One of the challenges faced by corporate purchasing organizations today is to continually reduce costs while working with the highest-quality suppliers. Supplier recruitment, evaluation and management are taking on a new level of importance in today's supply chain and one company that is taking this trend to heart is outdoor maintenance products maker The Toro Company of Bloomington, Minn., which spends about $800 million annually with both direct and indirect suppliers.

In the past four years Toro has implemented several cost-reduction programs including the "5 by Five" initiative, which was introduced in 2001 to increase Toro's profit after tax from 2.7% to 5.5% through cost and supplier reductions (see sidebar on 5 by Five). As a follow-up, Toro this year introduced its "6+8" initiative, which focuses on raising profit after tax to 6% or more by the end of fiscal 2006 and increase sales by 8%.

But these kinds of growth initiatives often concern purchasing and supply chain managers looking to maintain or improve quality of products and suppliers. Can supplier quality be maintained in such a cost-conscious environment? That's the question Deb Lynch had to ask herself when she came to Toro as a consultant on the cost-reduction project. Today, Lynch is the director of sourcing and supply management at Toro and says the sourcing organization she first encountered at Toro was very tactical and focused on piece part price to achieve improvements. Her first move was to look across the company and review the total spend and its potential for leverage—from engineered parts to indirect spend— using a portfolio or commodity analysis process.

Depending on the complexity of the commodity and the nature of the spend, each buyer was responsible for coming up with a strategy to work with the supply base to reduce costs, improve quality and maintain or improve delivery. In short, it was a total supplier performance management process and it needed to happen early in the sourcing process to be effective.

"During the product design process is when you are building in your cost structure and it is much more expensive to go back in later and try and take those costs out than it is to engineer the costs accurately in the beginning," Lynch says. "So we put together the New Product Development Sourcing organization which is co-located with engineering, and reports to me in a consolidated organization. They're involved in all aspects of the new product development process as it relates to suppliers, supplies, pricing and quality."

Now 12 people strong, the New Product Development Sourcing organization works closely with engineers from prototype up through production build on how to meet or beat target costs. Technical experience is as important for people in this organization as purchasing skill. Lynch says some have engineering degrees, some have business backgrounds and some are new to Toro while others are company veterans. A sourcing specialist from this group is assigned to each project development team to develop a sourcing plan for that project and determine what suppliers should be involved in each new product development process and when they should become involved.

The process is also being integrated with Toro's e-sourcing efforts. When Toro initiates a sourcing program out of New Product Development Sourcing or out of its production sourcing organization, the program is automatically set up as an e-sourcing project with a project management dashboard to track progress of cost savings, which is a high priority for an organization with defined fiscal savings goals.

Supplier quality and performance data is integrated into the supplier selection process with the goal that only suppliers with continuous/consistent high performance scores will be included in any sourcing activities or awarded new business from New Product Development.

"The exciting aspect of e-sourcing is that it allows true cross-functional team participation in the sourcing process, including the suppliers," says Lynch. "All team members can contribute to the development of an RFP or RFQ, review results online, contribute feedback and track project progress. We look at supplier evaluation from a target costing perspective and a technology perspective, looking at new or different technologies and materials. We also look at the warranty information, and the history of the supplier and component. We want to ensure that we are using the components from the suppliers for the right application. This process lets us bring the product in at or better than the target cost while building quality into the project."

When Toro announced at a recent supplier council meeting it was implementing a "no cost increase" policy, suppliers responded by saying their costs were increasing and they had to pass some of that on to customers like Toro. As a result, Toro this year will begin introducing the same lean initiatives it had undertaken internally to its supply base to pull cost out of the supply chain.

Toro has four goals with supplier lean: flexibility, quality, asset management/inventory and cost.

"In going lean, we want to work with our suppliers to convert to pull-based inventory systems as they are being implemented at our plants," says Lynch. "In addition, we have communicated with our suppliers an expectation for increasing cost management on their parts. Our cost initiatives are not directed at reducing the bottom-line profitability of our suppliers. Rather, we are asking our suppliers to adopt lean as a method to manage their costs and profitability and therefore remain successful or become more successful in this increasingly competitive and difficult global economy."

About 30% of Toro's suppliers are active in lean manufacturing already and the goal is to move those efforts into the supplier's supply chains as well. The company later this year will start the lean initiative with a group of about 20 key suppliers that offer the greatest savings opportunities. According to Lynch, Toro is working more collaboratively with those suppliers to align its sourcing efforts with the lean manufacturing initiatives.

"As our plants see the need for things like increased flexibility, pull-based inventory, vendor managed inventories, kitting of parts or supplier consolidation for reduced inventories, we work to establish cross-functional teams with the suppliers, Toro manufacturing, and engineering. We also identify the suppliers that we believe have the largest impact to our supply chain and begin working with them on specific improvements using lean tools and methodology."

To ensure quality is not affected by the lean moves, Toro two years ago implemented a supplier performance evaluation tool that measures cost, quality, delivery, warranty, continuous improvement and technology or a supplier's ability to deliver innovation. Data is pulled from Toro's SAP and warranty systems and consolidated into reports that are accessible to suppliers via an extranet.

"Suppliers can look at their report cards whenever they want to," says Lynch. "Then, depending on the issues, score and significance of the supplier to our businesses, the buyer will schedule formal reviews with the supplier on an annual, bi-annual or quarterly basis. We had one supplier who began to implement lean in their plant and has had some great success with that after learning where they stood in terms of their internal costs."

Toro has a separate three-person supplier quality organization that focuses mostly on supplier development as a strategic component and supplier performance improvement as a tactical component. The tactical involves reacting to specific issues while the development focuses on helping suppliers grow and improve their capabilities, Lynch says.

But a major shift to a lean supply chain does not come without speed bumps. Suppliers that look to be in serious need of help are brought into Toro's Adopt-a-Supplier program where a cross-functional team is formed that includes engineering, manufacturing, purchasing and quality to discuss specific issues with the supplier. The group then writes a charter and puts a project plan in place with input from the supplier about how they can fix the problem and progress is tracked using project management tools. Each buyer is required to adopt at least one supplier into the program a year. There are typically between 15 and 20 suppliers brought into the program each year.

As an example of the program's role, Lynch describes a recent situation where one of Toro's suppliers had a consistently low quality score and its number of rejections was increasing at an alarming rate, causing the supplier to be placed on restricted status. Toro's objective was to improve those scores and return the supplier to approved status because it had been a key supplier and a provider of an important technology.

"The problem was the supplier did not realize that they were not adequately testing their product and therefore they never truly identified the root cause of the problem," Lynch says. "We were not making progress on resolving the issues, so we moved this issue into our Adopt-a-Supplier program, organized a cross-functional team with the supplier and started working on the issues. We provided testing equipment to the supplier and they made changes to their process and testing. The cross-functional approach helps us provide continuous follow-up. Using project management, we assure that there is a plan, schedule, reporting and process owner with an implementation plan and follow-up."