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1 Management and Development of Suppliers. Outline  management and development of suppliers  rationalization and optimization of the supply base rationalization.

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Presentation on theme: "1 Management and Development of Suppliers. Outline  management and development of suppliers  rationalization and optimization of the supply base rationalization."— Presentation transcript:

1 1 Management and Development of Suppliers

2 Outline  management and development of suppliers  rationalization and optimization of the supply base rationalization and optimization of the supply base rationalization and optimization of the supply base  development of suppliers  industrial practices  McDonald’s suppliers  influences of manufacturing philosophy on purchasing  JIT and  JIT and Keiretsu  Nissan’s rescue  Carlos Ghosn  Nissan’s  Nissan’s Keiretsu

3 3 Management and Development of Suppliers

4 4  monitoring performance identify poor performing  to identify poor performing  to provide chance to improve  to provide a basis for future purchasing decisions  maintaining relationship  developing capabilities  activities by a buyer to improve the capabilities of suppliers to meet the buyer’s short- and long-term goals

5 Supplier Measurement Decisions  what to measure  quantitative vs. qualitative variables quantitativequalitative quantitativequalitative  delivery, quality, cost reduction, service levels  measurement and reporting frequency  reports to both buyer and supplier  real-time information in problems, troubleshooting, and expediting  daily, monthly or quarterly summary, and annual face- to-face meeting 5

6 Types of Measurements  categorical system categorical system categorical system  weighted-point system weighted-point system weighted-point system  cost-based system cost-based system cost-based system  Supplier performance index (SPI) Supplier performance index Supplier performance index  version of SPI adjusted for quantity delivered 6 Total Purchases + Nonperformance Costs Total Purchases

7 Easy to implement Requires minimal data Different personnel contribute Good for firms with limited resources Low-cost system Least reliable Less frequent generation of evaluations Most subjective Usually manual Smaller firms Firms in the process of developing an evaluation system Categorical System AdvantagesDisadvantagesUsers7

8 Flexible system Supplier ranking allowed Moderate implementation costs Quantitative and qualitative factors combined into a single system Tends to focus on unit price Requires some computer support Most firms can use this approach Weighted-Point System AdvantagesDisadvantagesUsers8

9 Total cost approach Specific areas of supplier nonperformance identified Objective supplier ranking Greatest potential for long-range improvement Cost accounting system required Most complex Implementation costs are high Computer resources required Larger firms Firms with a large supply base Cost-Based System AdvantagesDisadvantagesUsers9

10 10 Rationalization and Optimization of the Supply Base

11 11 General Trend: Reduction of Number of Suppliers  Dell  more than 140 suppliers in early days and about 40 in 1999  McDonald in US  hamburger suppliers: from 170 in early days to 5 in late 80’s  potato chips: from 175 in early days to basically 1 in late 80’s  reason: best trade off in maximizing value and minimizing risk  manage and develop with suppliers that can grow with the company

12 12 Rationalization and Optimization  a continuous process to determine the number and quality of suppliers in the supply base  usually a decrease and occasionally an increase in number of suppliers  rationalization: how many and which suppliers to keep  optimization: analysis the supply base for keeping the most capable suppliers

13 13 Phases and Activities  developing systems to evaluate suppliers  evaluating suppliers  keeping excellent and significant suppliers  replacing mediocre suppliers with better ones  initiating supplier development activities to improve performance  globally searching for world-class suppliers

14 14 What are the Advantages?  US operations of McDonald  hamburger suppliers: from 170 in early days down to 5 in late 80’s  potato chips: from 175 in early days to mostly 1 in late 80’s

15 15 Advantages  buying from world-class suppliers  closer relationships with fewer, better performing suppliers  fewer quality and delivery problems  leading-edge technologies  opportunities to collaborate  use of full-service suppliers  remaining suppliers generally larger in size with more capabilities  accessing to supplier’s engineering, R&D, design, testing, production, service, and tooling capabilities  fuller range of value-adding services  outsourcing integrated items  reduction of supply base risk  qualified suppliers with more consistent quality

16 16 Advantages  lower supply base administrative costs  greater information sharing  joint problem-solving  fewer problem-related interactions with suppliers  lower total product cost  lower variability in quality and delivery  greater production volumes spread among fewer suppliers  supplier’s fixed costs spread out over greater volumes  incentive for supplier process improvement  economies of scale and scope  ability to pursue complex supply management strategies  supplier development  early supplier design involvement  just-in-time sourcing  development of cost-based pricing agreements

17 17 What are the Disadvantages?  US operations of McDonald  hamburger suppliers: from 170 in early days down to 5 in late 80’s  potato chips: from 175 in early days to mostly 1 in late 80’s

18 18 Possible Risks  supplier dependency  putting all eggs in one basket  absence of competition  less motivation for suppliers to control cost and to improve continuously  deterioration in performance because of complacent  hard to switch  equitable contracts to maintain the relationship  supply disruption  loss of continuous flow of materials  overaggressive supply reduction  inadequate supplier capacity if demand increases  missing qualified suppliers  effort to find new replacement suppliers

19 19 Formal Approaches  twenty-eighty rule  Pareto principle  “improve or else” rule  need to improve quickly  triage approach triage approach triage approach  categorization of existing suppliers  competency staircase approach  series of performance milestones

20 20 Development of Suppliers

21 Supplier Development Process Map 21

22 22 Industrial Practice  Product Development by Suppliers of McDonald

23 23 New Product Development by Suppliers of McDonald  French fries Frenchfries  new way to prepare French fries  peel off the skin; immediately dried in the air; slightly fried before frozen storage  supplier invested US2.5 million to build a factory on this unproved idea from laboratory

24 24 New Product Development by Suppliers of McDonald  frozen hamburger, from supplier Keystonehamburger  old days: three times fresh meat to restaurants  1967  supplier tested 9 months for various frozen agents, frozen rate, temperature, ratio of meat and fat, ways to mince meat  quick freezing preserve water, leading to finer meat texture by the ice  sharing the technology with other McDonald suppliers  single customer: McDonald

25 25 New Product Development by Suppliers of McDonald  McNuggets  new product idea from McDonald  Keystone to get meat from chicken  Keystone spent US$13 million to build automated factory for chicken meat processing based on the successful pilot test before the formal approval  sharing the technology with Tyson Food

26 26 Questions  Why were suppliers of McDonald willing to  develop products for McDonald, often without any guarantee on partnership?  share their technology and methodology with other suppliers of McDonald?

27 27 Effect of Operations and Culture on Supply Management  Japanese Influences in Manufacturing Processes

28 Japanese Influences in Purchasing  necessary to understand Japanese philosophy and practices in manufacturing  from 70’s Japanese ideas being the mainstream  manufacturing: material intense with many purchasing and procurement activities 28

29 29 Philosophy and Practices in Manufacturing (Early 70s to Mid 90s)  affected heavily by Japan  Just-in-Time and Lean Manufacturing (Toyota)LeanManuturingToyota  Keiretsu (Japanese 「經連」 ) Keiretsu

30 30 Conventional Purchasing versus JIT Purchasing Delivery time dictated by production schedule of buyer Delivery time set by buyer Sole to few suppliers per part, Multiple suppliers per part, for quality and price Little inventory on partsInventory on parts Long-term purchasing agreement Short-term purchasing agreement Frequent deliveries for immediate production Infrequent deliveries, possible for a few weeks’ consumption JIT PurchasingConventional Purchasing

31 31 Conventional Purchasing versus JIT Purchasing Supplier close to buyer Proximity of supplier being unimportant Buyer work with suppliers to reduce supplier cost and price Supplier set price Communication between supplier and multiple sections, e.g., production, design, QC, etc., facilitated by purchasing Communication between supplier and purchasing More information exchange, traditional plus production schedules, production processes, including real-time information Traditional information exchange, on quality, quality, price, time, venue Product design to minimize # of parts Free product design JIT PurchasingConventional Purchasing


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