Performance Measures for Purchasers and Suppliers
Gerald G. Colella, C.P.M., CPIM, CIRM
Gerald G. Colella, C.P.M., CPIM, CIRM, MKS Instruments, Inc., 6 Shattuck Road, Andover, MA 01810, 508-975-2350.
82nd Annual International Conference Proceedings - 1997
Abstract: This paper will essentially answer four(4) basic questions concerning Performance Measures for Purchasers and Suppliers, citing examples and initiatives in place in many companies today. Those questions are:
- Why Measure? (Objectives of Supplier Measurement Programs)
- What to Measure? (Effectivity vs Activity Based Measures)
- How to Measure? (Customer Produced Statistics)
- Who Measures? (Buyer Ownership)
- Why Measure? (Meet Today's Strategic Organizational Objectives).
Basically, measurements are usually established on those things which an organization considers key to their continued success. Hopefully, the procurement group has chosen to measure those things that are aligned with the direction, strategies, and goals of the overall enterprise. Materials or purchasing groups initiatives should be synergistic with the direction of the company. Highlighted below are a number of objectives that many companies are focused on to achieve market leadership or world class status, and noted are those initiatives that purchasing/materials can launch and measure to support them.
Short Cycle Times. Purchasing and Materials can significantly impact a company's ability to shorten the time from recognition of customer need to shipment out the door in a manufacturing environment by working with Supplier Quality Engineering and suppliers alike to implement a successful Ship to Stock Program.
Rapid uninhibited material movement from the suppliers last operation directly to stock or manufacturing, thus bypassing the need for incoming inspection can certainly support shorter cycle times. A second benefit of lowering inventory in the pipeline can also be achieved. The inventory that was required in stock, in manufacturing, etc., due to the time required to move from the dock through inspection and into stock is thereby eliminated.
Incrementally, once a solid ship to stock program is in place, a move to direct point of use delivery in manufacturing vs delivery to a stockroom, and then ultimately pull or kanban systems triggered by manufacturing can be implemented.
Lowest Cost Producer. Certainly, all companies want greater profit margins, but the compelling impetus to lowering costs comes from considering what our competitors are doing. Better product margins alone may not allow a price structure that enables a company to price itself for market dominance. Focusing on additional cost "drivers" or "adders", and eliminating or minimizing them will help a company achieve lowest total cost producer status, and enable them to price their products competitively.
A well managed supplier measurement program focusing on 0 defects, on time delivery, and excellence in service will minimize the cost "adders" listed below, and free up needed cash, space, resources, etc.
- Express Freight Charges
- Overtime to "Catch up"
- Safety Stock
- Penalties for Late Customer Deliveries
- Multiple Sourcing Minimizing Price Breaks Etc., Etc., Etc.
High performing suppliers will allow companies to not face these issues and costs that unreliable suppliers create.
Outsourcing as a Competitive Weapon. Outsourcing or subcontracting value added activity to the supplier community has increasingly become a key focus in many manufacturing companies. Firms are realizing that leaner organizations will be those who are well positioned in the future.
The more a company outsources to suppliers, and depends less on vertical integration, the more the risk of rapid expansion or shrinkage is spread outside the organization. However, there is risk in allowing outsourcing suppliers to control a company's destiny and success. Well run Supply Base Management Programs which monitor and track supplier performance are key in running the overall corporation.
Support ISO 9000/TQM Efforts. Problem identification, resolution, and corrective action are integral elements of the ISO 9000 initiative, as well as basic necessities of a well run TQM program.
Both these initiatives require solid measurement systems and control of the supply base to be effective.
Improve Supplier Performance/Relationships. Accurate, fair, and effective measurements certainly enhance a supplier's performance by highlighting areas for improvement. Additionally, purchasing groups can utilize the data to award business to those whose performance merits it. During the 1980's and into the 90's, reducing the supply base became necessary. Supplier partnering was apparently the right thing to do, although for some, it was only trendy with no focus or direction.
Measurement systems certainly aid in facilitating effective quantifiable reductions in the base. Moving more business to superior performing suppliers not only improves the overall performance of the supply base, and enables attainment of quality and delivery goals, but also affords purchasing more "weight" with these suppliers.
Improving supplier performance also lowers a company's cost to operate as outlined above. Good metrics open up pro-active communications, and problem solving sessions between customers and suppliers.
Rightsizing Effectively. Companies with good measurement systems and excellent results, can shift labor from non value added activities to more productive positions.
Inspectors can now transition to supplier quality or internal process auditors. Material handlers can work on internal process improvements with less suppliers rejects or returns and more point of use delivery and storage.
Purchasing can minimize the need for expediters and clerical support, and focus on materials and supplier management or negotiation.
New Products to Market Faster. World class suppliers enable new product initiatives to come in on time, and usually under budget. Early Supplier Involvement (ESI) can be successful when high performance suppliers are utilized.
Enhance Image of Purchasing. Purchasing performance and subsequent standing within the company is gated by the performance of their supply base. Highly effective low cost suppliers will enhance the credibility of the procurement group who sourced them. Excellence in supplier performance is a great source of pride and esteem for any purchasing organization. The more credible the purchasing group, the more influential it can be.
What to Measure? (Effectivity vs Activity Based Measures).
I have listed a number of compelling reasons to establish key metrics. These objectives, if met, certainly can help to insure the success of any organization. Listed below are a partial list of measurements involving suppliers which support many companies strategies moving through the 90's.
Quality is where all improvement activities and measures should begin. Devising a tracking system for incoming quality of a company's supply base will pay off tenfold compared to any other. Without superior quality from suppliers, programs such as Ship to Stock, Point of Use Storage, JIT, etc., cannot take hold effectively, and may hold a high risk for any company.
On time delivery certainly is also mandatory in any supply base management program. Companies should decide the parameters surrounding on time such as, only whole shipments tolerated, any and all partials considered late, a window for on time such as five (5) days earlier than scheduled, 0 days late, etc. Above all, once these are defined, these parameters should be documented and communicated to the suppliers.
Service is difficult to define and measure, however, it can be anything a company considers integral to furthering its success. Several examples could be leadtime reduction, 24 hour access, or consignment inventories.
Purchase Price Variance, tracking current prices paid against company standards is often a key measure. Certainly lower prices, or holding prices is necessary to insure containment on costs. Percent of materials on ship to stock, kanbans implemented, value analysis/cost reductions or perhaps long term contracts negotiated could be other measurables.
Above all, measurements and tracking should be focused on those things that will effectively improve company results. Typically, there is a focus on the following activity such as number of orders placed, number of requisitions received, etc. Departments may use this data to gauge capacity required, but the focus should be on value added, effective activities.
How to Measure? (Customer Produced Statistics)
On time performance can be calculated by dividing total lots or pieces received on time by total lots or prices received. this can be tracked manually in a smaller company or by utilizing the data base in a computerized environment.
Quality can also be calculated using the same calculations as outlined above. Total lots or pieces accepted divided by totals delivered can be utilized to calculate the quality performance of each supplier. As a company moves forward in their quality measurement program, it should ensure that it has it's house in order. Many times, rejections are the result of unclear specifications, drawings, inspection processes. Specifications, and methods of acceptance should be quantifiable, communicable and fair.
Once these systems for collecting and calculating the statistics are in place, companies can effectively use the results to manage and control the supply base. Not only can individual suppliers results be tracked, but also suppliers within a specific commodity (i.e., machining) can be ranked by performance. This will allow companies to award the best performers within a commodity business accordingly. Finally, all supplier data can be collected, and sorted to understand the entire supplier base, and effectiveness of a company's supply base management program. This data can be tracked month to date, year to date, and can be the basis for annual supplier awards, if given.
There are a number of issues a company must tackle to insure accuracy and fairness. Above, I noted specifications and inspection should be clear and fair along with a reasonable MRB. Additionally, proper maintenance of purchase orders by buyers is necessary to insure a supplier is not penalized for a late or early delivery, when it is a matter of dates not being maintained on a PO.
Receiving can also be a source of contamination if delays or backups occur, or errors are made. These issues should be addressed, and eliminated, or perhaps if delays are common, a one day grace period can be added before a delivery is considered late.
The NAPM also recognizes three(3) versions of rating suppliers.
First, the Categorical Method. A list of factors to grade suppliers upon is established by the purchasing group. This list is then distributed in a survey to numerous departments interacting with the supply base. Grades are assigned by each user on each category. The grades are collected, and tabulated for all suppliers. Suppliers are notified of the results and awards are based on the results.
The issues that stem from this system are, subjective judgements without a lot of data tracking, prejudice or favoritism, and recency of a suppliers performance.
Advantages are; easy to prepare, little data tracking, and certainly better than nothing.
A second version of supplier rating is called the Weighted Point Method. This system takes the results from the quality, and delivery statistics and "weighs" those values they deem important to gain an "overall" combined rating.
For example, a customer may take the position that suppliers making custom parts to blueprint should have their quality results weighed more heavily than delivery. Perhaps their quality would represent 70% of their overall grade, and delivery 30%.
Conversely, a distributor may have quality considered as a given, but delivery far more critical, thus weighing would be shifted. The issues in this system are; extensive tracking, maintenance of purchase orders, and an explanation and justification of the weighing to the supply base. The advantages are; minimal subjective evaluation, and leveling of the playing field for all suppliers (machine shops vs distributors).
Lastly, the Cost Ratio method enables a customer to factor up a supplier's prices by their performance, resulting in the total cost of ownership versus just unit pricing. The disadvantage of extensive tracking can be far outweighed by understanding the true cost a company is incurring, supplier by supplier.
Purchasing can certainly justify utilizing higher priced suppliers through this system.
Buyer Ownership (Who Measures).
No measurement system can succeed without a process for managing and supporting it.
A cognizant buyer should be assigned to the suppliers upon approval. This buyer will act as the "point guard" working as the liaison between the supplier and the customer. Even if multiple buyers conduct business with the supplier, this buyer is responsible to coordinate supplier quality meetings, mail out rating charts, resolve conflicts as necessary, etc. As customers focus more business with fewer suppliers, this should make less work for these point guards.
Although sometimes controversial, basing a portion of a buyer's review on their supplier's performance can be an effective way of supporting improvements in the supply chain.
Statistics can be sorted by buyer and can be utilized in goal setting.
This process certainly will support an environment not geared towards PPV alone. Buyers should help set their goals and objectives, and in order to help themselves, should be trained in supplier auditing, problem solving, facilitating, TQM, just to name a few.
Hopefully, a well run supplier management/measurement program will result in excellence in supplier performance, enriched and satisfied buyers, limited frustration, and lower cost to all.
Good Practices: The first and utmost objective of any supplier measurement program should be to support suppliers improvement. This is a key building block in the house of supplier/customer partnering. Data should be tracked, and sorted in pareto form to enable the supplier to focus on the correct issues, facilitate root cause analysis, and implement final and lasting corrective action.
Buyers must also realize the role they play in affecting supplier performance. Forcing suppliers into onerous or unrealistic dates, or giving them work they are not technically capable to perform, is often a fatal practice.
Keeping leadtimes realistic, knowing a supplier's capability, and negotiating, versus heavy handed practices can significantly affect a supplier in a positive way.
Communication needs to be constant and honest. Buyers, and Supplier Engineers should use the data to work together to resolve real problems not perceived ones.
Above all, buyers should use the data, and ranking of suppliers in key sourcing decisions, and awarding of contracts. Business placed with responsive and responsible suppliers will significantly improve the materials management in a company. Moving business from the lowest performing supplier in a ranking (i.e., by commodity) to the highest performing supplier, will demonstrate a company's commitment to building an arsenal of world class suppliers.
Since embarking on a formalized Supply Base Management System, while relying heavily on data to support it, MKS Instruments, Inc. has seen the following results:
1989: Lots 79%, Pieces 82%
1996: Lots 99.5%, Pieces 99.8%
1989: 82% on time
1996: 95% on time
83% Material on Ship to Stock
2 Hour Average Dock to Stock Cycle Time
60% Reduction in Inventory