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  The NIST Manufacturing Extension Program for Kentucky

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You are Only as Good as Your Weakest Supplier

How good are your suppliers?  How much risk do they add to your manufacturing processes? These are questions that many management teams ask, but may leave unanswered.  Managing supplier relationships is often overlooked as an integral part of a company’s quality system.  While the criteria of all certification programs specify a robust purchasing environment, many company programs only meet the minimum requirements.  As certification criteria continues to evolve, more emphasis is being placed on risk assessment.

Measuring is not a Waste of Time

“Measurement Graphic

Always remember “You can’t manage what you don’t measure”, the following represents four areas of focus that you should be measuring:

  1. Supplier Quality performance and readiness-can the supplier meet quality expectations?
  2. Financial Risk-will the supplier remain in business?
  3. Supply/Delivery Risk-can goods be delivered on a timely basis?
  4. Price/Cost Risk-can the supplier meet and maintain price targets?

Supplier Quality-this area of focus is probably the most commonly found metric and is measured in multiple ways.  Audits, scorecards, dashboards, etc. are methods that are used to obtain supplier quality performance data.  A savvy quality program will report this data and address any shortcomings to management.  While this data is important, it does not necessarily dictate the “health” of the supplier.

Financial Risk-there are many third party monitoring systems available, and all generally are available for a fee.  What is offered by these products varies significantly, with more data/insight costing more than a simple credit score.  Generally speaking, such systems look at credit monitoring data, reported sales, ownership and principal partners.  Many accounting departments use such systems for reviewing Customer risk when offering credit and payment terms.  The same info can and should be incorporated in the buying process.

Supply/Delivery Risk-criteria that determines delivery issues or disruptions are harder to target, but some criteria include geographical location, unionization of facilities, supplier equipment maintenance programs, safety issues and carrier availability.  For example, a facility located in an area known for tropical storms should be carefully evaluated.  International war zones are also red flags.  This delivery exposure was highlighted by the Japan earthquake and tsunami in 2011, which caused disruption to many companies that were single sourced to affected suppliers.

Price/Cost Risk-another difficult consideration, which is impacted in several ways.  For example, the presence of a robust Continuous Improvement Program should be an indication of a company’s ability to meet/manage labor and waste factors.  Also, a Supplier’s robust purchasing system should be an indicator of their ability to manage supply chain issues.

Measuring Suppliers

If data is available from the above four focus areas, it is merely a matter of developing a weighted system to establish a score.  If the data is not available, or hasn’t previously been considered, it is time to start gathering the data.  Existing suppliers are easier to deal with because the data should exist regarding past quality and delivery issues.  The use of Questionnaires and documented discussions with supplier principals can be a source of data as well.

The key is to carefully consider what information is important and develop both the criteria and methodology to extract the data.  While it is understood that travel cost is high, there is no substitute for visits to supplier’s facilities.  While there, utilize the criteria that you find to be crucial to your supply chain decision making.  If you are using a particular format for supplier audits, re-visit this layout and see if additional information can be gathered during this time, i.e., robustness of supplier maintenance programs and detailed information regarding continuous improvement initiatives.  If you utilize questionnaires to pre-qualify potential sources, consider what questions are being asked.  Questionnaires are generally weighted toward a particular area, so if you feel that particular areas are weak, change the format.

Pay particular attention to Failure Mode and Effects Analysis (FMEA) data that may be generated by the supplier.  Insure that the supplier is carefully considering ALL aspects of process failure.  If you are not using FMEA’s, you might want to consider the power of this format to assess risk, then ask your supplier to submit these documents for key items.

Mitigation of Risk

“Risk Graphic

Once you know what issues you are dealing with, the process of minimizing such risk must begin.  The level of exposure and area of exposure will dictate what must be done.  In the case of a supplier struggling with cash flow issues, you must address the issue with the principals involved.  A plan of improvement could be issued, or you could start to develop alternate sources of supply.  Quality issues are also critical, and generally are known at a high level.  This could be the result of inadequate tooling, poor process control, or a myriad of other issues.  Solid recovery plans are mission critical to solving such dilemmas.  Ongoing issues may dictate alternate sourcing.

Any activity that you can start now to better show to both your Customers and the certifying bodies that you are serious about assessing purchasing risk will pay big dividends in the future.  It should be stated that starting such an endeavor is hard work, but the results of the labor well done will result in the purchasing and manufacturing staff having a higher level of confidence in the supply chain.  There are a lot of reasons that can be given to NOT start this process; “we currently don’t have a problem, we are not staffed for this”, etc.  But you don’t know what problems are lurking until such a system is in place.

Future maintenance of the system is a given and must be considered as part of the overall plan.  Once integrated into the policies and procedures of a facility, the execution of the program will be a matter of course.

Who has time to do all of this?  Advantage Kentucky Alliance has developed a service called “Supplier Source Selection Research”, and we stand ready to assist you with our staff of talented resources.  As a provider of Continuous Improvement, Growth Services, and Leadership Development, we understand the challenges facing the manufacturers and can apply our resources to leverage change within your organization.

For more information about how the Advantage Kentucky Alliance can help you assess and select sourcing suppliers, or for more information on any of our other Continuous Improvement or Growth services, contact Scott Broughton, Center Director at 814-505-3786, scott.broughton@wku.edu or visit www.AdvantageKY.org

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