Supply Base Assessment For Supply Chain Improvement Initiatives
In the following write up we are intending on giving you a sense of the challenges that organisations face with either new or existing suppliers and approaches which have proved successful in the western world are not applicable to the Far East.
A large global FMCG Organisation, had been buying products from Far East suppliers for eight years. The supplier base was mainly located in mainland China, Taiwan, Malaysia and Thailand. More than 85% of Far East annual spending was allocated to suppliers in those locations.
Existing Challenges:
Supplier A was working close to maximum capacity, supplier B was overly expensive to justify further spend, and Supplier C and D were not responsive. The performance of these suppliers was far from satisfactory and this organization was under growing pressure to increase sourcing from the Far East in order to remain competitive in the home market.
The Approach:
To improve low cost supply chain performance, one of the key processes was to overhaul the traditional criteria used to select a supplier. Whereas supplier qualifications are dominated by numbers, factory tour and formatted reports. The traditional approaches of supplier assessment focus on factors such as:
- Can supplier make the products at right prices?
- Does the supplier have adequate/enough equipments/facilities on shop floor?
- The size of supplier, and the number of employees
Typically, several questionnaires will be used. Supplier qualification is based on the number of boxes ticked. When things went wrong, the first thought would be: I need to get rid of this supplier and get a new one ASAP. Same methodology will be used, and the vicious circle goes on.
More attention needs to be given to evaluate supplier’s management ability, whether there is a strategic match between two organisations, and the potentials to develop partnerships (relationships).
The focus needs to be on the effectiveness of their internal operations, such as:
- Order/schedule processing and change management
- Material procurement and planning
- Capacity utilization and bottleneck management
- Production planning
- Inventory management
- Lead time management
- Plant layout, material flow efficiency
- Warehousing efficiency and material handling
- Communication and documentation
- Supply base management
- Quality process management
- Supply chain technology adoption
Considerations on supplier’s ability to meet the quality standards consistently and their ability to deliver OTIF (on time in full) are also key measures. Further qualifiers never before considered were self awareness of the areas requiring further improvement and their willingness to collaborate and form real partnerships.
Following findings are produced by using this comprehensive supplier assessment methodology:
Supplier A – A Potential Black Hole
Supplier A, proven to deliver quality product reliably, had been rewarded with more business, which ultimately overwhelmed them. Desperate to sell products in overseas markets and establish their presence, the supplier felt compelled to say yes to any request from a loyal customer. They were taking this approach in the knowledge they were overcommitted and did not have the financial flexibility to meet the higher demand being put on them.
Follow up actions include:
- Re-source the incremental and balance tipping demand (i.e. transfer it to other suppliers)
- Shorten this organisation’s payment cycle in order to improve Supplier A’s cash flow and enable them to buy the raw materials needed to ramp up production.
- Modify the demand mix and volume to match Supplier A’s capacity better, in a way that neither overbears supplier A nor, leave them idle, any extreme measure in either direction would put Supplier A out of business.
- Address forecast/demand/scheduling process flaws found within this organisations and within Supplier A processes.
- Some of the specific work included:
- Analysis of the company’s demand patterns and the impact on Supplier A’s operations.
- Identification of communication gaps that led to double counts of demand. Establishing communication protocols and performance measurements.
- Recommended specific step changes acting as a warning system to help prioritize critical materials, eliminating the need for expensive airfreight delivery.
Supplier B – A Cost Reduction Opportunity
Supplier B delivered quality product reliably, but at a high price. In-depth discussions with Supplier B indicated that they were in an untenable position and could not justify their price and that they were, essentially, taking advantage of this organisation.
Follow up actions include:
- A detailed assessment and implementation plan that clearly demonstrated to Supplier B that this organisation was aware of the overcharging and that they were willing to work out a new pricing structure.
- A road map to build and strengthen relationship to re-establish an acceptable level of trust in Supplier B.
Supplier C – An Untapped Resource
To date, Supplier C had enjoyed little of this organisation’s business; they were however growing well and had built over time a reputation for good performance. This organisation had discussed expanding business with Supplier C, but decided against it; rather through lack of knowledge and corporate inertia than good judgment and sent business to Suppliers A and B. As a result, Supplier C lost faith in this organisation.
Follow up actions include:
- Specific relationship-building steps to progress and establish Supplier C as a viable vendor.
- A specific plan for feeding orders to Supplier C to show seriousness of intention.
Supplier D – A Questionable Partner
Supplier D was an established supplier of products this organization needed. Investigations showed that nearly all Supplier D’s large customers were located in different geographical regions, and as a consequence this organisation would not be able to leverage any distribution efficiencies.
Bearing this in mind, and also that this organisation’s volume would only be 3% or less of Supplier D’s business, there were risks that this organisation might become a low priority. Finally, in discussions with other companies in the industry we learned that Supplier D used questionable business practices.
The conclusion was to avoid Supplier D.
