Executive report of key results of recent research on supplier development strategies and outcomes

Supply Chain Resource Consortium

North Carolina State University

College of Management

(843) 814 5494

Director, Supply Management

Delphi Automotive

Detroit, MI

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  Daniel Krause, Doctoral Dissertation, Arizona State University (1994)
  
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  Handfield, Robert and Krause, Daniel, Supplier Development Module Report, Global Procurement and Supply Chain Benchmarking Initiative, Michigan State University (1996)
  
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  Krause, Daniel and Handfield, Robert “Developing a World-Class Supply Base”, CAPS Research Report, Center for Advanced Purchasing Studies: Tempe, Arizona, 1999.
  
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  Handfield, Robert, Krause, Daniel, Scannell, Tom, and Monczka, R., “Avoid the Pitfalls in Supplier Development”, Sloan Management Review, vol. 41, no. 2, Winter 2000, pp. 37-49.
  
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Results of this research indicate that:

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  Supplier development strategies can result in significant improvements in supplier performance, including
  
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    Reducing product defects by 5 - 90%,
    
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    Improving on-time delivery by 6 – 15%,
    
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    Reducing order fulfillment cycle time by 30 – 80%,
    
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    Improving product performance by 10 to 30%
    
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  Not all supplier development initiatives are successful – in fact, as many as 50% are not successful, due to poor implementation and follow-up.
  
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  Most firms engage in reactive supplier development approaches (which addresses sporadic problems), as opposed to strategic supplier development approaches (which addresses continuous improvement of the entire supply base)
  
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  Approaches to supplier development include rewarding performance (“The Carrot”), penalizing poor performance (“The Stick”), on-going detailed assessment and feedback (“Measurement”), and direct involvement in suppliers’ operations (“Hands-On Approach”)
  
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  Research on which approach is most effective suggests that a combination of approaches may be appropriate under different circumstances, depending on the nature of the supplier, the type of commodity, and the management team at the supplier.
  

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  reductions in incoming defects by 6.2%
  
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  improvement in on-time delivery by 21%
  
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  reductions in order to delivery cycle time by 12 days
  
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  improvement in orders received complete by 8%.
  

However, results (shown in Figure 3) also suggested that not all of the buyers surveyed were satisfied with the outcomes of their supplier development efforts. Moreover, some supplier development efforts actually resulted in deterioration in the level of satisfaction. This was particularly true with respect to supplier performance in product innovation and ability to reduce total cost. A Supplier Development manager at Chrysler noted that:

Figure 6 shows some of the other major differences between reactive and strategic supplier development approaches. Moreover, strategic supplier development approaches focus on allocating resources for supplier improvement, with an objective of continuously improving the supply base in the long term. This process is undertaken by an executive-level assessment of critical commodities and suppliers, followed by a focused improvement carried out by a commodity or development team.

By examining the upper and lower quartiles of the differences between strategic and reactive companies’ key drivers (shaded areas), the differences in the focus of their development efforts emerge. Firms employing a strategic approach to development are more likely to be driven by the proactive need for strategic partnering, technology development, and a focused effort to improve performance of high volume critical commodities that have a major impact on the business. Reactive firms are more likely to be applying “remedial” approaches for suppliers that represent an immediate crisis or “burning platform”.

Respondents also identified the total number of suppliers currently involved in development programs by choosing the category that best described their situation. Figure 8 indicates that strategic companies became involved in the development of a wider segment of the supply base, (in a majority of cases, fifty or more suppliers.) Reactive companies generally focused on a smaller group of suppliers. These summary statistics lead us to believe that reactive companies are in some cases still in the process of “rightsizing” their supply base, in eliminating poorly performing suppliers.

Leading companies have successfully maintained momentum through a variety of mechanisms, including supplier participation on supplier councils, internal and external newsletters, and communication of key results via supplier performance reports.

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  90% reduction in defects in 3 years
  
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  30% improvement in incoming acceptance rating in one year
  
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  4% improvement in meeting specifications
  
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  30% Scrap reduction
  
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  Cpk improvement from .65 to > 1.00
  
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  80% to 90% improvement of PPM defective
  
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  Improvement in quality rating from 99.72% to 99.84% in 4 years
  
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  100% avoidance of process shutdowns
  
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  24,000 PPM reduced to 2700 PPM
  

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  7% Stock availability improvement
  
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  100% on time delivery (several companies)
  
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  94% of line items filled within lead-time
  
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  26%% improvement of on-time delivery
  
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  6% on time delivery improvement
  
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  15% improvement of on time delivery
  

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  $3 million in 6 months
  
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  10% reduction in price and freight cost
  
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  $1million to $2 million cost avoidance
  
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  16% reduction in previous purchase prices
  
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  5% price/productivity improvement
  
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  8% improvement in total cost
  
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  35% improvement in price per unit
  
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  11.4% cost savings per year
  
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  10% cost reduction
  

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  10% improvement in operational terms
  
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  30% improvement in concept to customer cycle time over industry average
  

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  28 days of inventory reduced (30 to 2 days)
  
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  41% improvement in cycle time (110 days to 65 days)
  
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  30% -83% lead-time reduction
  

Additionally, companies reported a number of non-measurable “soft” results occurring due to supplier development initiatives:

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  Growing alertness/awareness on quality and consistency in the supplier’s organization. In some cases, have developed a system with early warning on quality deviations.
  
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  Faster, quicker decision-making
  
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  Improved communication with other internal functions
  
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  Awareness of business objectives, and more trust and acceptance of responsibility to delivery new business processes
  
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  Supplier clearly understand the business and how their products are used, as well as their impact on our processes
  
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  Loyalty between partners
  
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  Establishment of strategic alliances resulting in mutual gains for mutual benefits
  
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  Suppliers see a benefit in having a group that is helping them improve.
  
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  Relationships improve which helps in gaining quicker agreement on direction and speeding implementation
  
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  Process understanding by both programs
  

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  Supplier expanding from being a local supplier in one region to a global supplier with a sales increase of 57%
  

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  Better contribution of manufacturing resources per man-hour
  
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  Reduction in manpower requirements
  
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  Less than 50% of internal resources required compared to 5 years ago
  

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  Improved safety performance on-site
  
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  Improved environmental compliance, avoidance of fines, and reduction of hazardous materials storage
  
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  Reduction of lost time injuries
  
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  Reduction in hazardous waste disposal
  

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  Increased number of supplier ideas and suggestions
  
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  Improved new product launch
  
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  Technology sharing
  

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  Improved customer satisfaction
  
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  Improved communication between supplier and field personnel that actually use the end product, leading to a better understanding of actual processes and application of service / material
  
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  Improved relations between buyer’s plants and seller’s customers
  
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  Enhanced synergy between engineering and procurement groups at both customer and supplier, benefits of transferred resources
  
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  Good public relations
  

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  Management of second tier suppliers increased substantially
  
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  Just-in-time delivery by local warehousing and supplier personnel to company location
  
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  Greater supplier use and number of orders released via EDI
  
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  Improved rail car management
  
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  Improved information sharing
  
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  Improved product availability
  
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  More stable supply
  
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  Improved planning and forecasting and supply chain integration
  
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  Reduction of inventory buyback and surplus inventory
  
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  Reduced contract management and improved logistics processes
  
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  Significant inventory reductions and savings in total cost of goods
  
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  Greater participation in information systems designed to reduce internal processes and handling costs of purchase orders
  
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  Evolution of delivery from no real window to a specific day
  
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  Reduced number of incoming inspections
  
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  Reduction of delivery delays