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Measuring up
How leading companies handle supplier metrics
Lisa Wichmann
Look into supplier metrics at world-class companies and four common denominators become apparent. They only measure what they plan to use; they let suppliers see the results; they take a holistic view of performance, and they’re starting to include newer metrics, such as lean production and Six Sigma. The systems are also becoming more intricate.
“There’s a growing level of sophistication and an understanding of the criticality of managing the whole vendor relationship,” says Philip Townsend, performance improvement leader with PricewaterhouseCoopers in Toronto. “More and more, it’s being based on data..In the past, it was gut feel; it was anecdotal; it was intuition. But that just doesn’t cut it anymore.”
As supplier metrics become more advanced, companies using the old-fashioned method of intuition should seriously consider a more formal approach.
“Sit down and think about what kind of indicators you want and translate them into some sort of balanced scorecard,” Townsend says. A Google search on the Internet will provide plenty of scorecard templates, but they should be tailored to each organization. It’s definitely not one size fits all. It also helps to keep it simple.
“There’s a tendency to have 300 indicators on the dashboard and that is not necessarily the way to go.” It’s far preferable to include only the critical factors, and then make sure the data is served up to managers who can take corrective action against an errant supplier.
Corrective action makes some purchasers uneasy. It isn’t fun to contemplate souring an otherwise healthy vendor relationship just because an order came in late. But metrics don’t have to carry such a negative connotation, says John Moran, vice-president of strategic sourcing at the Scotiabank Group in Toronto.
“Previously, it was a stick to hold over suppliers,” Moran says. “Now we’re looking at it as a consultative process where we’re collaborating with the suppliers,” Moran says.
“We’re indicating to the supplier what’s important to us…Likewise, they’re indicating to us how they feel about their business. So if they’re hesitant to put a particular metric in there, it tells us something.”
For example, last year, Scotiabank sourced mobile communication devices for its employees. The wireless device industry is somewhat new to supplier metrics, Moran says. So when Scotiabank started talking about service level agreements, “the supplier sat across the table from us and looked blank. He had no idea what we were talking about.”
They were hesitant, but Moran pointed out the agreement would only cover what the supplier himself had promised in the sales pitch. “If they fail to deliver the devices, they have no idea and understanding of what that means to our business. Maybe it was delivering a device to a vice-president of an international organization who has to fly out of the country. Delivering a day late doesn’t help him,” he explains.
“They can’t measure that value, so we’ve stressed the on-time delivery to be a pretty heavy metric for them and it makes them say ‘woah, it’s not just something we talked about with Scotiabank. They want us to put our money where our mouth is on this one.’ And to their credit they haven’t missed since we signed with them last year.”
The point is well taken in the automotive industry, where companies such as General Motors go to great lengths to share metrics data with suppliers ahead of time, and to keep them informed on an on-going basis.
GM suppliers log onto a web site to see their performance in real-time. Once a month, they’re given a colour-coded rating: red, yellow or green for each metric.
The automaker measures on on-time delivery, parts-per-million defects, disruptions to the manufacturing plant; quality certification programs, and cost performance, among other criteria.
“The one we’ve recently added is [related] to the whole launch area,” says Steve Rose, director of global purchasing supply chain with General Motors Canada in Oshawa, Ont. “We’re monitoring the suppliers’ performance to make sure we have a smooth start-up for new vehicles.”
Why? Simply because GM—like many other manufacturers—doesn’t have as much time as it used to for ramping up new products. “So we thought we needed to track it and get a closer understanding of which suppliers perform well on launches and when we’re awarding the business, that becomes a factor.”
Penalties and awards
Underpinning GM’s metrics program is the goal to develop good suppliers. Corrective action isn’t so much harsh as helpful. Transparency is also important. Suppliers know what will happen if they miss a metric.
“If the supplier has a small problem, we put him on controlled shipping 1 and that means he has to add an extra level of inspection at his plant before the product gets released to us, and that’s typically for a very short time period,” Rose says.
“If there’s a further problem we do controlled shipping 2 where it has to go through a third party…and the parts are inspected before they get to us, at the [supplier’s] expense, until the data shows us the parts are fine.”
GM also sends quality engineers to work with the vendor, and offers suggestions on improving shipping, packaging and lean production.
Refreshingly, the focus isn’t only on suppliers who need help. GM’s supplier award program recognizes the suppliers who stand out. Another good strategy is taking the information right to the top.
“We encourage the CEOs of our suppliers, not just the quality managers to look at this data,” Rose says. “I ask the CEOs to look at their data every day on the web, so the CEO is saying ‘hold it, how come I’m slipping here on quality?’”
Scotiabank uses a similar approach, but more in the way of penalties. If a supplier fails to meet a metric, the penalty is charged, unless the bank shared in the blame. The penalty will never cover the cost of the error, but it’s a useful tool for calling attention to the mistake.
Moran requires vendors to send in a cheque for the penalty, as opposed to just giving a discount on the next order. “If the supplier is able to hide that there’s a problem within his own organization by just discounting the next month’s bill, it doesn’t gain much attention…But if I ask him to deliver a cheque, the [approvals] go up and down that organization and pretty soon the president of the organization knows that last month, he failed a service level at Scotiabank.”
Strategies to encourage compliance are equally important at companies like Celestica Inc., where 80 per cent of revenue is comprised of material from suppliers.
Celestica carefully measures performance in three main categories: commercial, business and quality. Commerical metrics cover payment terms; while business indicators apply to criteria such as on-time delivery. Quality covers the usual factors such as defects per million parts. The data is automatically tabled into a scorecard tally.
“But I’m not so much interested in managing by an average score. It’s certainly an indicator, but I’m looking for a supplier to perform on all the metrics I’ve defined. If they’re not all important, I shouldn’t be measuring them,” says Mike Mortson, vice-president of global supply chain customer solutions with Celestica in Toronto.
“When I do business with a supplier, I’m not soley concerned with just the component price of the material they’re providing to me. I’m concerned with everything that surrounds the price—their delivery performance, their quality performance, terms and conditions…their responsiveness, their flexibility, their ability to fundamentally meet my needs,” Mortson says.
For instance, if a supplier offers a part for $1.00, but their quality has been poor, Mortson deems the price to be $1.05. A good supplier might quote $1.10, but if Mortson, from all his data, knows the supplier is a good one, he calculates the component cost at $1.05. “So I’m not just looking at price over price.”
Mortson is planning to make metrics data available to suppliers online, to augment regular meetings.
Companies such as Boeing already have such systems in place. Suppliers view live information on a daily basis, and a scorecard monthly. “The most important thing is to make the supplier aware...of the non-conformance,” says Michael Song, director of quality for global partners, the supplier organization of Boeing Commerical Airplanes.
Supplier who miss a metric are sent immediate notice through the web system. Asked what new metrics Boeing is putting into place, Song refers to Kaizan (lean) projects and statistical programs such as Six Sigma.
The common theme throughout quality metrics programs is preventative maintenance, as opposed to reacting after mistakes have been made, adds Brad Muir, director of material, logistics and procurement with Bombardier Aerospace in Montreal.
“What you’re trying to do is get some sort of a heads up that there may be trouble on the horizon and if your metrics are good, they should give you this forewarning and give you and the supplier enough time to get involved and get things back on the right track.”
And while the pressure in on to use less intuition and more hard data, there are still plenty of shades of grey, says George Zsidisin, assistant professor of supply chain management with Michigan State University.
“Traditionally, when we think of metrics, we’re focusing on things like cost, flash price, delivery and quality metrics, but some some astute organizations are going beyond that, by really trying to focus on behaviors of suppliers—things that you can’t necessarily always put a specific number on,” he says. “It could be things such as design of new products or even suggestions to current products.”
With that in mind, purchasers should sharpen their pencils for the trusty scorecard, but be ready to take into account the less empirical value suppliers bring to the table. The combination of the two will indicate how the supplier contributes to—or detracts from—the bottom line. b2b
Lisa Wichmann, editor of Purchasing b2b, can be reached at lisa.wichmann@pb2b.rogers.com.
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