Supplier Value Index (SVI) Rates MRO Suppliers

Author(s):

Gregory E. Benson, C.P.M.
Gregory E. Benson, C.P.M., Materials Manager, Eaton Corporation, Engine Components Operations-N.A., Kearney, NE 68848, 308/234-1841

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Effectively expressing the evolving needs of our manufacturing facility to our core MRO suppliers at Eaton-Kearney is crucial if we are to expect our suppliers to be responsive to those needs. In January 1993, we introduced our Supplier Value Index (SVI) rating system to our core MRO supplier group as a means of improving how we communicated our expectations of supplier related activities. The intent of this presentation is to provide the purpose behind the creation of our SVI rating, how it was developed, and the results experienced at Eaton-Kearney since its application.

Purpose. In the early 1990's nearly every MRO supplier that called on our facility touted a "large bag of offerings" they promoted as adding value to the products they sold to our plant. These "value enhancers" included items, other than unit cost, which were supposed to provide a lower total cost for the products they sold.

Clearly, we wanted to take advantage of valid "value added" resources provided by our MRO suppliers. The challenge, therefore, was to identify the legitimate value added offerings available from our MRO suppliers, and analyze the proposed benefit of each offering against the ever-changing needs of our production facility. Once the initial analysis was completed, the next step was to effectively communicate to our MRO suppliers those value added items which we considered to be of greatest importance to our manufacturing environment. Through this process of identification, analysis, and communication we have been able to take advantage of our suppliers' value added services by focusing their attention toward our specific list of value added expectations referred to in our Supplier Value Index.

How SVI Was Developed. Our Supplier Value Index is the result of on-going communication between our production, support, and purchasing departments, along with our core MRO suppliers. Over a period of several years, the Eaton-Kearney Purchasing Department received information from process engineering, production supervisors, machine operators, maintenance personnel, and so forth regarding how suppliers had provided added value on projects, and how they thought suppliers could have provided additional value on other projects which didnot receive supplier support equal to user expectations.

Beginning in the early 1990's many of our core MRO suppliers began seriously promoting the "value added" service and support concept. For some, this was just an attempt to divert our attention from unit cost increases on items they sold to us. However, for many of the more progressive MRO suppliers this was a genuine effort in trying to provide a lower total cost for MRO goods used at our plant. Starting in late 1991 and continuing through all of 1992 we worked very closely with several of these MRO suppliers in trying to identify and document value added services which would realistically reduce the total cost of MRO goods and services used at our plant.

In 1993, we began comparing the suppliers' value added offerings against our plant needs in an effort to find "common ground" between the two. The result of this analysis was the beginning point for our SVI rating system. The following are our initial ten SVI rating factors introduced to 23 core Eaton-Kearney MRO suppliers at our January 1994 MRO supplier workshop. These ten items were identified at our plant as the most "valuable" of all the value added offerings submitted by our suppliers. The points assigned to each item demonstrated its relative importance within this initial group.

1. On-time delivery performance. (Calendar year average)
100% to 99.90% = 10
99.89% to 99.40% = 6
99.39% to 98.50% = 3
98.49% to 97.51% = 1
97.50% = 0
97.49% to 93.00% = -5
Less than 93.00% = -10

2. EDI capable.
Yes = 10 No = 0

3. Location of inventory to plant. (In miles)
Less than 10 =10
10 to 50 = 5
50 to 200 = 2
More than 200 = 0

4. Payment terms.
2/10, net 30 or better = 5
1/10, net 30 = 3
Net 30 = 0
Less than net 30 = -5

5. Vendor responsiveness.
Meets or exceeds = 10
Does not meet = -10

6. Bar coding capability.
Yes = 5 No = 0

7. Certified Eaton-Kearney MRO supplier.
Yes = 10 No = 0

8. Formal supplier agreement.
Yes = 10 No = 0

9. Transportation cost responsibility on routine orders.
Supplier = 5 Eaton-Kearney = 0

10. Technical support.
Full-time in plant = 5
24 hr./7 days per week emergency response = 2
Traditional = 0
SVI Rating = Total points from items 1 through 10/10
Maximum Rating = 8.0
Minimum Rating = -2.5

SVI classifications were assigned to each supplier ranging from "World Class" to "Awful" based on their calculated SVI rating.

At our 1994 MRO workshop each attending supplier was provided with their baseline SVI rating. At the same time, we explained to all in attendance what we considered an acceptable minimum SVI rating to be by our 1995 annual workshop. A progress SVI rating report was sent to each supplier in July 1994, and the annual SVI rating review was covered at our January 1995 workshop. (The SVI review has become a mandatory topic for future MRO supplier workshops.)

The SVI rating system was not created to be a stagnate supplier measuring device; rather, its purpose is to evolve and change as our plant's needs and expectations change. An example of this evolution process was at the 1995 MRO workshop where a revised SVI was provided to the attendees. The 1995 version reflected expectation changes that had taken place in our plant which resulted in completely changing one of the original 1994 elements, and increasing the expectation level of a second. Again, this is consistent with the original SVI purpose which is to effectively communicate our changing needs and expectations to our MRO suppliers as they relate to MRO value added services.

Results. At our 1994 MRO workshop, a baseline rating was calculated and provided to each of the attending 23 MRO suppliers. The following is the SVI average rating for the attending MRO group of suppliers on each of the initial ten elements previously outlined.

  1. -6.95
  2. 3.92
  3. 1.00
  4. 1.30
  5. 8.26
  6. .65
  7. 1.09
  8. 3.48
  9. 4.34
  10. 1.78

In July 1995, a progress rating was reported to each of the 23 MRO suppliers. The following is the progress SVI average rating for the same group of MRO suppliers after six months.

  1. -4.48
  2. 4.35
  3. 1.43
  4. 1.74
  5. 8.70
  6. .87
  7. 1.30
  8. 3.48
  9. 4.78
  10. 1.78

The first full-year SVI results were reported to each of the 23 MRO suppliers at our January 1995 MRO Supplier workshop. The following is the SVI average rating on each of the initial ten elements after one full year for the companies in attendance.

  1. -3.52
  2. 5.65
  3. 3.26
  4. 2.17
  5. 10.00
  6. .87
  7. 1.74
  8. 4.35
  9. 5.65
  10. 2.13

The following is the percent change between the group's baseline SVI rating provided in 1994, and its 1995 average rating. Each of the original 10 elements showed an improvement.

  1. 97.4%
  2. 44.1%
  3. 226.0%
  4. 66.9%
  5. 21.1%
  6. 33.9%
  7. 59.6%
  8. 25.0%
  9. 30.2%
  10. . 19.7%

The data to date appears to support the premise that when we clearly identify, and communicate our expectations to our suppliers concerning which value added services are of greatest importance to our facility, our MRO suppliers are able to focus their resources toward responding to our needs.

As previously noted, we provided our MRO suppliers with a revised SVI "score sheet" at our January 1995 workshop. At that time we discussed at considerable length the reasons behind our revisions. Our revisions included a tightening of our expectations regarding on-time delivery, and greater emphasis on waste management and internal cost control. As of this writing it appears that our suppliers have accepted the revised expectations as they continue to demonstrate a willingness to be responsive.

Our expectation of our MRO suppliers is to show SVI rating improvement at the 1996 workshop when compared to their 1995 results. Our ultimate goal is to have all Eaton-Kearney core MRO suppliers score in the "World Class" classification, and then maintain that level of excellence. At our 1995 workshop we had two MRO suppliers out of 23 performing at the "World Class" level.

Summary. Effectively communicating an organization's "value added" expectations to its suppliers is one of the building blocks for an effective and long lasting buyer/supplier alliance. The intent of our Supplier Value Index rating system is to focus our attention, and the attention of our MRO suppliers, on factors beyond the unit cost of an item which have a significant impact on the total cost of acquisition. The SVI rating was developed at Eaton-Kearney in an effort to provide a quantifiable "measuring stick" for our analysis of the overall value of our MRO suppliers, and to assist in determining the total cost of goods provided by those suppliers for our manufacturing plant.


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