MANAGING & MOTIVATING SUPPLIERS PERFORMANCE

BY

VIRENDRA SAHDEV

WHY MANAGE & MONITOR SUPPLIER DELIVERY

More than 70% of inputs of our product are dependent on suppliers On time delivery critical for meeting customers commitments Well performing supplier helps us be more efficient, produce products timely, of good quality, reduce costs & increase profits Poorly performing supplier disrupts our operations, makes us fail in the eyes of our customers, increases our costs, and threatens our profits Managing suppliers performance a strategic focus of every organization

OBJECTIVES
Realize that supplier on-time delivery is affected by both buyer and supplier processes Identify those elements of the buyer and supplier processes that affect supplier on-time delivery Develop specific methods and techniques to manage and motivate supplier on-time delivery Modify existing processes to provide continuing management and improvement rather than providing a "one-time" fix or cure.

SUPPLIER DELIVERY PROCESS

Receipt of Enquiry Submission of Quotation / Negotiation Receipt & acknowledgment of purchase order Shipment from inventory/production scheduling Internal expediting to meet established required date Responding to buyer expediting requests

BUYER PURCHASING PROCESS

Recognition of the need Selection of the supplier Placing the purchase order Follow up of the order Receiving and inspection of the materials Maintenance of the records Evaluation of supplier

BUYER SUPPLIER RELATIONSHIPS

Overall communication process periodic visits of sales/ technical representatives of supplier Mutual strategic sourcing commitment A structure for continuing performance review

ANALYSIS OF SUPPLIER PROCESS

SELECTION OF SUPPLIERS FOR ANALYSIS
High

Spend Suppliers High Impact Suppliers

HIGH SPEND SUPPLIERS

80% of spend is with 20% of suppliers Find out total spend of company Find out total spend of each supplier Sort list of suppliers from highest spend to lowest spend Add the spend with the first supplier to the spend with subsequent suppliers, till sum equals to 80% of total spend Monitor these suppliers

HIGH IMPACT SUPPLIERS

Late delivery shuts down production line Late delivery delays production Poor quality shuts down production line Poor quality affects product performance Poor service leads to unacceptable service to customers

SUPPLIER PERFORMANCE MEASURERS

Cost Price, Payment Terms, Shipping Charges, Savings from process Improvements Delivery On time Delivery, Ability to support scheduling requirements, Stock availability Quality - Conformance of product to requirement, Rejection rates, warranty claims, Technology used to improve products Service - Responsiveness, Resolution of problems, Technology used to provide customer service

METHODS OF RATING

Weighted Average Supplier Score- card

SUPPLIER XYZ Compan y Weight 50% 25% 15% Score out of 10

Performance Measure On time Delivery Competitive Pricing Responses to Emergency Situations

Products that meet specifications

10%

Note : Total score is not the sum of scores for the four performance measures, but a sum of their weighted scores

SYSTEM METRICS FOR SCORING

A rating method that has the potential to remove some of the subjectivity from the supplier rating process is the use of metrics generated from procurement system. Metrics are statistics that relate to performance measures. Examples
Scores for delivery Within 1 day Within 2-4 days Within 58 days Within 9 Within 13 - 12 days - 16 days Beyond 16 days

10 8 6 4 Scores for meeting specifications No 2% rejection rejection 10 8 4% rejection 6

6% 8% 10 % rejection rejection rejection 4 2 0

IMPROVING SUPPLIER PERFORMANCE

Initiate the follow-up process For long delivery items, make a second followup contact about half-way through the delivery period Regard each late shipment as a process defect & report to supplier for corrective action Establish a valid & transparent supplier evaluation process Report supplier delivery performance on a monthly basis & conduct quarterly meetings Hold strategic vision meetings periodically

ELEMENTS OF BUYER PROCESS AFFECTING DELIVERY RECOGNITION OF NEED- BOM IETMS Release of Bill of Materials by Design Deptt. i. Manual process leading to incomplete or inaccurate information ii. Time consuming Checking Inventory in Stores I. Manual process II. Probability of errors III. Time Consuming Firming up the need

ELEMENTS OF BUYER PROCESS AFFECTING DELIVERY RECOGNITION OF NEED- BULK IETMS No scientific system for purchase of bulk issue items Probability of errors leads to either very high inventory or production stoppage

ELEMENTS OF BUYER PROCESS AFFECTING DELIVERY PLACING PURCHASE ORDER Manual process - items, prices, etc. all typed manually Time consuming process Probability of errors high

ELEMENTS OF BUYER PROCESS AFFECTING DELIVERY SUPPLIER EVALUATION

System of recording of deliveries not functional Non-communication of late delivery Vendor performance evaluation not a continuous process Communication of performance to supplier not existing

IMPROVING BUYER PROCESS SUGGESTIONS STAGE I

Prepare accurate & complete Bill of Materials Send one copy directly to Stores & one to Purchase Stores to check the stocks & reserve items in stock to avoid their issuance for other Project Explore the possibility getting List prices in Excel Format for their linking to Purchase order Keep draft PO ready, and delete items in stock upon getting the information Release PO & follow-up

IMPROVING BUYER PROCESS SUGGESTIONS STAGE I

Carry out mid stage follow-up for long delivery items Record actual delivery dates On receipt, issue or reserve the items for the Project for which ordered Communicate with supplier for each late delivery Review performance of each high spend & high impact supplier monthly & arrange meetings, where improvement required

IMPROVING BUYER PROCESS SUGGESTIONS BULK ISSUE ITEMS

Set minimum limit or minimum level of stock - that
level of stock below which stock should not be allowed to fall

Ordering point or re-order level = Maximum daily or weekly or monthly usage Maximum re-order Minimum limit or level = Re-order level or ordering point Average or normal usage Normal re-order period Example :
Normal usage : 100 units per day; Minimum usage :70 units per day Maximum usage : 130 units per day Re-order period : 25 to 30 days

Ordering point or re-order level = 130 X 30 = 3900 Units Minimum limit or level = 3900 { 100 X (25+300)/2 } = 3900 ( 100 x 27.5) = 1150 Units

IMPROVING BUYER PROCESS SUGGESTIONS STAGE II

AUTOMATION

An ERP solution, working on LAN, for purchasing process, linking Design, Purchase & Stores Generation of Master Codes for all items List Prices of all standard items to be generated in the system to be updated as required BOM in Design Deptt. to be prepared based on Master Codes ERP system to check stocks in stores and prepare PO based upon shortages discounts & other terms being fed manually Generation of reports of material status/ follow-up/ vendor performance

SUMMARY
Supplier on-time delivery is affected by both buyer and supplier processes Transaction concerns often become the primary focus and obscure the issues that must be addressed to improve on-time delivery Communication and management process more important than material issues in improving ontime delivery. By rating suppliers & communication, it is ensured that suppliers are adequately contributing to our companys success