Class 17 - Supplier Mgt/Development & Risk

Question 1

Why should a firm care about Supplier Management and Development?

Answer 1

To organize and manage resources and processes across a supply chain

Question 2

What is the primary objective within Supplier Management and Development?

Answer 2

Continuous improvement of supplier capabilities

Question 3

Supplier Management - organization must have the tools to:

Answer 3

1. Measure suppliers
2. Manage suppliers
3. Develop suppliers

Question 4

Supplier Management - measurement must be:

Answer 4

1. Continuous/accurate/timely

2. Simple to manage and understand: measure/rate/rank supplier performance

Question 5

Supplier Management - organizations must manage suppliers by:

Answer 5

1. Giving feedback
2. Listening to responses
3. Consequences

Question 6

What to Measure: The Traditional Three

Answer 6

1. Delivery Performance:
   - MRP %
   - ANDON (notion for calling out for help; also can be like a financial penalty to people who are late)
2. Cost Reduction: Purchase Price Variance
3. Quality Performance:
   - Number of escapes/turnbacks
   - Cost of escapes

Question 7

Delivery Performance: On-Time Delivery Performance

Answer 7

Point In-Time Measurement = Number of parts on time / Total Part Numbers

E.g.
Rolling 12-month part number activity = 150;
Part numbers late right now = 6;
On-time delivery performance = (150-6)/160 = 96%

Question 8

Delivery Performance: ANDON

Answer 8

A visual system to notify management and workers of a problem

• ANDON hours: Time that line stopped
• ANDON $: Fee associated with time line stopped

Question 9

Cost Reduction: Calculating PPV (Purchase Price Variance)

Answer 9

(Old Price - New Price) * Current Qty

E.g. 2020 Price = 10.00;
2021 Price = 11.50;
2021 Qty = 500;
PPV = (10-11.50)*500 = -$750

*General rule: negative is bad in most firms

Question 10

Cost Reduction: Total Cost Reduction

Answer 10

Includes items not reflected in Price:

• Lead time
• Inventory carrying costs (consignment)

Question 11

Quality Performance

Answer 11

1. Number and Type of Escapes/Turnbacks:
   - Class-1 = Caught in buyer facility before use;
   - Class-2 = Caught in WIP or FG;
   - Class-3 = Escape reaches Customer (worst case scenario)
2. Defects per Million (DPM)
3. Cost of Escapes

Question 12

Types of Supplier Measurement Techniques

Answer 12

1. Categorical System
   - Easiest/fastest and most basic
   - Subjective in nature
2. Weighted-point System
   - Must understand/apply methodology
   - Receive overall weighted average (1-5)
3. Cost-based System
   - Systems required
   - Total cost basis
4. Analytics/Big Data

Question 13

Supplier Performance Index (SPI) Report: What’s the best and worst score?

Answer 13

The bigger, the badder.

Best score = 1

Question 14

SPI Calculations

Answer 14

SPI = (Total Purchases + Nonperformance Costs) / Total Purchases

Total Cost = Total Purchases * SPI

Factor Ratings = Points Earned/Available Points

Question 15

Supply Base Optimization

Answer 15

A continuous process of determining the appropriate number and mix of suppliers to maintain based on capability

• As business changes, your suppliers change.
• Get rid of bad, add new and better, while still meeting offset requirements
• Does price always decrease when adding a new supplier? NO
• First supplier may be horrible, while the new one provides quality service with a matching price
• Supplier may be overseas and come with a higher price
• Supplier may come with advanced technology that calls for a higher quotation

Question 16

Advantages of Optimized Supply Base

Answer 16

1. Buying from world class suppliers
2. Use of full service suppliers: large on average can offer more
3. Reduction of supply base risk: probability of unintended or unwanted event
4. Lower supply base maintenance costs: interaction, qualification, training
5. Lower total product cost: leverage
6. Ability to pursue complex purchasing strategies (need more interaction and coordination)

*Optimization usually starts with rationalization (reducing the number of suppliers)

Question 17

Risks/Disadvantages of Supply Base Optimization (maintaining fewer suppliers)

Answer 17

1. Supplier dependency
   - Buyer: loss of core competency
   - Supplier: becomes too much of a business mix
2. Absence of competition: less options to move
3. Supply disruption: strike/fire/hurricane
4. Overaggressive supply reduction
   - Take out too much supply base capacity
   - Existing suppliers cannot absorb work fast enough (late hardware/quality issues)

*Cross-sourcing: select and develop suppliers with multiple or duplicate capabilities

Question 18

Supplier Development Initiatives

Answer 18

Remember that the primary objective is the continuous improvement of supplier capabilities:

1. Technology sharing: manufacturing processes, patent rights
2. Incentives for improved performance: more work, often too much new work
3. Supplier Benchmarking/Competition
4. Capital Investment: equipment, payment terms
5. Personnel
   - Coordination
   - Training: Lean, Systems Quality

Question 19

Approaches to overcome barriers to Supplier Development

Answer 19

1. Direct Involvement Activities: Hands-on
   - People/Funding $
2. Incentives and Rewards (Carrot)
   - New Work/Development
3. Warnings and Penalties (Stick)
   - Withholding Future Business

• Limited resource that few suppliers receive
• Suppliers should believe before and after that they received a source/valuable resource

Question 20

Tips for Supplier Development Success

Answer 20

1. Get supplier senior management commitment in writing
   - Resource requirements
   - Cost reduction sharing
2. Set common/aligned goals and expectations
3. Build a relationship and trust
4. Select small easy-win project first
5. Provide training
6. Follow-thru on implementation (weekly status)
7. Ombudsman: independent company person to hear concerns
8. Spend time explaining how “bottom line” is affected as gains are often difficult to measure
9. Place supplier development in mission and objectives

Question 21

Supplier Relationship Management (SRM) definitions

Answer 21

• The discipline of strategically planning for, and managing, all interactions with third party organizations that supply goods and/or services to an organization
• The systematic, enterprise-wide assessment of suppliers’ resources and capabilities with respect to overall business strategy, determination of what activities to engage in with suppliers (Make/Buy), and planning and execution of all interactions with suppliers
• A recognition that these various interactions with suppliers are not discrete and independent - instead they are thought of as comprising a relationship, which should be managed across functional and business unit touch-points and throughout the relationship life cycle

Question 22

5 Key Steps in Implementing an SRM Program

Answer 22

1. Segmenting the supplier base
2. Setting the objectives for the SRM program
3. Measuring the supplier performance against the objectives
4. Engaging the suppliers, being transparent and getting aligned
5. Collaboration and continuous improvement

Question 23

SRM Values

Answer 23

1. Business drivers and value
2. Stakeholder engagement and support
3. Governance and process
4. People and skills
5. Information and Technology
6. Relationship Development and Culture

Question 24

eRFx / Electronic Data Interchange (EDI)

Answer 24

An electronic order process that supports:

• RFP/Q Process: product specifications, bid
• PO/Contract process
• Shipping notification to buyer
• Receipt notification from buyer: inspection of products and documents
• Invoicing
• Payment Authorization and Remittance: accounting audits

Question 25

Issues with SPI

Answer 25

1. Allocation of late delivery is a flat rate
2. Flat rate penalizes smaller shipments
3. Easy to calculate but unfair comparison

Question 26

Risk Management

Answer 26

1. Inherent in supply base management and involves:
   - Identifying the common sources of risk
   - Establishing how can they be managed effectively
2. As supply chains grow (length) risk increases exponentially, there is no simple magic list of risk
3. Uncertainty vs Risk
   - Uncertainty: ability to predict future events and conditions
   - Risk: how uncertainty will affect the organization
4. Buyers must perform “due diligence” before the risk event occurs
   - Risk recovery is typically expensive in time, effort, and money

Resiliency: the capacity to recover quickly from difficulties; toughness

Question 27

FMEA - Failure Mode and Effects Analysis

Answer 27

A procedure for identifying and correcting potential quality problems inherent to product or process designs

Question 28

FMEA steps

Answer 28

1. Determine unit of analysis
2. Identify potential failures and sources
3. Prioritize failure modes
   - Severity: how serious (impact)
   - Occurrence: how likely (probability)
   - Detection: effectiveness of controls
   - Risk Priority Number (RPN) = Occurrence Rating * Severity Rating * Undetectability Rating
4. Create Plans
5. Implement plans, measure impact, adjust analysis

Question 29

Global Supply Chain Risk Management

Answer 29

How SC members communicate and collaborate regarding sources of risk, utilizing risk management tools to mitigate and minimize risk and uncertainty across SC

Question 30

Global SCRM

Answer 30

Capabilities required:

1. Visibility to access risk across SC
2. Event recognition and early warning system
3. Real-time SC Analytics for improved decision making
4. Evaluation of various competing scenario responses