Achieving a Competitive Advantage Through Supplier Quality Management
Robert J. Trent, Ph.D.
Robert J. Trent, Ph.D., Assistant Professor of Management, Lehigh University, 621 Taylor Street, Bethlehem, Pennsylvania 18015 (610) 758-4952, firstname.lastname@example.org
Robert M. Monczka, Ph.D., C.P.M.
Robert M. Monczka, Ph.D., C.P.M., Director, The Global Procurement and Supply Chain Benchmarking Initiative and Professor of Strategic Sourcing Management, and The National Association of Purchasing Management Professor, Michigan State University, East Lansing, Michigan 48824 (517) 432-2086, email@example.com
83rd Annual International Conference Proceedings - 1998
Abstract. To believe that all purchasing and supply chain managers can do to affect quality is to make sure buyers provide clear specifications and maintain open channels of communication with suppliers is wrong. The purchasing and sourcing process, often by working with other functional groups, has the opportunity to create a competitive advantage from effective supplier quality management practices. Capturing these advantages involves a commitment of time, resources, and expertise. This proceeding discusses the increasing importance of suppliers, particularly in supporting product and service quality, and presents a set of questions that executive managers must ask concerning how well their purchasing and sourcing processes contribute to total quality.
Introduction. Are quality-related problems solely the fault of the company whose name appears on a product? When quality-problems occur, the producer invariably receives the blame since, in the customer's mind, the producer has ultimate responsibility for the product. However, the reality is that, in many situations, external suppliers often provide the faulty components and subunits that make their way into final products. Are many quality problems actually the result of how companies manage their supply chain? Is supplier quality, which too many firms take for granted or do not show serious interest in measuring or improving, creating a competitive disadvantage?
When externally-sourced components and subassemblies significantly affect a product's cost, quality, and performance, or when suppliers provide value-added activities through design, engineering, and testing responsibilities, receiving the highest levels of supplier quality is not only desirable, it is a strategic imperative. Furthermore, any company that endorses total quality cannot ignore the importance of supplier quality management. Since quality at the source is central to total quality, executive managers must realize that the source for so much of the inputs for their organization's products, processes, and services is the supply chain. The ability of suppliers to affect customer needs makes supplier quality vital to longer-term market success.
This proceeding discusses the increasing importance of suppliers, particularly in supporting product quality, and presents a set of questions concerning how well purchasing and sourcing processes contribute to total quality. While some activities discussed in response to these questions are leading-edge, others are straightforward and should be accepted practice if firms expect to realize world-class quality and continuous improvement within their supply chain. The discussion includes primary research data to support the arguments presented.
INCREASING IMPORTANCE OF SUPPLIERS. Without question, executive managers are beginning to recognize the impact that suppliers have on competitive success. In 1990, the average perception of supplier importance, as perceived by executive managers, was 3.10; the average importance by 1993 increased to 3.72; by 1997 the average importance again increased to 3.83; and the projected average importance for 2000 is 4.64 (where 1 = little importance, 3 = somewhat important, and 5 = extremely important). Over 96% of executive managers said supplier contribution and importance will increase by 2000.
This shift in the perception of supplier importance results primarily from three trends that will continue to affect companies over the next several years. These trends include (1) a focus on core competencies and technologies with outsourcing of non-core requirements, (2) pressure to innovate and improve continuously in critical performance areas, including quality, delivery, cycle time, and product and process technology, and (3) the presence of intense worldwide competition with constant cost reduction pressure. In fact, the two most cited reasons by executive managers for the increasing importance of suppliers are the need for suppliers to help reduce the total cost of acquisition and the need for cost containment.
A critical area to focus purchasing attention continues to be supplier quality management. Although supplier performance has likely improved in real terms over the last several years, supplier quality still does not fully satisfy continuously changing performance expectations. When asked to rate supplier delivery and product/service qualityperformance, two quality-related performance areas, procurement managers maintain that performance in these areas is just above average (a rating of 4.8 and 5.1 respectively where 1 = poor, 4 = average, and 7 = excellent performance). Furthermore, the perception that executive raters have of supplier quality across most quality-related areas has not changed appreciably over the last several years. The challenge facing managers concerns how to make actual supplier quality performance align with expected quality performance.
ACHIEVING WORLD-CLASS SUPPLIER QUALITY. Figure 1 presents a hierarchy of activities that, when executed properly, supports world-class supplier quality performance. This figure presents these supply chain activities according to implementation complexity. Complexity refers to the skill, time, and resources required to successfully execute a particular activity. One way to approach the topic of supplier quality management is to ask a series of questions regarding an organization's sourcing practices. The answers to these questions will provide insight regarding how well positioned a firm is to pursue and realize world-class supplier quality.
Have We Reduced Our Supply Base to a Manageable Level? A prerequisite for world-class supplier quality involves optimizing or rationalizing the supply base. Supply base optimization is the process of determining the right mix and number of suppliers to maintain. Historically, this process has required most companies to reduce the number of supplies they relied on, often drastically and in a brief period. In fact, a dramatic supply base restructuring took place during the late 1980s and early 1990s within the U.S.
Why should supplier optimization affect supplier quality? Simply stated, pursuing value-added activities is easier with three hundred suppliers than with three thousand suppliers. Furthermore, optimization should lead to higher average supplier quality if a company has reduced its supply base correctly. Remaining suppliers should provide higher levels of overall performance. Who would eliminate their best suppliers?
Supply base optimization remains a continuing activity within most industries. In 1993, over 80% of respondents in our research said they reduced the number of active suppliers they maintained between 1988 and 1993, with an average supply base reduction of 35%. In 1997, almost 75% said they had decreased suppliers over the previous several years, with an average reduction of 20%-30%. Fully 84% expect to maintain fewer suppliers by the year 2000, with a further reduction of 20%-30% percent expected. Only 8% plan on increasing their number of tier one suppliers over the next several years.
The massive supplier reduction efforts carried out during the early 1990's resulted primarily in selecting a smaller group of suppliers from the original supply base, thereby largely ignoring the evaluation of new suppliers. Part of this resulted from the urgent need to reduce the supply base quickly in response to competitive threats from oversees producers, beginning for some companies in the early to mid 1980s. The resulting improvement in supplier quality was not as great as it might have been if purchasers had broadened their supply search. While relying on fewer existing suppliers minimized disruption and supplier switching costs, it also precluded broadening the supplier selection process to include potentially better suppliers. Most companies have undergone some supply base restructuring, therefore any improved quality that resulted was not unique to any company.
Optimization is only a first step toward world-class supplier quality. Advanced sourcing strategies, particularly those requiring closer interaction between the purchaser and seller, simply are not feasible with a large supply base. Executive management must ask if supplier optimization has created the foundation for pursuing more complex sourcing activities that will accelerate supplier quality improvement.
Do We Measure Supplier Quality Performance? An often neglected area involves the continuous measurement of supplier performance. Most organizations, large and small, have failed to recognize the need for supply chain measurement, and therefore diverted systems development resources to more "important" areas. Wide differences still exist in the quality and capability of supplier measurement systems. Some systems involve only a monthly qualitative assessment of supplier performance while others assess performance against stringent performance targets daily. Other companies fail to assess supplier performance at all.
Why measure supplier performance, and what is the relationship with quality? It is how organizations use the data rather than the act of measurement that makes these systems valuable. Procurement managers use supplier measurement systems to identify (1) supplier performance improvement opportunities, (2) real performance trends, (3) best suppliers to select, both for regular purchase agreements and for longer-term agreements, (4) where to commit limited supplier development resources, and (5) the overall effectiveness of supply chain improvement efforts. Because firms have a fact-based assessment of supplier performance, these systems simplify the awarding of future business. The formal measurement system is also an efficient way to convey customer (i.e., purchaser) requirements throughout the supply chain. Delivery and quality requirements become definable performance elements.
Measuring continuous supplier performance is not the only time when firms should evaluate suppliers. The supplier evaluation and selection process also provides opportunities for assessing supplier performance and capabilities. For most firms, supplier evaluation is central to their philosophy of quality at the source. Almost 70% of procurement managers say their firm uses a formal, quantitative-based supplier evaluation process to assess potential suppliers. Almost 80% formally assess supplier capabilities directly by cross-functional team site visits. These site visits usually investigate supplier process capability, control techniques, and commitment to continuous quality improvement.
In 1990, only 47% of the companies in our research had a formal system to measure supplier performance, and only 36% maintained specific minimum levels of acceptable supplier performance. By 1997, 85% of firms had a formalized system with just under 60% maintaining defined minimum levels of acceptable performance. For smaller firms, these figures decline rapidly. Executive managers, while recognizing the importance of performance measurement throughout other parts of their organization, must question where and when formal supply chain measurement occurs along with how to use the data to support enhanced supplier quality.
Are We Establishing Aggressive Supplier Improvement Targets? Some firms believe that incremental supplier improvement fails to create the performance and quality advantages required from their sourcing practices. Aggressive improvement targets reflect a major shift in thinking at most firms, particularly as it relates to supply chain management. Incremental goals, however worthy, invite suppliers to perform the same comfortable processes incrementally better with mediocrity often the result. Establishing aggressive performance targets mean that a purchaser expects supplier performance to improve at a rate faster than the improvement competitors realize from their suppliers.
Executive management plays a key role in setting the expectation that the supply base must achieve the same performance improvements expected of the purchaser. Motorola, for example, has decreed that suppliers must pursue the same aggressive goals that it establishes for itself. Company executives aim for a great deal more than merely fine-tuning existing supplier performance. Motorola suppliers must satisfy stringent improvement expectations in four critical areas: keeping pace in attaining perfect product quality; remaining on the leading-edge of product and process technology; practicing just-in-time manufacturing and delivery; and offering cost-competitive service. A comprehensive measurement system allows Motorola to verify progress against these ever-changing goals. Motorola is beginning to measure supplier quality in parts per billion defect levels.
Performance measurement systems, combined with aggressive supplier improvement targets, are essential for promoting supply chain improvement. Once a supplier proves it can satisfy current performance expectations, then more demanding objectives take effect, reflecting the need for continuous improvement.
Do We Reward Superior Supplier Performance and Improvement? Offering performance-related rewards recognizes that a direct link exists between rewards and supplier improvement. Traditionally, purchasers sought improvements from suppliers but were unwilling to share the subsequent benefits. This often resulted in self- promoting behavior by suppliers. Suppliers who improved internally avoided notifying the purchaser of improvements for fear the buyer would demand all the benefits. These same suppliers might also be unwilling to commit time or resources to improve the product or the buyer-seller relationship. The incentive to invest in longer-term improvements simply did not exist. As a result, minimal innovation or improvement originated within the supply base.
A best-case example of rewarding supplier improvement efforts can be found at Chrysler. Suppliers enter improvement suggestions electronically through Chrysler's on-line SCORE (Supplier Cost Reduction) system, which in 1997 saved the company and suppliers an estimated $1.5 billion in current and future costs. Many of these savings involve quality improvement suggestions leading directly to cost reductions. Chrysler shares the savings from these suggestions directly with suppliers, which provides the incentive to participate. Suppliers also know that Chrysler seriously evaluates each idea put forth.
Purchasers have many ways to reward superior supplier performance and improvement:
* Share the benefits resulting from supplier-initiated improvements
* Provide early insight into future product development plans
* Award longer-term purchase contracts
* Offer a greater share of a purchaser's total volume
* Provide access to new technology
* Offer opportunities for early new product design involvement, which can provide an advantage in securing a purchase contract
Consider what a longer-term contract can do for a supplier and how these agreements affect quality. Most suppliers, particularly smaller ones, rely on external funds for financing inventories and capital equipment purchases. Longer-term agreements are evidence of a commitment between the buyer and seller. These agreements enhance the likelihood that suppliers will get the financing required to improve operations, particularly for the purchase of quality-improving capital equipment. This strengthens the supply chain in ways that may not have occurred without the "rewards" offered by the agreement. Additionally, longer-term agreements often stipulate continuous improvement requirements, which further encourages quality-improving capital investment. Improvement rewards of all kinds can accelerate quality improvement and is one way to directly influence supplier quality. These rewards can also foster a greater commitment by the supplier to the purchaser's unique needs.
Do We Quality Certify Our Suppliers? Supplier certification is the formal process of certifying, usually through an intensive site audit performed by a cross-functional team from the purchaser, that a supplier's processes can produce consistent quality. Certification means that a supplier's processes and operating methods are in total control and that incoming material usually requires no inspection. Certification usually applies to a specific process or site rather than an entire company or product.
Certification directly affects quality because of the process used to assess supplier performance. Purchasers usually rely on cross-functional teams and rigorous audits when visiting suppliers. During these visits the teams usually identify performance improvement opportunities. Alcoa, for example, relies on audits to identify supplier deficiencies that require improvement. Specifically, the Alcoa certification process consists of meetings with supplier management to explain the importance of quality improvement, supplier self-surveys and trial audits to identify deficiencies for correction before the audit team arrives, comprehensive site visits by cross-functional teams with feedback, and participation from users regarding historical supplier performance. Suppliers scoring the highest on Alcoa's quality audit receive the largest portion of Alcoa's future purchase requirements. Lower scoring suppliers who do not improve risk losing Alcoa's business.
While the certification process should contribute to higher levels of supplier quality, the process also exposes the supplier and purchaser to certain risks. Supplier risk involves not meeting the purchaser's quality performance requirements. While certified suppliers often become preferred suppliers, suppliers who fail to receive certification or do not show meaningful improvement risk losing the purchaser as a customer. Also, a supplier with larger customers may find that each has a different set of quality requirements. This can create inefficiencies due to the need to conform to differing requirements. Suppliers are becoming receptive to a standard set of requirements, such as the automotive industry's QS 9000 standards, ISO 9000 standards, or the Malcolm Baldrige criteria. By 2000, over 90% of firms expect to apply some level of ISO 9000 standards to their supplier assessment practices.
For purchasers, the resources required to develop and execute a certification program, such as personnel, time, and travel budget, can be extensive. Larger firms are clearly more likely to have a supplier certification process in place compared with smaller firms. Also, purchasers may become complacent once a supplier receives certification. This reflects a belief that quality certification guarantees total quality from certified suppliers. In reality, supplier processes, management, and the work force change over time. Certification, which applies to a specific point in time with no guarantee of future performance, demands a continuous commitment of resources for regular reassessment. Ford Motor Company recently withdrew Q1 certification and business from 44 suppliers due to quality-related problems at Q1 certified facilities. Ford has prohibited these suppliers from bidding on new work for a six to nine month period as they correct their internal quality problems. Industry experts say Ford's move is significant because it marks the first time an auto maker has moved to take action against so many suppliers.
The certification process also benefits from a comprehensive supplier performance measurement system capable of identifying any deterioration or negative trend in certified supplier performance over time. A lack of continuous measurement increases the risk that certification will not lead to the longer-term benefits sought from the certification process.
Are We Committing Resources to Supplier Performance Development? Perhaps one of the most significant changes over the last several years has been the increased willingness of firms to help in the development of supplier performance capabilities. Various types of supplier development activities and resources exist, some of which require an intensive commitment of resources. While development initiatives have increased since 1990, few U.S. firms initiate supplier development activities, and those typically are larger firms. When surveyed, firms admit they expend only limited to moderate resources, on average, to develop supplier capabilities (average 3.69 where 1= limited resources, 4 = moderate resources, and 7 = significant resources expended.) Supplier development is an area that begins to separate average supply chain practices from leading-edge supply chain practices.
Companies pursue supplier development activities primarily for two reasons. The first is to improve an existing supplier performance capability, which should improve the overall quality received from suppliers. The second reason involves working with a supplier to develop a new performance capability. This can create new competition within a market, which allows a purchaser to avoid a sole source situation. Developing new capabilities can also help reduce the total number of suppliers a firm maintains.
Once a firm fully rationalizes its supply base, improvement will occur primarily through the development of existing supplier capabilities rather than large-scale supplier switching. However, firms must target their development resources carefully since not all suppliers qualify for assistance. Some suppliers will never achieve world-class performance, despite the resources committed to the effort. Others may not require attention simply because they currently deliver exceptional performance and will continue to do so. Still, other suppliers may choose not to participate in any development projects. Scarce resources require careful allocation.
Supplier development commands a total commitment of resources at Honda of America. Because Honda sources 80% of its part requirements from suppliers, more than any other major automotive producer, supplier performance improvement is crucial to continued success. Consider some resources and activities Honda commits to supplier development: two full-time employees help suppliers develop employee involvement programs; forty full- time engineers in the purchasing department work to improve supplier productivity and quality; suppliers receive technical support in areas such as plastic technology, welding, stamping, and aluminum die casting; special teams help suppliers resolve problems as-needed; a "Quality Up" program involves working directly with executive managers at those suppliers with lower quality; Honda personnel regularly visit supplier facilities; and an executive exchange program between Honda executives and supplier executives allows key managers to appreciate the issues each party faces. U.S. managers must question how to use supplier development activities to drive supply chain improvement.
Are We Involving Suppliers Early in Product and Process Development? Early supplier involvement seeks to maximize the benefit received from a supplier's engineering, design, testing, manufacturing, and tooling capabilities. This approach, which is also a leading-edge sourcing activity recognizes that competent suppliers have more to offer a purchaser than simply producing an item according to specifications late in the development process.
U.S. industry is starting to recognize the value of including suppliers early during new product and process development. An "America's Best Plants" competition conducted by Industry Week, for example, found that almost 90% of competition finalists emphasized early supplier involvement during product and process development. According to our research, only 29% of firms surveyed emphasized early involvement in 1990 as a key supply chain strategy. By 1993, this increased to 34% of firms. By 1997, 67% of firms emphasized early involvement. John Deere, a maker of construction and farm equipment, maintains that early involvement, along with supplier development activities, are the most critical supply chain activities the company must pursue to remain competitive globally.
The logic behind early involvement is straightforward. Qualified suppliers, working directly with cross- functional product development teams, can provide insight into the production processes required to support a purchaser's requirements. Purchasers can work with suppliers to identify parts that can be most efficiently and effectively produced given a supplier's production capability. Furthermore, design and technical expertise for purchased components, subassemblies, or systems may reside with suppliers. Allowing a supplier to put its full experience to work for a purchaser can lead to better quality and designs. Suppliers may also provide insights into how to simplify a product's design, which impacts product cost and quality. Early involvement also allows a supplier to anticipate and begin pre-production work, which can lead to reduced product development cycle time and reduced early production problems. A supplier can work with engineering personnel early to establish component tolerances to improve process capability ratios and product manufacturability.
CONCLUSION. The right organizational structure and personnel capabilities are essential for carrying out the activities discussed throughout this proceeding. Many organizations rely on cross-functional teams to work with and involve suppliers. These teams are also responsible for developing the sourcing strategies that directly affect supplier quality. Plant level buyers simply do not have the resources or time to execute the externally-focused and intensive activities required to support total quality with suppliers.
Purchasers must develop and implement plans that result in a world-class supply base. Failing to do so risks realizing a competitive disadvantage from a firm's purchasing and sourcing practices, particularly as it relates to quality. Executive management must challenge supply chain managers by asking a simple question: "What have you done for us lately?"