STRATEGIC SOURCING
LEARNING OBJECTIVES
2.7 CREATING A WORLD -CLASS SUPPLY BASE
The primary objective of supplier management is the continuous development and performance improvement of suppliers. Supplier management involves purchasing, engineering, quality assurance, and suppliers working together to achieve better relationship between buyer and seller. Unless companies are able to improve their supply base upto world-class levels, they will be at the mercy of competitors who can take market share with in short period of time. Therefore it is essential that companies must take effort in improving their supply base to world-class level. Bringing up the level of suppliers to the world-class level is possible through effective supplier development process. Let us discuss in this section how organization manage, develop and improve the performance of suppliers to the level of world-class.
2.7.1 Supply Base Optimization
In section 2.3 under types of strategic sources, we have introduced the concept of optimizing the supply base. This strategy is utmost important in developing a world-class supplier. The process of identifying the proper mix and number of su ppliers to maintain is known as the supply base optimization. Effective supplier management and development begins with a determination of the correct number of suppliers an organization should maintain. It involves eliminating suppliers who are not meeting the world-class requirements either currently or in the near future. The trend in the market forced manufacturers to have few vendors. Most purchasers have taken suitable steps to reduce the total number of suppliers with whom they do business. Eliminating the un-qualified vendors from the list is the first step in optimizing the supply base. Subsequent optimization requires the replacement of qualified suppliers with the better perform ing suppliers. During the optimization phase,
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the buyer takes effort in developing the supplier to meet the world-class requirements.Supply-base optimization should result in improvements in costs, quality, delivery and information sharing between buyer and seller. Suppliers in an optimized supply base often develop longer-term relationships with purchasers, which can lead to further jo int improvement efforts. Some of the benefits of doing business with world-class suppliers include reduced defects, fewer delivery problems, visibility to leading edge technology, opportunities to develop closer relationships with high performing suppliers, and a lower total production cost.
Maintaining few suppliers may some times pose certain risk. Maintaining large supply base may promote a healthy competition between suppliers, whereas a single or few supplier sources is selected carefully and develop close working relationships, supply risk can actually decrease. Maintaining fewer suppliers will lead to lower supply-Base maintenance costs. If a single supplier receives large quantity order, lower production costs can be attained due to economies of scale. Also, if we want to implement complex purchasing strategies the small supply base is appropriate. Some purchasers fear that a small supply base can become too dependent on a purchaser for its economic survival. Mutual commitment between buyer and seller can solve this dependency problem. Supply disruption is a potential risk when sourcing from a single supplier. This risk can be solved in carefully selecting the supplier who is having multiple capabilities. Enough care should be taken on optimizing the supply base. There are several approaches available for optimizing the supply base. Pareto‟s 80/20 rule can be applied in choosing the vital few suppliers. Improve or Else‟ is another approach in which suppliers are given a chance to remain in supply base.
Competency stair case approach provides opportunities to the existing suppliers to meet buyer‟s quality standards.
2.7.2 Supplier Development
Supplier development is a critical activity in creating world-class supply base. Supplier development is any activity undertaken by a purchaser to improve a supplier‟s performances to meet the purchasers supply needs. Supplier assessment rewarding supplier for their performance, creating healthy competition among suppliers, and making them involve in buyer activities are activities performed to develop the supplier. Effective supplier development requires the commitment of financial, capital and Human resources, skilled personnel, information sharing between the purchaser and supplier and measurement of supplier performance. The steps involved in supplier Development are discussed below:
Step1
Identify critical components for development: In this step the purchaser has to scan all the components that are purchased form outside. If already a world-class supplier is supplying certain components, they need not be considered again. Therefore the components, which require world-class supplier list, has to be prepared before actually
SUPPLY CHAIN MANAGEMENT
developing the supplier. A corporate level steering committee may be formed for this exercise.
They can investigate whether the commodity account for more than 50% of the turnover value and whether the purchaser is willing to develop mutual trust with the supplier. After answering to these questions, the committee can conduct assessment including personnel from finance, marketing, technology, accounting, production and design. Using this process, a company separates low opportunity goods from high opportunity. Finally identifies the components for which supplier has to be developed.
Step 2
Identify critical suppliers for development: Identifying the supplier for development is an important aspect. For the items identified in the previous step, the various suppliers who are presently supplying these components must be listed for selection. The supply base assessment identifies the suppliers within any product group requiring development. Parato‟s 80/20 analysis can be used to select the vital few supplier performance based on their facilities and suppliers are ranked from worst to best. The suppliers who meet the requirements are selected for development.
Step 3
Form steering committee: The buying company must demonstrate its commitment by forming executive steering com mittee to oversee the supplier development process. Team members may come from all functions and not just from purchasing. Team members must visit the supplier premises and assist the supplier company to attain the world -class quality.
Continuous monitoring through audits improves the supplier quality.
Step 4
Collaboration between steering committee and suppliers Top Management team:
Once steering committee is formed at the buyer‟s premises, they interact with the top management team of the supplier‟s company. Team identifies the improvement opportunities for improving quality. They use strategic alignment for improving quality. They use strategic alignment, measurement and professionalism to institutionalize the practice at the supplier‟s premises. Collaborations between the steering committee and the supplier‟s top management team improves the relationship and trust between them, which will enable continuous improvement throughout the supply chain.
Step 5
Identify Areas for improvements: Steering committee and top management team of supplier company meet periodically and during discussions they identify the critical areas for improvement companies adopting a strategic approach to supply base development are able to identify a wide variety of areas for improvement.
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