1. Supplier Management and Supplier Development
Chapter 8
Supplier Management and
Supplier Development
Chapter 4

2. Preliminaries
The goal of supplier management and supplier development is a world-class supplier base
Supplier management involves
Supplier Performance Measurement
Supply Base Optimization
Buyers accepting some responsibility for supplier performance
Supplier management is a pre-requisite to Supplier development

3. Preliminaries Supplier development is defined as a buyer firm infusing
Suggestions and ideas, and/or
Human resources, and/or
Training, and/or
Financial capital, and/or
Technology
into a supplier to
Improve his capabilities
Improve his performance
In order to meet the buyer firm’s short-term and long-term supply needs

4. Supplier Evaluation is an event to
Supplier Evaluation (Ch 7) in comparison to Supplier Performance Measurement (Ch 8)
Supplier Evaluation is an event to
Pre-qualify suppliers
To award contracts
To pursue improvement opportunities
Supplier Performance Measurement is a continuing process

5. Supplier Performance Measurement
Quantitative Variables
Cost reductions
Quality performance
Delivery performance
Contract Deficiency Notices (CDNs)

6. Supplier Performance Measurement
Qualitative Variables
ETDBW
Responsiveness
Problem resolution ability
New Product Development Support
Technical ability
Commitment to R&D
Trust levels

7. Supplier Performance Measurement
Reporting and using the information
Regular reports to the commodity buyer
Buyers meet with suppliers
Carrots and Sticks

8. Supplier Management Techniques
Categorical system
Weighted point system
Cost Index

9. Categorical System Score Performance Category E G F P 
Meets Delivery Requirements
Customer focused
Fair pricing
Problem resolution capabilities
An innovative supplier
Communication and trust levels     

10. Weighted Point System
A weighted average of scores across a number of categories

11. Cost Index: Quantifies total cost of doing business with a supplier
The Supplier Performance Index:
Nonperformance costs are generally per incident standard costs for late delivery, order shipped incomplete, quality problems and are based upon such things as rework costs, a line shutdown, lost customer sale, inspection and return costs, etc.

12. Cost Index: Quantifies total cost of doing business with a supplier
The Supplier Performance Index example:

13. Cost Index: Quantifies total cost of doing business with a supplier
The Supplier Performance Index:

14. Cost Index: Quantifies total cost of doing business with a supplier
The Supplier Performance Index with the Q adjustment:
Where Q is

15. The Supplier Performance Index:
Cost Index: Let’s adjust with the Q assuming $150,000 is the average price of a lot from all suppliers
The Supplier Performance Index:

16. Cost Index: Let’s adjust with the Q = $15,000/$150,000 = .10
The Supplier Performance Index:

17. Supply Base Optimization
Rationalizing versus Optimizing
Implementation: First phase is to eliminate marginal and perhaps very low volume suppliers
“Optimization” is a continuous process

18. Advantages of an optimized Supply Base
Reduced cost
Having a World-Class Supply Base
Suppliers that generate fewer problems
Buyers re-direct their time to value-adding activities
Access to suppliers’ engineering, design and other capabilities

19. Risks of a reduced supplier base
Absence of competition may generate complacency and price increases
Risk of supply disruption

20. Formal Approaches to Supply Base Reduction
The Pareto Rule (20/80)
“Improve or Else”
Triage Approach
Competency Stair Case Approach
Stair Case Example
Step 1. Internal Information and Management Processes
Step 2. Quality Standards
Step 3. Production Capabilities
Step 4. Logistics Performance

21. Supplier Development
Supplier development is defined as a buyer firm infusing
Suggestions and ideas, and/or
Human resources, and/or
Training, and/or
Financial capital, and/or
Technology
Into a supplier to
Improve his capabilities
Improve his performance
In order to meet the buyer firm’s short-term and long-term supply needs

22. Supplier Development
Step 1. Identify candidates for supplier development
Is the supplier essential? Or
Does this supplier meet minimum requirements and show great potential?
AND
Is this product or service a source or potential source for competitive advantage?

23. Supplier Development Step 2. Form a CFT
Step 3. Meet with supplier’s top management
Discuss your supplier development plan
Seek a commitment on Kaizen
Sense if “alignment” and trust develop

24. Supplier Development
Step 3. Meet with supplier’s top management (continued)
Talk about resource commitments, roles of each party and potential rewards
Develop agreement on specific measures that will indicate success

25. Why Supplier Development?
Suppliers’ capabilities are not high enough to meet current requirements or future expectations
Switching costs may be high
Supplier has great potential
Joint efforts may accelerate supplier improvement
Mutual benefits

26. Example of Supplier Development Results
527 firms surveyed
Example of Supplier Development Results

27. The Major Obstacles to Supplier Development
Too overwhelming
Solution: Dichotomize, standardize, rationalize
Lack of senior executive support
Solution: Demonstrate the potential gains
Issues of trust
Solution: Nondisclosure agreements, exclusivity agreements, ombudsmen
Supplier doesn’t have the vision of the concept
Solution: Supplier Evaluation Reports, incentives, training sessions, designating Supplier Champions

28. Let’s move on