "best value" methodology for evaluating them. Under best value, EFTC wants suppliers to reduce cost 6% per year. "We want to do that through true productivity and not just price reduction," says Briant. With delivery, suppliers must meet a zero days late, three days early window. They must deliver to that window 98% of the time. "We would like everything 100%, but with our 2,900 active suppliers, that's not a reasonable goal. We are 95.6% right now," says Briant.
Regarding quality, EFTC is looking for inbound quality of less than 500 parts per million (ppm) defect levels. "We "use parts rejected over parts received," says Briant. The 500 ppm benchmark is an average for all components. Semiconductors typically have lower ppm defect levels, while passives are higher.
As EFTC moves to more direct relationships with suppliers, it will use its best value criteria to certify suppliers. "We are going to use our Oracle system to look at those metrics, except for service and innovation, which will be separate," says Briant. "We'll decide who has maintained best value from the top three categories, marry that with service and innovation, and see who has maintained that for three months or more," he says.
"Certified suppliers will receive a bigger piece of the pie by commodity through supplier performance and supplier rationalization. More business is the biggest reward," he says.
Partnering for performance
Supplier responsiveness also is important at Toronto-based CM Celestica. It is part of Celestica's Partners in Performance supplier recognition program, under which suppliers are also rated on price, delivery, and quality.
"Our Partners in Performance suppliers do the basics well and provide additional support beyond what our needs are," says Paul Blom, vice president of supply chain management. "They are very responsive to us. They work with us on the production side when we have changes. They work with us in implementing important elements of electronic commerce. They give us return privileges, or provide supplier-managed inventory or repetitive supplier scheduling," he says.
Celestica wants suppliers to understand its material needs so that when unexpected new orders from customers arise, suppliers can respond and ship the needed parts on time. Celestica measures suppliers' performance to responsiveness. "We measure how readily suppliers respond to upsides and what terms and conditions they provide," he says.
Technology also comes under responsiveness. "We need to understand what they are doing technologically," says Blom. "We need to know what things suppliers are doing that are new and leading edge and useful to us," says Blom. Celestica tries to measure to what extent supplier communicates technology developments to Celestica. It also measures how well suppliers communicate solutions to technical problems that concern a part.
Understanding price
With price, Celestica buyers try to understand what the pricing trends are with a given commodity, and then rate suppliers accordingly. "We continuously benchmark pricing in commodity areas," says Blom. "For instance, with passives we will focus on understanding the takedown rates and try to make sure we are getting prices that are dropping as fast or faster than the industry average. If a supplier does not meet the falling price, it would affect his evaluation and how much business he would get," he says.
A supplier's quality is measured and goals are set. Celestica measures ppm levels; different commodities have different target levels. The ppm targets are lower for semiconductors than passives. "Each plant has a tracking system for finding defects at receiving and the production line," says Blom. "Those are aggregated against total consumption of the part and what kind of defect rate we saw for the month."
Celestica also looks at the quality of transactions. "When the supplier delivers parts to us, is the shipment coming to us in the right format with the right packaging?" asks Blom.
With delivery, suppliers must meet a zero days late, three days early window. "We map them to a continuous-improvement plan. We look for month-to-month and quarter-to-quarter improvements," says Blom.
While Celestica rates its supplier on quality, price delivery, and responsiveness, the weighting of each criterion can differ by commodity or supplier. "Some commodities are customer controlled, so our customer already has put the price together. As our customer outsources manufacturing to us, the customer will already have a contract in place with a supplier, say on an asic (application specific integrated circuit) that deals with price," says Blom. So Celestica won't spend a lot of time evaluating that supplier on price. "We'll just make sure we receive the negotiated price when the part is shipped.
"When we control supplier selection against the approved vendor list from the customer, then we put a greater focus on price because we are the ones responsible for negotiating the price on behalf of our customer," says Blom.
Suppliers who perform well are rewarded in different ways. The obvious reward is that they will receive more business from Celestica. But Celestica is also looking to develop deeper, longer-term relationships with suppliers who perform well.
"We end up committing to suppliers more in terms of time and resources to the relationship and that helps them, not only in terms of level of business, but how well we interact with them."
Celestica has electronic data interchange (EDI) relationships with its best suppliers, which often results in a more efficient and less costly procurement process for the supplier. "As we develop a deeper relationship with suppliers and they understand where we are going as a company, it helps their business run more smoothly. They see less expense-per-dollar output to Celestica because we optimize the time we work together," says Blom.
Blom says supplier-evaluation programs have helped improve supplier quality over the years, and such programs will continue to be important in improving quality in the future.
"Supplies have gotten so much better in producing the components," says Blom. "Ten years ago we spent more time screening and stressing components before putting them in assemblies because we didn't trust component quality. We tended to get hit more with maverick lots. That doesn't happen as much any more."
Evaluating TCO
Many electronic OEMs use a total cost of ownership (TCO) model in evaluating suppliers. Case in Point: Lucent Technologies. Lucent evaluates suppliers through its "cooperative vendor program." The company's global procurement organization (GPO), supply line engineering, and factory engineering groups all rate suppliers.
"We rate suppliers three times per year for semiconductors," says Sharon Strouse, commodity team leader for Lucent's supply management center for semiconductors. "We meet with suppliers face to face," she says. "We use the meetings as an opportunity to build relationships with them."
GPO uses a total cost of ownership model comprising delivery, price, and service to evaluate suppliers. The component engineering group at factories provides a rating based on failure mode analysis, which can be everything from a defective part that causes a line to shut down to the wrong label being placed on a box of parts. The supply line engineering group does quality reviews of a supplier's facilities and processes and monitors the product-change notice process.
With GPO, a supplier can receive 15 points for cost reduction, 45 for service, and 40 for delivery in a rating period. With delivery, a supplier's delivery performance is measured based on ability to deliver to Lucent's want date, to the supplier's leadtime, and to the supplier's "last positive acknowledgment (LPA)." That means if Lucent wants a delivery on Oct. 1 and the supplier agreed to that date, but later changed it to Jan. 1, the supplier is rated on the Oct. 1 date. With the delivery rating, percentage of deliveries to Lucent's want date is worth 25 points, leadtime is 10, and the LPA is 5 points.
With service, suppliers are rated on how well they communicate with Lucent about changes on orders. For instance, if a supplier promised delivery on a date but cannot meet that date and fails to notify, points are deducted from the supplier's service rating. Suppliers also are rated on their response to requests from Lucent, such as information about a new part. The quicker the supplier responds to the request with the correct information, the higher the rating. Service also encompasses buffer stocks that a supplier keeps for Lucent and participation in electronic data interchange (EDI).
With pricing, suppliers are rated against market prices. Lucent benchmarks prices and wants suppliers to be at market price or below. GPO's ratings factor in ratings of the other groups, and suppliers are given a rollup rating. Forty percent of the rating is quality/reliability; delivery/flexibility is 30%; service, 15%; access to technology, 5%; and price is 10%. In the most recent rating period, suppliers rating score ranged from 94.4 to 77.
Suppliers who consistently score higher are rewarded with new design wins and a larger portion of Lucent business. Lucent also uses the ratings of its suppliers to recommend strategies for the commodities it buys.
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