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Supplier Analysis: Achieving the Optimum from your Suppliers - Improved Performance and Lower Total Cost

Author(s):

L. Wayne Riley
L. Wayne Riley, Manager of Global Materials Services, Intel Corp.

83rd Annual International Conference Proceedings - 1998 

Introduction:
Every Buyer and company have their own "formula" for analyzing their respective suppliers for ascertaining the acceptable "fit" for performance of their supplier, and ultimately, their suppliers' materials / service. Many company "formulas" are expertly documented. Most have served the company's requirements to a satisfactory level. However, very few Buyers or companies are able to perform a proficient analysis of their suppliers to project the long term success of their suppliers' ability to grow their manufacturing when the buyers' company grows. This has been a universal void with most buyers - The Alignment of Supplier/Buyer Manufacturing for Improved Perfromance and Lower Total Cost.

Background:
Why do buyers analyze their suppliers' ability to provide materials / service?? The challenges facing all buyers today is to provide more supplier capability with less resource commitment. There are 6 major categories plaguing the buyers in selecting suppliers today:

  1. The need for higher quality levels of products, materials and service.
  2. Lower inventory levels of supplies maintained by their factory.
  3. Higher standards of achievement for your products and your suppliers' products.
  4. More global support for materials and service.
  5. Continued product margin pressures.
  6. General public image and impact.

When a supplier selection does not provide the buyer with his/her expected results, the improper decision made for the purchase of materials, services or personal requirements is attributable to 1 of 5 different criteria:

  1. Lack of Information - Source of resources determines the direction of your decisions.
  2. Incorrect Information - Uncensored information or not privy to information.
  3. Poor Logic - Make decisions by looks.
  4. Myopic Thinking - Too involved in the process, not looking at the whole.
  5. History - Decisions due to history or tradition.

Current:
There are 4 major components to analyzing the suppliers' ability to provide materials and services for today's environment: Capability, Stability, Resourcefulness, and Competitiveness. These 4 components cover the suppliers' current ability to manufacture and deliver quality materials / service. However, these 4 components do not address the applicability of the supplier to provide optimum materials and service to meet your changing manufacturing environment; hence, their manufacturing environment aligning with the manufacturing requirements of your own environment. This also impacts the suppliers' ability to meet your optimum cost structures and performance requirements, as well as to meet your future manufacturing and growth potential.

Before a buyer engages with a supplier to provide materials or services, (s)he must:

  1. Know how the manufacturing, technology, and service directions of your suppliers' materials / products coincide with the manufacturing direction of your products.
  2. Understand your suppliers' commitments and business needs.
  3. Provide the appropriate level of analysis:
    • Don't over analyze materials
    • Don't under analyze materials
    • Not required for one-time, non-critical purchases
    • Not required for small dollar purchases

Alignment:
The analysis where Buyers place little attention and effort, yet has the most impact on current and future cost and performance, is the alignment of the suppliers' manufacturing operations to your specific manufacturing operation. This alignment will ensure you have selected the correct supplier today, and ensure your have the correct supplier for future growth. It is in this environment, manufacturing alignment and product growth, where suppliers become inefficient for the current demand and future support of your changing requirements. Therefore, making a proper decision today will prevent short term cost pressures, and ensure long term supplier availabilities for improved performance.

Before buyers can analyze their suppliers for Capability, Stability, Resourcefulness and Competitiveness, they must ensure their suppliers' product and process structures are aligned with your company's product and process structures. Product structures are the dependability and cost alignment of the manufacturing output. These categories flow from low volume / low standardization to high volume / high standardization. Process structures are the size/scope of their suppliers' manufacturing process environment, from a small, job shop operation to a large, continuous flow operation.

The "Product / Process Structure" can be summarized into 4 categories along a "Process / Product" matrix. Category I is the small "job shop" environment, producing low volumes with low standardization. Characteristics include:

  • custom designed products
  • multiple product variety
  • highly flexible processes with fast reactions to changes
  • high profit margins
  • high levels of product variety
  • generally long lead times
  • low capital investments

Category II is the larger operation with a batch (disconnected flow) manufacturing process, producing multiple products at low volumes. Characteristics include:

  • Higher volume outputs
  • less product variety
  • lower manufacturing costs
  • more dependable delivery requirements
  • more standardized designs
  • higher capital investments

Category III is the large connected flow (assembly line) operation with a few major products, but higher volume outputs. Characteristics include:

  • higher volumes of production
  • less product variety
  • lower costs structure
  • more dependable production output
  • higher capital investments
  • more standardized designs

Category IV is the continuous flow process with very high volume outputs, along with high standardization. Characteristics include:

  • very high volumes
  • little product variety
  • dependability in production output
  • lowest labor cost
  • low unit cost
  • high capital investment

It becomes the buyer's responsibility to analyze his own company's category, then determine the category of your respective suppliers and how they fit with your needs. If your manufacturing or service falls into one category, and your supplier is located in another category, then your respective company manufacturing alignments are not congruent. Your supplier will be unable to meet your current (and future) flexibility, dependability and cost requirements. This leads to an improper positioning of your supplier which will produce short term increased cost and unpredictable performance. If your suppliers' category is congruent with your manufacturing or service category, then your supplier is positioned to provide the appropriate level of flexibility and output at the optimum cost structure. In reviewing your future requirements for the suppliers' materials or service, the buyer will be able to ascertain the long term impact on supply and cost when production increases and market pressures require more reliable and low cost solutions. This will also eliminate the need to conduct extensive supplier evaluations for future supply due to inability of your supplier to fulfill orders. Thus, eliminating costly management and analysis time.

Summary:
It is not the mission of the buyer to develop your current or future suppliers along this "Product / Process" matrix from Category I to Category II. It is the buyers' responsibility to ensure their current or selected suppliers are positioned to provide the highest performance at the optimum cost levels. Aligning the manufacturing processes of the supplier and your company will not ensure long term viability or success. However, it will ensure that if the suppliers' product support levels are appropriate, then you will have a greater probability of current success for cost alignment and performance enhancements. You will also be positioned for future success when the production volumes increase or standardization becomes more critical...


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