Avoiding the Big Squeeze: Ten Steps to Better Managing Your Suppliers

Oct. 15, 2007
Good supplier management requires recognition of everybody's needs and expectations.

Manufacturing professionals are tasked with managing many aspects of the company, from production operations to sales operations to profit & loss (P&L) statements. It makes sense, suggests Brian Mundy, that managers should also become adept at managing their suppliers because by doing so, "You can align their expectations with your own and proactively solve problems before they become major headaches." Mundy, managing director with consulting firm Management Logic, offers the following guidelines to improving supplier management issues.

1. Analyze the Process

Review the performance of current suppliers. Look for high performance variations among the suppliers, or unexplainable performance variations. Perform research to calculate the cost savings associated with conservatively addressing the low performing suppliers. Build a business case to rationalize time and money spent on improvements.

2. Perform Root Cause Analysis on the Supplier Management Process

Determine the areas and relationships that would benefit the most from a supplier management process. You should approach the supplier relationships that have been challenging, but addressable, as a high priority to gain momentum around the management process. Also, with many buyers, 80% of their materials may come from 20% of their suppliers. Take advantage of this by focusing on these relationships as high priorities.

3. Identify and Prioritize the Needs of the Buyer

For each product supplied by a supplier, determine what factors matter most. For instance, if you are an airplane manufacturer and your supplier sells engines, while price is a factor, quality and reliability hold far greater importance. Quantify the importance of each of these factors.

4. Identify the Stakeholders

Identify the key stakeholders in the relationship management process. One of the most effective methods of performing this step is through the use of a RACI framework:

  • Responsible -- Those who do work to achieve the task.
  • Accountable -- The resource accountable for the completion of the task.
  • Consulted -- Those whose opinions are sought.
  • Informed -- Those who are kept up-to-date on progress.

It is important for each party to have a designated subject matter expert for various areas of the relationship -- IT/logistics, quality assurance, legal, etc.

5. Identify Roles and Responsibilities

The key to any mutually dependent relationship is role clarity. This is the clear designation of what the buyer responsibilities should be, and what the supplier responsibilities should be. While a simple concept, many roles tend to migrate as the relationship matures. Begin with the gathering of internal role expectations and probe for the ideal roles each stakeholder should take on. Do not stop at input from one particular area, but gather input from all stakeholders. Once the ideal roles and responsibilities are identified, take the necessary steps to prioritize the roles based on previously prioritized needs (see step 3). A word of caution: Role prioritization could be something of a sticking point for many stakeholders, but keep the process open so that few are surprised with the ultimate recommendations.

6. Identify the Appropriate Key Performance Indicators

Buyers should identify key performance indicators (KPIs) to act as checkpoints as to whether the performance and behavioral needs are being met by the supplier. They should be challenging yet attainable for each supplier.

7. Create a Governance Process to Manage the Relationship

While it may be tempting to tell your suppliers how to run their business, keep in mind that you are only really concerned with the portion of that business that affects you. Therefore, know and understand the limitations for what you can demand of a supplier. Interestingly, these limits are often far further than a buyer believes. Remember that you are your supplier's customer -- they want to exceed your needs.

Building out a governance process is the method by which you can manage this relationship. Through this process you will set the terms of the interaction and the result of noncompliance of those terms. A supplier governance process simply documents the management of the relationship in simple terms.

To understand how to build out a governance process to manage this relationship, it is important to understand the necessary components. The first step is to document how your ideal process should look -- from supplier selection, to supplier management, and finally, to supplier termination. Then, based on this process, determine the ideal roles and responsibilities, behaviors and performance thresholds at each step in the process for the appropriate stakeholders.

Think of the governance model as the process flow that holds all the pieces together. It documents the roles and responsibilities together with the KPIs and their respective priorities. Taking this one step further, it shows exactly what happens when each of the KPIs are not met. The governance model is a good opportunity to lay out the nonconformance consequences with all stakeholders.

8. Integrate the Governance Model into the Terms of the Contract

Once the governance model has been created and the consequences for noncompliance have been clearly laid out, integrate them into the terms of the contract. There should be little disagreement at this point if all stakeholders have been consulted in the earlier steps.

9. Clearly Communicate the Changes to All Those Affected

To ensure viable communications, the buyer should identify a primary communications liaison for both the supplier and buyer to ensure conflicting messages are neither sent nor received by either party. Once the appropriate parties are designated, communications should be scheduled at regular intervals to review both required and desired supplier/buyer behaviors. One of the true advantages to integrating a governance model is the simplicity in which responsibilities, behaviors and performance expectations are laid out. By effectively communicating the process for all the stakeholders, they should all have an equal understanding of the relationship and what is required.

10. Measure Success

The final step to implementation is to ensure the appropriate reporting mechanisms are in place. Make sure there is a process to assess performance for both the supplier and the buyer. Often this is completed using a management dashboard to provide KPIs in one location at the appropriate frequencies -- daily, monthly, quarterly, annually, etc. The ultimate aim of reporting is to have the relevant information in the hands of people who need it at the appropriate times.

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