Developing The Supplier Benchmark Audit, The Precursor To Supplier Approval

Author(s):

Patrick S. Woods, C.P.M., CPIM, A.P.P.
Patrick S. Woods, C.P.M., CPIM, A.P.P., Commodity Manager, Emerson Electric/Fisher Controls, Sherman, TX 75091, 903-868-8160

83rd Annual International Conference Proceedings - 1998 

Overview. What is a benchmark? Webster's Dictionary defines the word as "something that serves as a standard by which others may be measured." The purpose of this presentation is to illustrate how to develop a supplier benchmark audit which will allow you to define the standard by which to measure your supplier(s), quantify and weight each standard according to its importance to your organization and develop a survey scorecard to summarize and apply the findings in the context of a Best In Class, Acceptable, Marginal or Unacceptable supplier. The benchmarked supplier can then be evaluated in the light of this summary and compared with Best In Class standards. The Supplier Benchmark Audit, therefore, is the precursor to supplier approval/reapproval.

Defining The Standard(s). The first step in the benchmark development process is to design the benchmark audit document which is nothing more that an in-depth questionnaire which allows you to gather information about the supplier's technical, operational and/or financial capabilities. Note: Other areas can be added depending on the importance to your firm.

Background Information - Regardless of the type of supplier to be benchmarked, each form should begin with this section. The Background Information section should include the supplier's name, contact person/address, main location, other locations (if applicable), year the company was established, publicly or privately held, and subsidiary of (if applicable).

This is also the section where you can determine the number of employees overall as well as the number of employees in key areas (i.g. quality, engineering, marketing/customer service, management, administration or other areas deemed important). Other questions relative to background information could include major product categories of their customer base as well as a list of major customer names (with corresponding contact, phone and percentage of total sales). At this point you could also request the supplier's five-year growth plan as well as a copy of their long range business plan (if applicable). The next areas to cover in the study will again depend on what is important to you in supplier evaluation. However, listed below are some areas important to most customers. Again, you can either delete or add subjects as you deem appropriate.

Quality Assurance - questions could include:

1. Does the supplier have a documented (in writing) quality system in place?
2. Is a copy of their Quality Assurance (QA) manual available for you to review?
3. Are Statistical Process Control (SPC) techniques incorporated as part of their system?
4. Is there a continuous quality improvement plan in place?
5. Does the supplier set annual quality objectives with appropriate measurements?
6. Does the supplier have a QA department and do they have the authority to stop production material at receiving, inspection, production and or final shipping?
7. Is there a documented quality training program in place for hourly and salaried employees?
8. Are process capability studies conducted for new products prior to production release?
9. Does the supplier have a documented supplier evaluation and certification policy for its suppliers (2nd tier)?
10. Does the supplier have its own receiving inspection system in place that segregates incoming material and verifies identification, lot quality and supplier performance history?
11. Are systems in place to insure that only your latest drawings and specifications are available for use?

Technology - questions could include:

1. Does the supplier have an organizational chart?
2. Do they participate with you in joint development efforts in technology?
3. Is there a program for continuing education of technical personnel?
4. Are technical personnel involved in the up-front quoting and planning process to assure that parts can be manufactured/services can be provided?
5. Do routers and operation sheets identify specific operations for each component?
6. Is the supplier's equipment adequate to meet your requirements?
7. Does cross-training for critical skills exist?
8. Are there currently sufficient people resources to support current and future business?
9. Is there a union affiliation?
10. Is there a sufficient outside labor pool to support your growth and/or employee turnover?
11. Does a procedure exist to provide feedback from production to the appropriate function?
12. Does a defined preventive maintenance schedule exist?
13. Do backup plans exist to continue production in the event of machine downtime?

General Management/Financial - questions could include:

1. Does the supplier have a written policy on integrity?
2. Does a formal system exist for the development of an annual business plan?
3. Is the supplier's overall mission identified (Mission Statement)?
4. Does the supplier's management possess a high level of organizational and managerial skills?
5. Are educational opportunities offered to all employees?
6. Is a system in place to insure that the supplier covers all P.O. requirements?
7. Is there good work interaction between the workers and management?
8. Are the supplier's company values posted?
9. Is there an ongoing program to reduce cycle times?
10. Is technical and administrative help available to fix problems?
11. Is full responsibility for product warranty accepted if product failures should occur?
12. Is excessive follow-up required with the supplier?
13. Are communication meetings held with employees to discuss the supplier's performance measurements on quality, delivery, other?
14. Are financial audits performed annually?
15. Are financial audits performed by outside companies?
16. Is the supplier willing to share key financial data with you (i.g. assets, liabilities, total debt, sales, cost of sales, other key financial measurements)?

Delivery - questions could include:

1. Is the supplier aware of your delivery and cycle time goals?
2. Does the supplier positively respond to requested schedule changes?
3. Are schedule push-outs accepted?
4. Does the supplier have an effective planning system to insure the timely delivery of raw material from its supplier (2nd tier)?
5. Does the supplier have an effective inventory system in place that will consistently meet your schedule and inventory requirements?
6. Does/will the supplier work with you on consignment inventory programs?
7. Are the supplier's packing slips, invoices and necessary paperwork properly and accurately completed?
8. Are P.O. acknowledgments returned within the time frame, accurate and complete?
9. Are records and supplier personnel available to review current delivery status on P.O.s?
10. Are you or your designated representative promptly notified of delivery problems or schedule slippage?
11. Is there a plan for reducing lead-times?

Pricing - questions could include:

1. Does the supplier have defined programs to control its utility and operating costs?
2. Are there processes for controlling and leveraging raw material costs?
3. Is there sufficient knowledge of industry and market trends to control raw material costs?
4. Does the supplier submit alternative proposals on quotations to reduce costs?
5. Are productivity improvement suggestions submitted for cost reduction?
6. Are quotation prices fixed for an acceptable period of time?
7. Are P.O.s accepted for required quantities without a minimum-buy requirement?
8. Are schedule adjustments allowed without premium or unit price increases?
9. Is unit pricing within a competitive range of market served?
10. Is total cost within the competitive range of the market?

Environmental & Safety - questions could include:

1. Do hazardous conditions exist beyond normal business operations?
2. Is operator safety a priority?
3. Is the work environment clean and maintained?
4. Are all OSHA and EPA regulations in compliance? Are certificates available for review?
5. Are environmental issues discussed with the supplier's employees?
6. Are MSDS sheets available for review by all the supplier's employees?

As you have probably realized, the sample questions listed above represent many different areas of importance to the customer: quality assurance, engineering/user, management, finance/accounting, production & inventory control and environmental. Representatives from each of these areas within your company and others as deemed appropriate should be involved in the development of the questions to be used in the benchmark study as well as part of the team involved in benchmarking the supplier.

Quantifying The Standard(s). The next step in the benchmark development process is to assign points to each question. A point value system could be developed as follows:

SCORING5 = BEST0 = WORST
Rating Guidelines:

• 5-Implemented - Proven Process
• 4-Implemented - Not Proven
• 3-Started Implementation - Not Managed Well
• 2-Recognized Or In Plan - Not Implemented
• 1-Recognized - No Plan
• 0-No Recognition

To the right of each page of questions, a rating column could be listed allowing each member of the benchmark team to rate each question on the 1-5 scale listed above. It would also be beneficial to allow the supplier to review a copy of the benchmark study ahead of time and rate themselves. Therefore the rating column to the right of each page could be shown as follows:

RATING
SELF TEAM
Question #1._____ _____

Weighting Each Section. The next step in the benchmark development process is to weight each major section. For simplicity sake, if a perfect score is equal to 100 points or 100 percent, then the combination of points for all sections would total to a maximum of 100 points. Applying this logic to the questions above could present an initial problem. Listed above were 67 questions. Assuming that on average, each question would rate a 3, then the total points possible would equal to 201 or double the 100 point maximum. To correct for this situation, each major section is assigned a maximum number of points (weighting) with a quality point adjustment factor and then the sum of the points for all sections are equal to 100 points or 100%. In the sample sections above, a point weighting system could be assigned as follows:

• Quality Possible 20 Points
• Technology - Possible 20 Points
• Financial/Management - Possible 20 Points
• Delivery - Possible 15 Points
• Pricing - Possible 20 Points
• Environmental - Possible 5 Points

Total = 100 Points

Developing The Supplier Survey Scorecard/Adjustment Factors. The specific ratings for each survey question, both supplier self assessment and team assessment can be summarized in a scorecard format and the overall rating could equate to Best In Class (85% or higher), Acceptable (75 to 85%), Marginal (60 to 75%) or Unacceptable (60% or lower).

EXAMPLE
SUPPLIER SURVEY SCORECARD
Quality - Possible 20 Points Max Score Self Team

1. Formal Quality Plan (4 Questions)20109
2. Management Quality Commitment (2 Questions)1088
3. Quality Training (1 Question)534
4. Process Capability (1 Question)533
5. Material Control (2 Questions)1075
6. Drawing & Spec. Control (1 Question)553

Total =553632
Quality Point Adjustment Factor = Total X .3636 = 201312

Technology - Possible 20 PointsMax ScoreSelfTeam

1. Technical Depth (3 Questions)151312
2. Process Planning (2 Questions)10810
3. Facilities And Equipment (2 Questions)1087
4. Resources (3 Questions)151412
5. Customer And Production Feedback (1 Question)555
6. Preventative Maintenance Program (2 Questions)1077

Total =655553
Quality Point Adjustment Factor = Total X .3077 = 201717

General Mgmt./Financial - Possible 20 PointsMax ScoreSelfTeam

1. Integrity And Ethical Practices (1 Question)555
2. Business Planning (2 Questions)1055
3. Effective Organ. & Operations (3 Questions)151210
4. Management Behavior (2 Questions)101010
5. Ownership And Service (4 Questions)201518
6. Leadership (1 Question)555
7. Financial (3 Questions)1585

Total =756058
Quality Point Adjustment Factor = Total X .2667 = 201615

Delivery - Possible 15 PointsMax ScoreSelfTeam

1. Schedule/Product Support (3 Questions)151313
2. Prod. Planning. & Inv. Mgmt.(3 Questions)151313
3. Contract Compliance (2 Questions)101010
4. Delivery Service (3 Questions)151212

Total =554848
Quality Point Adjustment Factor = Total X .2727 = 151313

Pricing - Possible 20 PointsMax ScoreSelfTeam

1. Cost Effective Management (3 Questions)151513
2. Cost Reduction Program (2 Questions)1099
3. Pricing Policy (5 Questions)252321

Total =504743
Quality Point Adjustment Factor = Total X .4000 = 201917

Environmental/Safety - Possible 5 PointsMax ScoreSelfTeam
A. Environmental Safety (6 Questions)303030
Total =303030
Quality Point Adjustment Factor = Total X .1700 = 555

SCORECARD SUMMARY
Maximum Score SelfTeam
Quality 201312
Technology 201717
Management/Finance 201615
Delivery 151313
Pricing 201917
Environmenta l555

Total Score =1008379

Condition =85% And Up -Best In Class
75 To 85% -Acceptable
60 To 75% -Marginal
60%/ Below -Unacceptable

Note: Prior to benchmarking your supplier, you may wish to first chose another company, preferably, in the same commodity industry or in a related industry that has demonstrated Best In Class capabilities (i.g. ISO quality system, proven cost reduction programs, inventory control programs, positively recognized by competitors or in the industry) to benchmark and confirm an overall rating of 85% or higher. This will give you a true basis of comparison or a benchmark that your supplier should work toward in its continuous improvement program(s).

Applying The Findings. The standards listed above (or the ones you chose) will allow you to quickly sort out the supplier's strengths, weaknesses and neutral points. Key questions to consider would be: Does this supplier's strengths out weigh their weaknesses? Are such weaknesses acceptable or do they need to be corrected? Does this supplier already have a corrective action plan in place to correct its deficiencies or is there an attitude of complacency (what you see is what you get!)? Is the supplier's deficiencies correctable or should I move on to another source/opportunity. Generally, from strictly a rating perspective, Suppliers who fall into the Acceptable category can move into the Best In Class category. Suppliers in the high end of the Marginal category (with additional work and corrective action planning) can also move up into the Acceptable or even Best In Class categories. Suppliers falling into the low Marginal or Unacceptable ranges are probably beyond hope (or require major resources and commitments to make drastic improvements) and should be abandoned for better opportunities.

If you chose to share the data with the supplier, they can also benefit from the fact that you have evaluated them in a clearly defined, quantitative method, targeting specific areas for improvement as opposed to your classifying them as simply a "Good" or "Bad" supplier.

Parting Thoughts. As mentioned above, the conducting of the benchmark visit should be a team effort with representatives from both the customer and supplier firms that can adequately address each area (i.g. the quality area should have both your QA rep. conducting the audit and the supplier's QA rep responding to the audit). You should also plan your strategy with your audit team prior to the visit (i.g. should we split up or cover a specific area as a team?). After the visit, you should sum up your findings/ratings as a team and promptly communicate them with the supplier as to how they rated and what their future holds with your firm. It is also a good idea to send out the audit form to them at least a couple of weeks prior to the visit to give them time to answer the questions and if required, bring in key personnel to address the issues. Lastly, encourage the supplier to return the document to your prior to your visit so that you can review it with your team and focus on the deficient areas. Note: depending on the size and complexity of the supplier, the actual visit should take from 1-2 working days.

Based on the above discussion, why not develop your own benchmark audit? The results may surprise you!

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