Supplier Value Index (SVI) Rates MRO Suppliers-Part II

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.

82nd Annual International Conference Proceedings - 1997 

Developing an effective method of communicating the expectations and evolving needs of our plant to our "core" MRO suppliers was central to the development of our Supplier Value Index (SVI) rating system. Prior to our implementation of the SVI in 1994, our experience with our core group of MRO suppliers was one of inconsistent performance.

When we reviewed the 1993 performance results of our top 23 MRO suppliers at Eaton-Kearney, we discovered the following:

  • These 23 MRO suppliers represented only two percent of our total MRO suppliers; however, they were responsible for over sixty-five percent (in dollars) of our total MRO purchases.
  • The group's average on-time delivery performance, on an annualized basis, was just over ninety percent.
  • Approximately one-third of the group was capable of receiving EDI transmission of our purchase orders.
  • Only three out of 23 were capable of bar coding goods shipped to our plant.
  • Only three of the 23 suppliers had inventory of the goods sold to our facility within 50 miles (1 hour) of our plant.

It became apparent that the development of a means to communicate more effectively with this group of suppliers our expectations concerning delivery, technology, inventory responsiveness, and other critical needs would allow us to reduce our total MRO expense.

How SVI Was Developed. Beginning in the 1990's many of our MRO suppliers began promoting the "value added" service and support concept. Although this was an attempt by some suppliers to divert our attention from their unit cost increases, for may it was a genuine response to our continual request for lower MRO costs.

In 1993, we seriously began evaluating the "value added" offerings from our MRO suppliers against our plant's manufacturing support requirements, as identified by our engineers, maintenance associates, machine operators, and supervisors. The result of our analysis was the foundation of our SVI rating system.

The following was our initial list of ten SVI rating elements introduced to our "core" 23 MRO suppliers at our January 1994 MRO Supplier Workshop. The points assigned to each element provided a relative importance indicator to the supplier. (It should be noted that additional elements were identified; however, we chose to focus on our "top ten" list.)

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
Net 30 = 0
1/10, net 30 = 3
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

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 at our MRO supplier workshops.)

Initial 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 1994, 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 had elapsed.

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

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

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

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

Part II. 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.

A demonstration of this evolving process was at the 1995 MRO workshop where a revised SVI was provided to the attendees.

Specifically, 1995 revisions were:

1. The expectation for 100% on-time delivery performance was greater for all suppliers during the upcoming 1995 year. Therefore, points awarded for on-time delivery reflected this expectation. The 1995 SVI on-time delivery points schedule was revised as follows:

100% to 99.90% = 10
99.89% to 99.50% = 6
99.49% to 98.75% = 3
98.74% to 97.76% = 1
97.75% = 0
97.74% to 93.50% = -5
Less than 93.50% = -10

2. Vendor responsiveness for 1995 was a given, and would no longer be a measured element for 1995. In its place was the introduction of a waste elimination element. All attending MRO suppliers were expected during 1995 to develop and implement a waste reduction/elimination program for their respective companies.

The thought behind this element was that if our suppliers were reducing cost related to waste at their locations, this action would result in lower total cost to our plant for items provided by those companies. (total cost included unit cost, shipment errors, administrative costs, and product reliability.)

3. All other SVI elements remained the same.

At our January 1996 MRO workshop we reported the second full year results to the attending suppliers. As was the case during 1994, we found a significant overall improvement in our suppliers' performance during 1995. The following is the SVI average rating, by element, of the attending group of MRO suppliers.

1. -1.03
4. 2.03
7. 2.72
10. 2.13
2. 9.45
5.(10.00)
8. 4.63
3. 3.50
6. 2.72
9. 6.83

The following is the corresponding percent change between the group's 1995 SVI rating vs. 1994 results.

1. 241.7%
4. (6.5%)
7. 56.3%
10. 0.0%
2. 67.3%
5. NA
8. 6.4%
3. 7.30%
6. 212.6%
9. 20.9%

Element 1: Supplier on-time delivery performance improved significantly in spite of the fact that we "raised the bar" on our 1995 expectations when compared to 1994.

Element 5: For some reason, our suppliers did not take this element seriously, or they did not understand the expectation. The results were thoroughly discussed at the 1996 workshop, and the element remained as a 1996 SVI performance expectation.

After two full years of implementation, the SVI data continued to support the premise that "when we clearly identify and communicate our expectations to our suppliers, our suppliers are able and willing to focus their resources on meeting our expectations."

Following the report of 1995 results at our 1996 MRO workshop, we once again updated our SVI elements to reflect the evolving expectations at our plant and distributed them to our suppliers. The 1996 SVI element revisions were as follows:

* Element 1: Once again we increased the pressure on on-time delivery. The rating scale for 1996 was as follows:

100% to 99.75% = 10
99.74% to 99.25% = 6
99.24% to 98.50% = 3
98.49% to 98.01% = 1
98.00% = 0
97.99% to 94.50% = -10
Less than 94.50% = -20

* Elements 2-6: No Change

* Element 7: We eliminated the element concerning transportation cost responsibility, and added an element on Quality System Certification.

* Elements 8-10: No change

Summary. SVI can be adopted and implemented within any organization. For example, in January 1996, Eaton ECO-NA adopted an SVI rating for core suppliers who service all ECO-NA locations. That SVI rating was modified to reflect issues pertaining to; delivery performance, corrective action activity, customer service support, electronic data technology, training, and cost reduction activity.

A key point to remember is; if purchasers can clearly communicate their expectations to their suppliers, the suppliers most often can meet those expectations.

The SVI rating is an available tool to assist in communicating purchasers' expectations.


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