Industryweek 14587 Next Generation Newsletter White Bkgrnd

Metrics that Facilitate Improved Supplier Performance

May 9, 2014
Manufacturers need a “primary” metric that relates supplier performance to supplier operations.

In a previous blog (“Management by the Numbers”), an assertion was made that customer-established quality, on-time delivery and price performance targets weren’t producing optimal supplier operational effectiveness. This point represents a bit of heresy within the supply management profession since these three metrics are what can be characterized as the “Holy Trinity” of supplier performance metrics. Certainly, if such traditional metrics are going to be questioned, additional elaboration is needed. Please bear with me.

Original equipment manufacturers (OEMs) as well as many of their upper-tier suppliers have, over the last generation, transitioned away from fabrication manufacturing to almost a sole focus on assembly. As a result, the greater portion of their finished goods cost-of-goods-sold has changed from being generated internally to primarily being composed of purchased material. This implies that supplier operations are now the greater part of an OEM’s extended enterprise. In the past OEMs could concentrate on those aspects of supplier performance that impacted their own internal manufacturing lean-ness and be reasonably assured that this focus would keep them competitive. With the greater impact of purchased material on their cost, OEMs now need to exert that same concentration on the supplier lean-ness if they want to maintain competitiveness.

The following question gets to the nub of the issue:

“Have the traditional quality, on-time delivery and price supplier performance metrics produced lean supply chains?”

The obvious answer is “no.” It was stated in my previous blog that suppliers can “game the system” such that they are able to hit their given quality, on-time delivery and price performance targets through wasteful means yet still be viewed as “top performers” by their customer. How is this so? Here are a few examples:

  • Intensive sorting can ensure that (most) parts delivered to their customers do not have defects. Yet, the resulting high quality performance is no indication that a supplier has robust manufacturing.
  • Large built-ahead stocks of inventory can ensure that delivery of customer orders are on-time. In this case high on-time delivery results do not assure that a supplier has high order fulfillment agility.
  • Cutting or eliminating margins can help maintain price competitiveness, at least for a while. Suppliers that defer necessary investment tend to require customer crisis intervention (fire-fighting) over the long run.

Suppliers are able to “look good” in the eyes of their customers because these three performance bogeys are set in “secondary” metrics. Secondary metrics measure results but do not answer how results are obtained. OEM focus on secondary supplier performance measures may have worked when the greater influence on cost was their own internal operations and the key factor to competitiveness was keeping internal manufacturing operating efficiently. The increased impact of purchased parts on overall cost means that supplier operational efficiency needs increased focus.

Quality, on-time delivery and price are not directly related to supplier operational efficiency and so come up short in managing suppliers. Why? Because they don’t tell how suppliers achieve their performance. Again, they allow “gaming the system” to come into play.

What is needed is a “primary” metric that relates supplier performance to supplier operations. Most OEMs today do not apply such a primary performance metric and so are in effect “operating in the dark” relative to supply chain performance and improvement.

How should this metric gap be addressed? Are the traditional metrics to be discarded? Of course not. Supplier impact on OEM internal operations remains important. In next-generation supply management, however, quality, on-time delivery and price are considered “necessary but not sufficient” pieces of supplier data. What is also needed is knowledge of whether supplier performance is the result of lean or through waste.

Luckily, over the last two decades such a primary metric has been developed in academia and proven out through use by a handful of forward-thinking OEMs. I will share and explain what that metric is and how it can be applied in conjunction with the “Holy Trinity” in upcoming blogs. Rather than leaving you completely in suspense, however, I’ll give you a hint on the essence of this new metric by ending with quotes from two Toyota executives:

Taichi Ohno, considered the father of the Toyota Production System: “All we are doing is looking at the timeline from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time by removing the non-value-added wastes.”

Simon Nagota, vice president, supply management (retired): “Time is the shadow of waste.”

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