BUYING FROM THE RIGHT SUPPLIER
3. QUALIFICATION OF NEW SUPPLIERS
Will the supplier respond promptly to rejected materials and provide credits, as appropriate?
Will the supplier comply with customer policies and procedures?
A major automobile manufacturer, known for its commitment to quality and low cost, stresses the word “actual” in qualifying or working with suppliers. This company emphasizes “the actual part, at the actual place of production, by the actual people doing the work.” The point is to avoid sitting in a conference room and taking the word of a staff person or salesman, but rather to witness the activity first-hand, to see what is actually being done. This approach is extremely effective in supplier qualification and in problem solving.
If the needed source simply does not yet exist, it may be necessary to implement a source development effort. Investing in or subsidizing the supplier’s cost of development and testing may make sense. Getting closer to a supplier’s product development processes is a key activity for the purchasing engineering function. Selection of the right source, along with negotiating the right price, are purchasing’s greatest challenges!
3.1 How Many Sources of Supply?
How do we spot check prices, or assure we are keeping up with current technology, or benchmark quality and delivery performance? The implication of these questions is that the purchasing manager should consider having a policy about using multiple sources of supply as a precedent to deciding from whom to buy.
Why have more than one source? If you split the business, how do you determine who gets what? Should you use two sources if one is more expensive? Are you concerned that a supplier may be unable to supply because it has suffered a catastrophic fire or flood? Whether to use single or multiple sources is a controversial subject. Some buyers argue that multiple sources reduce risk while increasing costs. At the same time, some companies today are using fewer sources based on the philosophy of developing a more productive relationship with a supplier through a mutual long-term commitment to work together.
Arguments for multiple (does not imply many!) suppliers are:
Competitive supply provides leverage to ensure performance at reasonable price levels.
Assurance of supply may be increased.
Buyers have greater flexibility should a supplier’s quality slip, technology fall behind or they fail to maintain delivery performance.
Keeping multiple sources allows the buyer to become knowledgeable about competitive technical innovations. Unless the item is basic, how do buyers know which supplier will come up with technological innovation?
This is relevant when buying sophisticated electronics and tight tolerance mechanical items.
A major impetus to the movement toward single source has been quality legend W. Edwards Deming. One of Deming’s 14 points about quality is to have a single supplier. He proclaimed you’re lucky if you get one company who can make what you want. While recognizing his contribution to quality, Mr. Deming was probably not an expert on contracts. An acquaintance told how Deming refused to visit with General Motors until they agreed in advance to keep him on the job for a long time based on the assertion that the “transformation” would require a long-term commitment. The spokesperson mentioned that Deming didn’t know what the PO read, but quoted him as saying, “I will bill you from time to time based on my belief of your commitment to my principles.”8
Many have agreed with Deming’s position on single sourcing, and some American automakers that single-sourced some items say the practice cuts down on component dimensional variability. They claim to be able to work more closely in meeting design and quality requirements if using fewer suppliers. They also claim it’s easier to insist on a process for failure analysis when the supplier has total responsibility.
Believing the Japanese use only one source, some buyers jump on the bandwagon of the sole-source philosophy. But the truth is, the Japanese almost always have back-up suppliers. After 4 years of single sourcing with Inland Steel, Honda of America added both Armco and Bethlehem Steel as suppliers. As Honda’s VP for Corporate Planning explained, “These new sources give us greater flexibility to meet our increased production and expanding operations.”9
What are some practical arguments for a single source of supply?
Consider the following:
It’s easier to work out delivery schedules as may be needed for just-in-time (JIT) delivery requirements.
The supplier can be expected to share in continuous improvement efforts to provide savings and customer service benefits.
Sometimes no one else is able or willing to supply.
Concentrating purchases with one good supplier provides advantages of
“economy of scale.”
Special dies, tools, molds or setup charges are often too expensive to duplicate.
8 “W. Edwards Deming: The Prophet of Quality,” 1994 Wootton Productions’ TV program.
9 Purchasing, April 10, 1986, p. 28B7.
In the event of product defects or failures, corrective action can be taken sooner, as there is no delay in determining who supplied the defective parts.
Requirements may not be large enough to warrant the added expense of testing and inventorying with another supplier.
Suppliers who know they are solely responsible may be more accountable.
Yet, when only one source is used, competition is essentially eliminated after the initial point of partner selection. Single sourcing puts the burden of performance completely on the supplier partner, and in practice the supplying partner must step up to the challenge of true partnership. Some quality experts point out that if a backup source is available, each source will feel relief from responsibility.
A distinction can be made between sole versus single source. Sole source is said to mean there is no one else qualified or available, while single source means the buyer chooses to use only one of several available sources. So, it’s usually beyond the ability of the buyer to overcome a sole source without a deliberate source development process.
Not all buyers have embraced the single source philosophy. Most experienced buyers prefer a backup. Typical reactions from buyers have been, “What if my supplier goes on strike, or burns down, or gets flooded out?” Those are good questions. Whether to have a backup source or use a single source depends largely on whether there is time to recover from delays or problems. Buying for a high-volume assembly line favors having an alternative. If buying for resale, or the buyer can wait for new shipments, perhaps a single source is enough.
When a single source does make sense, be sure to have the following provisions in place:
A commitment from the supplier for disaster recovery and work stoppage contingency plans
Cost-based formulas to determine in advance the basis for price increases or decreases
A plan to deal with new technology development by competitors A joint improvement program, outlining specific cost and service improvement projects
Clearly a factor in determining a company’s sourcing strategy is the degree of trust and the quality of the relationship with the supplier. If a buyer wants to use a single source, but still have backups, here’s one way of achieving both objectives: Divide the business for the broader commodity
family, say castings, among two foundries. Give each supplier half the total purchase volume, while sourcing all of the volume of each pattern or of specific parts to a single supplier. This gives maximum item volume production to each supplier. Have an understanding that capacity will be made available for the parts that supplier does not currently supply, in case of an act of God or catastrophic problem. One automaker calls this approach,
“single-source/dual-capability.” In many circumstances, this is a logical approach to this difficult buying dilemma.
A stated policy to use only one source limits the buyer’s options. Certain higher risk environments not only justify but also actually support a multiple sourcing strategy. Each commodity or item should be judged on its own.
Wise PMs will decide upon and prepare a policy statement based on their specific situational needs.