BUYING FROM THE RIGHT SUPPLIER
6. SEARCH FOR LOW-COST SUPPLIERS
6.2 Post-Selection Supplier Evaluation
How do buyers manage their supply sources? Assume a company has sales of $1.00, and purchases of $.53, thereby indicating a productive value-added of $.47. In such a case, if a company doesn’t manage its suppliers, it is managing only about half of the cost of products sold, and this won’t hack it in a competitive environment Throughout the performance period, buyers must tell suppliers what is expected. How high is high?
A buyer can manage suppliers by using a variety of day-to-day options, such as:
Increasing or decreasing purchase volume
Getting local stocking of items, for faster shipments and lower inventory Using competition to get the best package of price, leadtime, and quality Giving incentives for better supplier performance
Dropping a supplier for poor service
Taking legal action—as a last resort, hopefully (rather drastic)
Reporting performance—quality, delivery, and other performance data The term “managing suppliers” may bother some in the purchasing profession. Management may be defined as, “the art of making things go right” to properly address this concern.
With good job performance, the following desirable results are signs of effective supplier management:
Near-zero rejection rates—at receipt and forward through the life of the end item delivered (today some buyers seek six-sigma quality levels, equivalent to a defect rate of only 3.4 defects per million pieces) Lowest total cost incurred
Good supplier relations, with ongoing joint productivity improvement efforts
Reputation of “Firm but fair!” with suppliers anxious to expand the business relationship
The ultimate test—high customer satisfaction level
Some people resist the tracking of supplier post-award performance on the grounds that it’s the supplier’s job to perform, and they therefore only list the suppliers they plan to eliminate. Underlying this approach is often the concern that an elaborate system is needed, but this need not be the case.
There is value in knowing a supplier’s performance throughout the performance period, and with the ability of the Internet to quickly transmit information around the world, this has become much easier and less expensive to achieve.
If buyers are to award business based on performance there has to be some standard of judgment. We are interested in a moderate, reasonable way to identify those suppliers that perform well and those that perform poorly.
How we use the system is key. The focus is not on punishment, initially, but on communication to improve performance for the benefit of both parties.
Let’s take the case of a supplier who has performed poorly, yet makes a commitment to get back on track. Surely, there is nothing more discouraging to such a supplier upon inquiry to be told, “We still think you’re doing poorly.” Conversely, nothing is more gratifying than to have the buyer formally acknowledge a positive turnaround. The emphasis, then, is a positive approach that can bring about improvement. Good suppliers can be superior ones, but for this to happen both the buyer and the supplier have to know how they’re doing to help them to achieve superior results.
The following list was compiled from a survey of those who used a supplier rating system 10 Purchasing managers rated in priority, on a scale of 1 to 10, the importance they attached to various aspects of supplier performance:
Quality of product 9.7
Competitive prices 9.4
Delivery dependability 9.0 Services offered: technical and other 8.0 Total cost reduction assistance 7.7 New product and R&D ideas 6.2
Some of the information analyzed by companies, but not used in then-supplier measurements, were:
Financial strength 5.2
Geographical location 4.3
Reputation 4.2 Other factors 2.0
10 Results of surveys from seminars by Pooler and Associates at the World Trade Institute, New York, Chicago, and Los Angeles, 1987–1993.
6.2.1 A Sample Rating Exercise
One supplier measurement system that continues to offer value is the purchase performance index. This index attempts to reduce all basic factors into one numerical rating, or “Ideal Index.”
A typical rating is composed of the traditional supplier performance areas of quality (assigned 40 points), price (35), and service (25). The percentages will vary according to the importance given each area in relation to the whole. Any such rating is composed of both subjective and objective factors.
Figure 5-2 shows an example of an “Ideal Index” for supplier ratings for quality, delivery and price, then combining the three performance ratings to determine an overall rating as shown in the last box.
Let’s actually rate our fictitious company from earlier in this chapter. The Amanda Kay Products Co. (AKP) supplies controls for air conditioners. If all their shipments were acceptable over a period of time, a value of 40 points (maximum) would be assigned to quality, which indicates optimum performance. If some lots were not acceptable, the 40 points would be reduced proportionately. During one quarter, AKP supplied 2000 acceptable valves out of 2500 shipped. The quality rating therefore would be 2000 divided by 2500 times 40, which is 32 points.
The price rating is based on a maximum of 35 points. A list is compiled of all unit prices from each major supplier of similar interchangeable controls. To the list, transportation cost and the cost of nonrecoverable defective purchased material is added. While AKP will replace the 500 rejected controls, they usually will not make up the loss (assume $500) that resulted from removing defective controls from units that had been assembled before the defect showed up. The new unit cost for each supplier is then determined. The lowest ultimate cost always will be given the full 35-point value. Since the price factor for AKP is 35, to determine a competitive supplier’s rating, the lowest cost is divided in turn by each of the other higher costs. The resultant ratio times the full 35 is the rating for each of the other suppliers.
The final rating is for service, which is usually a percentage of delivery promises met. The delivery promise date from the supplier is the standard for measurement, and not the requested delivery date. If a supplier never missed a delivery, the full 25 points are awarded. This rating may be adjusted based on such factors as outstanding sales help or expert engineering advice. As an example, the buyer applies this subjective factor to adjust the 25 points.
Since AKP has delivered all lots on time, but has failed to take prompt corrective action on a leaky washer, 22 points are awarded based on the buyer’s judgment.
The composite rating, 100 points for perfection, is the total for the three measured areas. AKP scores 89, made up of quality 32, price 35, and service 22 points. A rating of 90 to 100 is excellent, 80 to 89 is good, 70 to 79 is fair, and below 70 is not acceptable. So, AKP is considered to have a rating of
“Good.”
As previously noted, variations on the areas and points awarded can suit the specific company and its situation. For example, for some companies a designation of 50 might be more appropriate for quality, while the delivery weights a 20, cost competitiveness a 20, and service and reliability a 10. The data necessary to maintain this rating may seem daunting at first, but to put it to the test, first select a part family of major importance. Then gather the information only for the suppliers of that part family, monthly for 3 months.
Remote locations can provide monthly data by e-mail or over the Web. Enter the information into a simple spreadsheet as in Figure 5-1, and run the “Ideal Index” calculations. How does this match with intuitive ratings? Have any opportunities to improve emerged from the analysis? Now the cost-effectiveness of the rating effort can be evaluated fairly.