Strategic Supplier Development Process

This part of the chapter is founded on Krause’s et al extensive research of how 84 international companies’ deal with the subject supplier development. By analysing the respondents, the researcher offers a validated model of the supplier development process that includes steps critical to supplier development activities.123

Once supplier performance is measured and assessed, a supplier performance database identifies those suppliers that consistently are unable to perform. To further improve the performance and capabilities of their supply bases the respondent firms engage in supplier development.

120 _{Forker et al, 1999} 121 _Ibid

122 _Ibid

Fig 4.2 Strategic Supplier Development Process, Krause et al, 1998, p 44 Identify critical commodities for development

Firms that had implemented the strategic approach to supplier development typically utilised a corporate-level executive committee to assess the relative importance of the goods and services purchased by the company or business unit. The result of this assessment was a “portfolio” of commodities that were essential for success in the targeted industry segment. Several companies used a “purchasing portfolio analysis”, which for example separates low-risk commodities from high-risk commodities, and low-volume purchases from high-volume purchases.

Identify critical suppliers of strategic commodities

A majority of the companies that employed a strategic approach to supply base development did not only identify candidates for improvement by their poor performance. They also instead often used a formal process where they analysed supplier performance, using a variety of different methods. One example was when a buying company benchmarked supplier performance to world-class performance expectations. If any performance gaps were identified, these suppliers were identified as supplier development prospects.

Identify critical commodities for development Identify critical suppliers for development Form cross- functional commodity team Initiate communication with supplier’s management Identify critical performance areas for

improvement to gain competitive advantage Identify opportunities and probability for improvement Rewards and recognition Provide joint resources

as required and implement supplier development effort Develop agreements on improvements Systematically institute ongoing continuous improvement

Form cross-functional supplier development team

The research states that it is important to use cross-functional teams to drive the supplier development effort. Core team members were often assigned on long- term or permanent basis, and included quality, procurement, operations and design personal. An alternative is to form ad hoc cross-functional teams to correct specific problems as they occur. A risk with the latter solution is that company might lose the long-term benefits.

Initiate communication with supplier’s management

The respondents indicated that the next step in the supplier development process involved approaching suppliers and arranging a meeting of the buying firm’s cross-functional team with top management at each of the suppliers. Here matters like improving the flow of materials, services and information between the supplier and the buying firm should be discussed to achieve mutual benefit.

Identify critical performance areas for improvement to gain competitive advantage

At meetings with each supplier’s top management team, areas for improvement were identified along with a specific measure for each area and in this phase the objectives for improvement were set. In some cases, these objectives were driven by the buying firm’s customers’ expectations. In other cases, companies shared technology road maps to identify opportunities for joint development of new technologies.

Identify opportunities and probability for improvement

Respondents indicated that once potential supplier development opportunities had been identified, they were evaluated in terms of feasibility, resources and time required to carry out the project, and potential return on investment. Some of the criteria used by the companies to evaluate opportunities included cost- benefit analysis and willingness and ability of supplier to implement changes. Develop agreement on improvements and performance metrics

Once a feasible supplier development initiative has been identified, the parties must come to an agreement on the specific metrics that will be employed to measure the success of the agreement. One measure used that is important to this thesis is percent of delivery improvement. The agreement should also

specify the role of each party, that is responsible for the success of the project, and the manner and timing for deploying allocated resources.

Deploy resources and implement development effort

Once companies reached agreement with suppliers on performance metrics, the development effort was put into motion. The companies emphasised that supplier development requires joint improvements by both parties, not just improvement on the part of the supplier. Moreover there must be mutual deployment of resources, whether in the form of facilities, training, personnel, information, capital, and technology in order to sustain a successful development effort. The respondents indicate that a supplier is unlikely to fully embrace a set of changes required for improvement, unless there is tangible evidence that the purchasing organisation will support their efforts with matched resources.

Rewards and recognition

Many of the researched companies used supplier recognition programs to foster the suppliers to continued performance increases after the supplier development effort is finished. These programs varied from recognition in company newsletters to more formal and public recognition in the form of supplier award banquets and supplier council meetings. Further many of the companies indicated that if progress toward continuous improvement was not evident in supplier performance evaluations, corrective action might be taken, including reducing or disqualification of the supplier’s share of business. This outcome contrasts markedly with successful suppliers, that might be rewarded with repeat business, increased sales and profitable growth.

Institute ongoing continuous activities

Once a supplier development project has been completed, the supplier’s continued progress must be monitored and tracked over time. Ongoing exchange of information is needed to maintain momentum of such projects. The researched companies indicated that this momentum could be sustained by creating visible milestones for objectives, updating goals, open communication, and adopting continuous improvement strategies.