Harnessing Strategic Supplier Development To Significantly Improve, Quality, Delivery And Cost
Debra L. Stubbings
Debra L. Stubbings, Managing Director, DLS Consulting Pty. Ltd, Sydney Australia, 61 2 47588 885, email@example.com
84th Annual International Conference Proceedings - 1999
Abstract. In the early 1990's Sterling Winthrop Australia's business was being attacked in the market place by the introduction of Generic products across two major markets - Analgesics and Household. Management took on the challenge moving the culture of the organization from a large slow moving pharmaceutical organization to a lean, innovative, customer driver business. The Purchasing Department at the time was unworkable; Perceived by management as a clerical function, Computer generated requisitions took 4-5 days to place, Supplier performance was not monitored, Average 7 suppliers for every category purchased, Prices escalating around 10% pa, Quality problems abounded.
To Suppliers, Sterling was seen as an organization committed to efficiency and growth, with its business methods changing to remain competitive in dealing with the demands of today's ever changing market. The financial performance was strong, improvements being recorded each year, enabling the Organization to remain at the leading edge of technology. Considering this, Sterling was not an organization to rest on its laurels, as a market leader in Analgesics with Panadol solid dosage holding 70% market share. Sterling was totally focused on retaining this share in the face of generic product introductions to the market place.
The Purchasing department, seen as a key player in assisting the business, remains competitive within the market place. The key performance drivers for Purchasing were to:-
The targets established in these three key areas were:
IMPROVE QUALITY. As a pharmaceutical quality zero defects was a primary activity. After all we were in the business of making people better. But also the cost of reject material had ramifications right throughout the entire business. If Suppliers delivered poor quality products it had to be either returned or reworked through the plant. This would either delay production and cause out of stocks, or mean excess inventory would need to be carried just in case the Supplier let us down again. Or if it were reworked then unnecessary costs would be added to the product that could have otherwise been avoided. Either way rejects material costs the business.
IMPROVE DELIVERY. In order to reduce inventories it was essential to eliminate safety stocks and choose Suppliers that could guarantee on time delivery every time. The opportunities to take millions of dollars out of inventory in the major of cases offset the occasional times when Suppliers were chosen not just on price. Sterling never chose the cheapest Supplier. Consideration was always given to the bigger picture. The opportunity to take $3million from inventory was far more important than choosing a Supplier that wasn't able to provide the highest level of service for the sake of a few cents per kilo.
REDUCE COST. The focus here was to reduce cost through continuous improvement and the elimination of waste. This meant working with Suppliers, and even developing joint teams to look at the cost drivers within a product and find innovative ways to control or reduce these costs.
In order to support these goals Sterling's Purchasing team developed a key strategy. To Develop and Enhance relationships with suppliers into long term Business Partnerships, through Strategic Alliance. The focus was to move away from the old traditional transactional method of Purchasing were Buyer and Supplier are adversaries, and Suppliers are informed about nothing important within the organization. Such relationships occasionally mean a Supplier will receive repeat business but not always. These types of relationships are based purely on the lowest price and no extra effort is ever afforded the Supplier regardless of how often and what lengths they may go to in times of trouble.
Breaking away from this Transactional relationships, through partnership agreements and an integrated service it is possible to move towards a goal of mutual profitability. The four corner stones of this are Formalization, Commitment, Trust and Knowledge.
Formalization, by providing a rigorous structure by which Suppliers operate under, that is effective and communicated, then Suppliers can understand what the exact requirements are and work on improving their business systems to meet those requirements.
Commitment, suppliers are not likely to invest time and money into processes that are seen as overnight fashions. They will however fully support a relationship that is seen as having the full commitment of the Business at all levels.
Trust, in order to build any relationship, either personal or business, there must be strong elements of trust. Do not wait for the supplier to start to build a trusting relationship. If you want to change the relationship, then you must be the one to start building trust.
Knowledge, an important key in the mutual profitability goal. If suppliers are able to share information regarding the processing and use of their products within your business then they will be able to provide ideas and assistance in reducing costs. Likewise it is essential for the customer to have sound understanding of the processes used to manufacture the goods being purchased. This will allow both parties to work together towards realistic improvement opportunities.
Prior to implementing the Supplier Development Program at Sterling the average lead time for products was 62 working days, around 3 months. From a Purchasing point of view a 3 month lead time creates an enormous amount of inaccuracy. From a planning point of view it mean unstable production plans which drives large quantities of inventories had to be carried to support fluctuations in the market. This manifests itself at the front end of the business as high back orders and low customer satisfaction.
By introducing Supplier scheduling and providing Suppliers with a forecast, lead time was halved within 12 months. This was considerably more accurate, which means we could hold lower amounts of Inventories. Our production plans became stable. This then meant low back orders and high customer satisfaction. The further introduction of Quality Certification and the opportunity to work together with Suppliers to build quality into the product at source and remove non value adding time from the production cycle took lead time reductions even further down.
With an average lead time of 7 workings the Purchasing system was now highly accurate. It meant the opportunity to hold Zero Inventory, Production plans were extremely stable. This reflected within the business with Zero back orders, total customer satisfaction and increased sales and profit.
SUPPLIER SCHEDULING. The first module of the program was titled Scheduling, and is the process of linking Suppliers directly to the production plans, it requires Stable plans and educated Suppliers. That is Suppliers who understand the system and the documentation and can utilize the information provided to add service to the business relationship. Scheduling motivates Suppliers to deliver quality products on time to reduced or minimum lead times.
The first steps of scheduling were to start training or educating Suppliers. This meant holding Education sessions to unveil Sterling's MRPII system. By allowing Suppliers to understand how the forecast numbers were derived and the commitment Sterling had towards the forecast, then ensuring the Suppliers understood what they were expected to do with the numbers.
In this way Suppliers felt confident that they could effectively purchase goods and materials against the forecast and have some assurances that the products would be purchased as committed. This linking of Suppliers to the production plans at the time was innovative, and Sterling were among a handful of organizations offering what was previously considered highly confidential information to suppliers. This linkage is in fact the key to getting Suppliers to reduce their lead time. Once Suppliers had an opportunity to establish the forecasts from Sterling within their own systems, lead time reductions started to flow. Every Supplier was set a target, these targets ranged from as little as 2 days to as much as 6 weeks depending on the Supplier and the product in question.
Interestingly though deliveries did not start to occur on time until after lead time reductions had been taken place. This was totally unexpected. As it seems logical to think that the long a Supplier has to deliver your goods the more likely they are to get the order in on time. However in reality this logic proved to be false. The focus on Supplier Scheduling is on Customer Service and Process improvement.
SUPPLIER CERTIFICATION. The second module of the program, was introduced after Scheduling was in place. Basically this occurred because of concerns from the Quality department that Purchasing were placing greater demands on Suppliers to get their orders in on time at short and short lead times. QA wanted to be assured that quality did not suffer as a result of Purchasing. This involvement started one of the strongest inter departmental teams that Sterling had ever seen. With QA apart of the Supplier Development Program we were able to make further inroads with Suppliers on reducing costs. Certification was seen as an important component of a Total Quality Management System. Based on the principle of defect prevention as opposed to defect detection.
The objectives of Certification were to:-
Improve Quality. The situation here was Purchasing were starting to buy smaller and smaller quantities with a much greater frequency. As a pharmaceutical organization with a GMP license, it is essential that every delivery from every order be inspected. Such inspections can in the case of both raw materials and packaging materials be extremely time consuming. E.g. Inspection of a raw material powder would take between 4 & 5 hours for one laboratory staff member. QA realised that if Purchasing continued to reduce order quantities from Suppliers they would soon need a department 3 times the size of the current department to cope with the workload. Ideally what QA wanted was not only to ensure themselves that the Supplier had produced the product to specification but to create a system where they could at the same time assure this in such a way that they could pull back from full testing to HPLC identification. This would be the only way they could keep their head count to the right level, support the business drive to reduce lead time and still meet the TGA requirements for GMP and testing incoming goods.
Improve Delivery Performance. By being able to ensure the products being order were manufactured with quality built in at source it was further possible to improve delivery performance. Suppliers that produced faulty products with the short lead times in place either had to sort, rework or totally re manufacture the product. In such cases, delivery would invariably be delayed. In this way guaranteeing quality had positive impact on improving delivery performance.
Increase Productivity. By insuring quality was built into the product Suppliers received the benefits of increasing productivity. Likewise Sterling did not have to re-work or sort faulty goods in house, thus adding to our own productivity levels. One such product - Maize starch, a which powder used in tablet manufacture, also used in the baking industry. This material regularly arrived contaminated with black specs which required sieving. The process of sieving yielded a 30% loss. This quality problem increased the real cost of the item by the 30% wastage but also by the labor required to perform the sieving. It also meant at least 30% more material had to be held in inventory to ensure we did not run out of stock, which usually seemed to happen anyway. This is a prime example of how paying more per kilo reduced the cost of the finished product to the business.
Reduce Cost. The final objective for the Certification program was to reduce the cost of items. This was effectively achieved for the simple reason that we provided ways for our Suppliers to reduce their wastage and reject levels. These savings were passed onto us and other customers. An extremely effective way of controlling ongoing price increases is to work with the Supplier to improve processes and share in the improvements achieved.
Certification specifically looked at three different areas:
In Quality Systems, Sterling's QA team looked at the types of systems the Supplier had in place to ensure a quality product was manufactured. The then looked at the process improvement areas a Supplier was working on. Specifically here a Supplier was expected to be working on a specific area that would return benefit to Sterling. They were rated on how many projects had been completed, how many were underway, and what would be looked at in the near future.
The area of product quality looked at the quality of a product as it was delivered to Sterling. This would not only incorporate the actual quality performance measure, but also a severity rate and a non-conformance area, where we could still pick up on products that may still need to be moved through our plant quickly with us having to add unnecessary value to make the product usable.
By applying weightings and scoring a Supplier in each of these areas it was possible to rank Suppliers of different industries and understand their impact on our business. Whether that impact be positive or negative.
Suppliers with low ratings were immediately targeted for improvement in quality or deletion from the Supply base.
Supplier Appraisal. The third module of the Supplier Development Program titled Appraisal views a Supplier's performance across many aspects, rating each area against a best in class achievement. This highlights the relationship between each measurement and incorporates a self assessment from the Supplier. The appraisal looked specifically at three different areas
The appraisal is designed to identify Best Practice and provide a gap analysis for improvement. The combination of a self assessment directly from the Supplier is an innovative concept. The information supplied is easily audited through Purchasing visiting the Supplier's site. Being an annual activity, the appraisal module became the tool to assess Supplier performance for the purposes of the Annual Awards function. The scores were plotted onto a Radar chart. By combining the best score in each area (regardless of which Supplier it came from) and then overlaying each individual Supplier it is possible to identify individual performance and compare directly against the Best performance, thus providing the gap analysis. It was found the majority of Suppliers took this information as a Benchmarking exercise and sought out those companies that were identified as Best in Class for the purposes of improvement.
The opportunities the Appraisal Module provided particularly in the area of stimulating Supplier's to continue to improve in each of the measurement areas was significant. The module created an opportunity to inject competition into relationships even though sole sourcing was utilized extensively.
The benefits to Suppliers were identified as:-
- Long term relationships
- Opportunity to increase business volume
- Cost reductions and quality improvements from shared expertise
- Image enhancement
- Improved channels of communication
- Stable production plans offering reduced inventories
These were the main advertised benefits of the program, however many of Sterling's Suppliers found there were other benefits to their organizations other than these.
Senior Managers from Suppliers were often utilized through education sessions to tell their story on how their organizations had benefited from the program.
Benefits To Sterling Winthrop. The benefits to Sterling affected all areas of Manufacturing and gave the Marketing department a competitive edge. From Marketing's point of view, the most significant improvement was in new product introductions. Which supported the companies First to Market Objectives. Due to the significant improvements in communication, Product managers were able to more accurately and efficiently prepare artwork, this reducing Sterling art prep time. Suppliers were also able to turn artwork around significantly faster. The average 4 weeks for new products was reduced on average to 1 week, in urgent cases could be further reduced. This benefit saw Sterling regularly launch new products faster and more cost effectively than their competitors.
From a production point of view, the Purchasing Department's ability to ensure quality products were delivered on time had significant impact on production efficiencies. The reduction in Inventory even allowed warehousing space to be reclaimed and utilized for the building of a new laboratory.
Such significant improvements did not go unrecognized within the world of Sterling Winthrop. In 1992 the Supplier Development program won a Sterling Quality award for its impact on the business, and the Logistics Department was recognized world-wide as a Center of Excellence.
In 1993 the program played a significant role in Sterling winning the coveted Australian Quality Award.