Managing Key Supplier Partnerships
William S. Wehr, C.P.M.
William S. Wehr, C.P.M., Director-Quality Systems, Lewis-Goetz and Company, Inc., Pittsburgh, PA 15228, 412/341-7100
83rd Annual International Conference Proceedings - 1998
Abstract. Managing supplier partnerships is a major concern to buyers as source consolidation continues to be effected. The objective is to increase business to the extent possible with those key suppliers that are the most capable partners. Achieving this objective requires that these partnerships be developed, structured, administered, and evaluated to determine whether they are successful or unsuccessful in meeting the buyer's needs. Lewis-Goetz and Company, Inc. ("Lewis-Goetz") of Pittsburgh,PA has developed a Supplier Partnership Management Process (SPMP) to provide a defined structure for managing and continually improving partnerships with key suppliers. SPMP consists of seven process features that are integrated to provide performance accountability, defect identification, cost improvement commitment, problem solving, and two-way communication. These process features establish a baseline for measuring the success of the partnership while allowing areas for improvement to be clearly identified. The following sections explain the management process and highlight implementation concerns using a limited case study. The objective is to provide a practical framework that can be used as a guide for managing partnerships to measure and improve the benefits to both parties.
Lewis-Goetz Objective and SPMP Overview. Lewis-Goetz is an industrial rubber
products and hose distributor with twelve operating locations in nine states. As a distributor, major emphasis is placed on maintaining partnerships with several key suppliers with the objective of increasing customer service, reducing inventories, and minimizing total operating costs. SPMP was developed to provide a structure for defining, measuring, and achieving
these objectives through a continuing improvement process. A secondary objective was to shift the emphasis from price to increased service and total cost reduction. Both of these objectives for key supplier partnerships were the same requirements levied on Lewis-Goetz by many of its key partner customers.
Even though supplier relationships may have existed for many years, neither partner may have taken the initiative to manage the relationship. For many distributors, most of the effort has subjectively focused on product line, product delivery, pricing or "cost", technical product support, and marketing assistance. Objective performance measurement and accountability have not traditionally been emphasized in distributor-supplier relationships. SPMP was designed to fill this traditional void by using a step-by-step approach to structure and obtain supplier commitment. The first step is to align supplier performance objectives with those of the buyer (including the buyer's customer support objectives) and to establish mutually acceptable measurement methods. These measurements and Supplier Corrective Action Requests (SCAR's) are used to identify performance deficiencies which are subjected to root cause analysis and definitive corrective action to prevent recurrence. Performance measurement includes tracking total cost reductions effected by the supplier for the buyer in the form of value-added improvements. A project team approach is used to identify and resolve both objective and subjective problems that arise in the relationship. Continuing performance accountability and assessment of all measurements and projects is provided through periodic review meetings.
Process Features. A total of seven process features has been established to initiate, implement, and administer SPMP as outlined above. Although each of the features are separate and distinctive, all seven must be operative and integrated to facilitate a successful and continually improving partnership. The SPMP process features are measurement criteria, goal setting, supplier score card, Supplier Corrective Action Request, value-added contributions, continuing project list, and periodic review meetings. Each of these processes will be discussed in the following sections.
Measurement Criteria. Measurement criteria comprise the first process area to be addressed in implementing SPMP. The buyer's performance goals that are critical for effective support of his customers must be translated into associated goals for the supplier. Typical measurements may include on-time delivery, shipping accuracy, product quality, invoice accuracy, and lead time conformance. Mutually acceptable measurement methods must be defined to include both data collection and data analysis. This is particularly critical since the buyer and the supplier may use different criteria for assessing the same performance area.
Goal Setting. Identifying measurement criteria inherently includes establishing performance goals to define acceptable and unacceptable performance. Goal setting is always a sensitive issue because any evaluative assessment of the supplier's performance will ultimately be communicated to the supplier's top management through the periodic review meetings. Customer-specific performance measurement of this nature may not be received well by supplier top management and result in punitive action toward supplier middle management. Goal setting should take into account only those performance areas that are important to the buyer and that are meaningful to the supplier. Consideration should also be given to those performance areas that can be quantitatively measured, i.e. on-time delivery, material defects, etc., and the extent to which data is readily available for measurement. Initial goals will be general, i.e. reducing the buyer's inventory investment, and over time lead to more specific goals, i.e. inventory reductions for specific product groups at targeted buyer locations. A key principle that must always be applied is that partnership goal setting is a dynamic process; buyer and supplier performance expectations change over time to meet increasing customer demands. Therefore, partnership performance goals must continually be reassessed and changed to meet these increasing expectations.
Supplier Score Card. An effective method for reporting performance using the measurement criteria is a score card prepared by the buyer and periodically provided to the supplier. The score card should be a compilation of supplier to buyer transactions or events that have been individually coded based on the mutually established measurement methods. Included in the score card format should be the time period covered, the total number of transactions, the total number of conforming and non-conforming transactions, and an indication of current performance relative to the goal. Multiple measurements can be weighted and an overall performance index computed to provide a single composite measurement. The recommended frequency for preparing score cards is quarterly since this interval usually provides the best window for assessing performance trends. All score card elements should be included on the agenda for all review meetings to permit discussion and understanding of performance trends.
Supplier Corrective Action Request. The Supplier Corrective Action Request (SCAR) is a qualitative tool used to provide immediate defect feedback to the supplier. Although this concept has been used extensively for some time by manufacturer buyers, distributor buyers have not applied this method to define and communicate supplier generated defects. As a key continuing improvement tool, the SCAR provides real time reporting by the buyer of the supplier defect and, most importantly, obligates the supplier to conduct a root cause analysis. This analysis requirement presumes that the supplier has an internal quality system that employs at least basic Statistical Process Control (SPC) problem solving, i.e. process flow analysis, Pareto charting, cause and effect analysis, etc. If the supplier does not possess these problem solving capabilities, the buyer may need to intervene and assist in developing these capabilities or require the supplier to obtain outside assistance. The SCAR is effective only to the extent that timely defect reporting is initiated by the buyer and prompt analysis/corrective action is initiated by the supplier. Due to the importance of these prerequisites, SCAR frequency and processing should be included as one of the SPMP measurement areas.
Value-added Contributions. In buyer-supplier relationships, the term "value-added" is categorically defined as actions initiated by the supplier to reduce the buyer's total costs (including acquisition, material possession, and operating costs). These actions extend beyond the logistics of moving material from the supplier's location to the buyer's location. At one end of the distribution channel, the distributor's customer has been increasingly expecting (and receiving) value-added contributions from the distributor to the extent that many partnership agreements include specific contribution requirements as a percent of total sales. Typical value-added transactions for the distributor's customers include inventory reductions, alternative products/materials, product application improvements, extended product life and elimination of downtime. At the other end of the distribution channel, suppliers to distributors have not met the value-added expectations of the distributor. SPMP is designed to identify targets and track supplier value-added contributions such as reduced supplier lead times, reduced order quantities, more frequent shipments, new product development, and customized customer support. Each value-added contribution must be documented using a standardized form and specific savings calculated. The cumulative value-added progress is to be included as an agenda item at the periodic review meetings.
Continuing Project List. Within a buyer-supplier relationship, there exists a continuing series of issues that require resolution. These issues can range from transaction concerns regarding supplier order acknowledgments to the availability of catalog and price updates in electronic format. Because of their variety and subjectivity, these concerns cannot be effectively monitored using conventional measurement criteria. However, because of the impact that these concerns have on the overall effectiveness of the relationship, some form of management and tracking is needed. To meet this need, SPMP includes a continuing project list to be jointly maintained by the buyer and supplier. A project moderator is designated by each party to function as a clearing point for handling all project concerns and issues. The moderators continually update each other and maintain project listings to show project initiation, responsible party, current status, and closeout. Joint and unilateral focus groups may be used as needed to resolve significant projects with the results reported to the moderators for tracking and reporting. All completed and current projects are discussed at the periodic review meetings with new projects identified through the evaluation of performance reports.
Periodic Review Meetings. An overall assessment of supplier performance and consideration of other relationship concerns is accomplished through periodic review meetings. The suggested frequency for these meetings is quarterly depending on the participants and the extent of problems/concerns that need to be addressed. Preferably, one senior management representative from each party should be present to provide the level of commitment and authority needed to take action on specific issues and concerns. Additional middle management and other functional representatives should be present as needed to address specific topics. When a number of issues need to be addressed and detailed improvement plans need to be developed, a working group of functional representatives from both parties should be convened prior to the periodic review meeting. As an alternative to quarterly meetings, working groups can meet quarterly and meetings with senior management can be held semi-annually. The agenda for each periodic review meeting should include performance measurements, goals, score card elements, value-added contributions, and project status. Minutes should be recorded for each meeting and copies distributed to all participants.
Implementing SPMP. The effectiveness of SPMP in managing key supplier relationships is a direct function of the methods used to implement the process. Since the process is designed to be used with only key suppliers, the buyer must first identify those suppliers to be involved in the process. A Pareto ranking of suppliers by sales volume should be performed and initial SPMP implementation should be restricted to no more than three of the top-ranked suppliers. In the Lewis-Goetz experience, two key suppliers were selected for initial SPMP implementation.
After the key suppliers have been selected, an introductory meeting should be held with senior and middle management of both participating parties. The purpose of this initial meeting is to present the process features and describe the manner in which the concept will operate. Senior management commitment at this point is absolutely essential since a major change in relationship accountability and involvement is being proposed. Without senior management support from both parties, the implementation of the remaining process elements will falter due to lack of time and resistance to change. The first Lewis-Goetz introductory meeting included the Lewis-Goetz Chairman/CEO and the supplier's President. Commitment and support from the supplier was achieved; however, post-meeting implementation was hindered due to specific responsibilities not being assigned by senior management of both parties to a working group to resolve all implementation details. The meeting with the second Lewis-Goetz supplier was with a Lewis-Goetz corporate staff member and the supplier's customer service manager. The response from the supplier was positive and constructive feedback on the SCAR and on-time processes was provided. Functional supplier contact individuals were defined; however, essential Lewis-Goetz computer system modifications delayed SPMP implementation. In both of these situations, the effectiveness of the introductory meeting was undermined by the lack of timely and complete follow-up action which diluted the impact of the management commitment.
Following the introductory meeting, a working group consisting of both parties should be convened to establish initial measurements, performance goals, and details of the SCAR process, i.e. individuals responsible for initiating SCAR's, supplier representatives designated to receive and process SCAR's, follow-up contact points, etc. Continuing project moderators should be assigned and coordination details defined for project identification and tracking. To streamline implementation, working group representatives should have sufficient authority to assign tasks to functional areas within their respective organizations concerning transaction coding, data collection, data analysis, and data reporting. Formatting and calculation of the supplier score card should be assigned to the working group. Milestone completion dates should be established for each SPMP process element and the related sub-tasks with a copy of the milestone schedule furnished to senior management of both parties. This provides implementation accountability and establishes an overall project priority.
Consideration should be given to holding an initial periodic review meeting to serve as an overall SPMP coordination review that will provide a model to be used in future meetings. Following this initial meeting, data collection and measurement should begin to generate performance history for the next periodic review meeting. As experience is gained in SPMP, adjustments in any or all of the process features may be needed to provide the extent of performance feedback required by the buyer and supplier participants. Both parties should take responsibility for recommending changes to insure that measurements and accountability are meaningful and pertinent.
Implementation Concerns. Based on the experience of Lewis-Goetz in working with two key suppliers, there are three implementation concerns: 1) introducing a change in supplier performance accountability; 2) collecting and analyzing the data needed for measurements; and 3) scheduling periodic review meetings. Establishing supplier performance accountability is major change in the buyer-supplier relationship and carries some inherent supplier resentment when the overall accountability process is initiated by the buyer. Part of this resentment can be overcome through joint participation in working groups to implement SPMP details that can be structured to accommodate supplier concerns. Any remaining resentment should dissipate over time as periodic review meetings are conducted and performance issues are handled in a constructive manner.
Rarely will buyer and supplier information systems be structured to capture and analyze performance data in the same manner. Resolving these differences will probably be one of the greatest challenges in implementing SPMP. In the case of Lewis-Goetz, the supplier was using his scheduled ship date as the basis for determining on-time delivery while Lewis-Goetz was using the scheduled due date at their warehouse as the baseline. Resolution of these differences required changing the on-time delivery criteria in the supplier's system and obtaining a mutually acceptable warehouse due date before finalizing orders to the supplier. Since changes such as these require time to implement, initial measurement criteria should be restricted to only two or three areas with others to be added at a later time.
The scheduling of periodic review meetings can be a problem especially when obtaining the participation of senior management from both parties. Assuming that there was mutual initial commitment to the process at the introductory meeting, this can be a difficult problem to overcome. One approach is to propose a schedule for all review meetings one year in advance including location designation. This schedule should then be coordinated with senior management to confirm their availability for participation although this will not preclude last minute changes in priorities that will prevent their attendance. Another approach is to limit senior management participation to every other meeting with middle management being present at each meeting to provide continuity. Careful advance planning and efficiently conducting each review meeting will encourage senior management participation.
Conclusion. Although developed by Lewis-Goetz for distributor suppliers, the process features of SPMP can be applied to nearly any buyer-supplier relationship. This is because SPMP is designed to focus on improvement by making the supplier accountable for jointly developed performance measurement criteria, eliminating defects, and reducing the buyer's total costs. The key to SPMP's effectiveness is the requirement for joint buyer-supplier participation in implementation and ongoing coordination in administering the individual process features. The commitment of both parties to each of the process features will determine the extent to which SPMP will be beneficial in underwriting the buyer's customer performance objectives. For Lewis-Goetz, SPMP has provided an effective structure for defining supplier commitment and facilitating increased performance from its key suppliers.