1. SUPPLIER DEVELOPMENT 1

2. Objective
Develop a methodology to objectively evaluate service providers or products, ensuring that the best one is selected for a given situation. The intent is to consider all relevant factors and minimize the subjective issues that can potentially influence such a decision. 2 2

3. THE NEED 3

4. THE NEED
Decrease the number of suppliers in order to develop supplier partnerships.
Help improve competitiveness,
Lower costs
To increase quality and reliability of products.
The strengthened supplier/buyer relationships can also lead to improved trust which then can lead to more win/win team achievements through cooperative efforts. 4

5. Vendor Definition
A third party that performs functions on your company’s behalf or provides services to your company.
Some examples include:
Core Processing
Information and Transaction Processing
Security Monitoring
System Development and Maintenance
Print and Reprographics
Strategic Alliances
Internet Services 5 5

6. Indian Scenario Competition is becoming increasingly intense
Manufacturing companies need to lower costs and improve quality
Materials are a significant part of cost of production for a majority of industries
Outsourcing of components is a means of lowering costs and reducing risk
Industry has developed in a protected and controlled economic environment
In the past, cost, quality and customer service were not critical parameters 6

7. Indian Scenario (cont’d)‏
Most suppliers are small or medium scale units
Small industry is defined in terms of investment in plant and building
Small industry has always been given special protection by the Government (reservation policy, excise concessions)‏
Consequently, most suppliers did not grow or increase investments to improve technology, as well as production and quality control systems
In the past, pricing was only on cost plus basis 7

8. Indian Scenario (cont’d)‏
To reduce/avoid tax payments, most industries declared low profits
Consequently no internal resources were generated
There were no long term contracts or relationships with buyers
Now competitive environment requires suppliers to meet stringent quality standards, regularly improve technology and be cost competitive 8

9. Approaches to Developing Suppliers
Single Sourcing
Use only one supplier per component
Pros: Strong relationship and supplier becomes an expert at providing the quality product your company expects at a low cost
Cons: Any disruption in the supplier’s production could leave you shorthanded
Discuss pros and cons with class.
Bring up 9/11/01 and discuss shortages that occurred due to logistics. What other types of events or natural disasters could occur that would impede timely delivery of supplies? 9

10. Approaches to Developing Suppliers
Dual Sourcing
Number of approved suppliers is limited (generally 2 -3)‏
Pros: Reduces risks of having a sole supplier
Cons: Reduces amount of specialization of suppliers
Discuss other pros/cons.
Can you have the same trust and commitment as sole sourcing? 10

11. Approaches to Developing Suppliers
Supplier Evaluation
Rates suppliers on quality, technical capabilities, and abilities to meet scheduled requirements
Pros: All suppliers are evaluated on same basis
Cons: Minimal hands on with no focus on improvement
This approach is a pre-selective technique which acts as a “report card” to help determine which suppliers will be used.
Open discussion to advantages/disadvantages. 11

13. Approaches to Developing Suppliers
Sourcing Filters
External Validation of Quality Programs
ISO 9000:2000
Pros: Gives customers comfort; “Seal of approval”
Cons: Qualifications do not necessarily guarantee quality product
External validation requires suppliers to use outside registrars to qualify/certify for either program. (or other similar programs).
Requires outside third party to evaluate the supplier, which can give a source of comfort to you, the customer.
Auto manufacturers heavily rely upon external validation.
Open discussion to pros/cons. 13

14. Approaches to Developing Suppliers
Supplier Certification/Qualification
Inspections performed by company to evaluate suppliers
Pros: Thorough understanding of suppliers strengths/weaknesses
Cons: Time consuming; focused entirely on evaluating supplier, not improvement
Supplier certification is where you, the customer, establish a set of criteria to evaluate the supplier and then physically go to the plant to complete certification.
This method is more thorough than the evaluation (report card) method. It requires an actual inspection and can clearly identify strengths and weaknesses in production lines and quality. However, it lacks the developmental and training components. 14

15. Approaches to Developing Suppliers
Supplier development programs
Hands on work with suppliers to continually improve quality
Pros: Develop suppliers to meet your exact needs
Cons: Very time consuming to groom suppliers to meet your needs
This approach takes a long term look at your suppliers. It is an opportunity to help your supplier create a reliable, quality, and low cost product.
It also gives an opportunity to really integrate and share information to meet strict deadlines. It also builds a strong, trusting relationship. 15

16. Supplier Development in the Real World
Honda Motors
Partnered with Parker Hannifin Corp
Honda engineers worked over six Parker plants making basic efficiency changes saving Parker over $1.6 million a year. 16

17. Supplier Development in the Real World (Continued)‏
Areas Honda helped to improve do not all involve parts supplied to Honda
Why help suppliers improve areas that do not directly affect the company?
“We want suppliers to be better companies because, ultimately, that makes us a better company,” Richard Mayo, Honda purchasing executive
Emphasize that Honda helped Parker improve in areas that do not even affect Honda.
Discuss why better suppliers make better companies
-Timeliness
-Reliability
-Quality
-Cost 17

18. Supplier Development in the Real World (Continued)‏
Improvements in Parker products directly related to Honda’s developmental help
-Decreased cylinder line travel from 19 days to 5 minutes
-Reorganized production process to decrease scrap from 5% to 2% and increase output per man-hour by 30% 18

19. Vendor Development Policy
Technology, quality and manufacturing standards of vendors in were not of international standards
Most vendors were reluctant to make investments for Maruti
Not confident that Maruti could achieve stated volumes
First task was to dispel doubts and create confidence
Maruti assured vendors of long term relations
No annual tender system
Maruti normally limited suppliers of any component to two vendors
Good volumes thus assured 19

20. Vendor Development Policy (cont’d)‏
Prices fixed once a year on basis of cost of production
Transparent and quick payment system - no delays
Maruti provided financial help to vendors for tooling, payment of custom duty etc.
Maruti helped to identify sources of technology, and its transfer to Indian vendors
Maruti deputed engineers for introducing systems, improving manufacturing practices, trouble shooting
Suzuki provided opportunities for training to vendors 20

21. Vendor Development Policy (cont’d)‏
Where large and complex dies were required, Maruti imported and supplied to vendors
Line of credit for vendors arranged with FI’s to enable lease financing for purchase of equipment and tooling
Maruti assisted in bulking purchase of aluminium, steel, plastic materials, seat fabric to lower costs
Maruti provided feedback to vendors on their performance and monitored improvements 21

22. Vendor Development Policy (cont’d)‏
Annual awards were given to vendors to encourage them to improve
These measures and the sales success of Maruti made vendors willing to invest
Maruti participated upto 26% in equity of some vendors
Assisted in project formulation, implementation and management of these JV’s
Assured reasonable return on investment
Management control of JV’s left to Indian partners
11 JV companies were established 22

23. Lessons (Cont’d)‏
For this, developed long term relationships and instilled confidence in small suppliers
Devoted resources to upgrade vendors in terms of technology, quality, systems, and management
Indian industry today needs to recognize the important of outsourcing and upgrading vendors
Since not many buyer companies have resources comparable to Maruti, important to build institutional arrangements to provide marketing and affordable consultancy services for small industry
This activity should be carried out by appropriate non- Governmental agencies 23