For many businesses, goods and services provided by suppliers or partners account for a significant portion of the cost and value of the final product. Suppliers include not only companies that provide materials and components, but also distributors, transportation companies, and information, healthcare, and education providers. Key suppliers might provide unique design, technology, integration, or marketing capabilities that are not available within the business, and therefore can be critical to achieving such strategic objectives as lower costs, faster time-to-market, and improved quality.
Organizational partners might include educational institutions that collaborate on research and training. (Conversely, a company might be viewed as a partner for an educational institution.) Increasingly, suppliers are viewed as partners with customers, because there usually is a co-dependent relationship. A powerful example of supplier partnerships is the response that occurred when a fire destroyed the main source of a crucial $5 brake valve for Toyota.1 Without it, Toyota had to shut down its 20 plants in Japan. Within hours of the disaster, other suppliers began taking blueprints, improvising tooling systems, and setting up makeshift production lines. Within days, the 36 suppliers, aided by more than 150 other subcontractors, had almost 50 production lines making small batches of the valve. Even a sewing-machine company that had never made car parts spent 500 person-hours refitting a milling machine to make just 40 valves a day. Toyota promised the suppliers a bonus of about $100 million “as a token of our appreciation.”
Strong customer/supplier relationships are based on three guiding principles: 1.Recognizing the strategic importance of suppliers in accomplishing business objectives, particularly minimizing the total cost of ownership, 2.Developing win-win relationships through long-term partnerships rather than as adversaries, and 3.Establishing trust through openness and honesty, thus leading to mutual advantages. One example of these principles is the Baldwin Piano & Organ Company, which set up a 10-year agreement with Southland Marketing Inc. for piano plates to get “higher quality, more consistent supply, and lower cost.”2 Baldwin helped finance the purchase of the equipment needed to finish the plates.
The contract is expected to save Baldwin 10 percent a year on its plate costs. Successful suppliers have a culture where employees and managers share in customers’ goals, commitments, and risks to promote such long-term relationships (recall one of Deming’s 14 Points about supplier relationships–not purchasing solely on the basis of price). In many companies, suppliers are treated as if they were actually a part of the organization. For example, functions such as cafeteria service, mailroom operations, and information processing are being performed by suppliers at their customers’ facilities. As more and more of this type of outsourcing is done, the lines between the customer and the supplier become increasingly blurred.
Many companies segment suppliers into categories based on their importance to the business and manage them accordingly. For example, at Corning, Level 1 suppliers, who provide raw materials, cases, and hardware, are deemed critical to business success and are managed by teams that include representatives from engineering, materials control, purchasing, and the supplier company. Level 2 suppliers provide specialty materials, equipment, and services, and are managed by internal customers. Level 3 suppliers provide commodity items and are centrally managed by purchasing.3 Measurement plays an important role in supplier management. Texas Instruments measures suppliers’ quality performance by parts per million defective, percentage of on-time deliveries, and cost of ownership.4 An electronic requisitioning system permits a paperless procurement process.
More than 800 suppliers are linked to Texas Instruments through an information exchange system. Integrated data systems track the incoming quality and timeliness of deliveries as materials are received. Analytical reports and on-line data are used to identify material defect trends. Performance reports are sent each month to key suppliers. Joint customer-supplier teams are formed to communicate and improve performance. A supplier management task force of top managers directs current and strategic approaches to improving supplier management practices.
Finally, communication, feedback, and recognition or awards are important practices in supplier and partnering processes. For instance, the Fastener Supply Corporation, which distributes fasteners, electronic hardware, and other products to over 300 customers makes frequent contact with its 250 suppliers, invites them to company functions and shares such information as customers’ forecasted requirements.5 Feedback should provide timely and actionable information to suppliers to lead to improvement and ensure that suppliers meet the organization’s performance requirements. At Fastener, any potential performance problems are brought to attention with prompt notice and immediate feedback. An annual award dinner recognizes outstanding suppliers for quality and continuous improvement.
Many companies such as Bethlehem Steel, Miller Brewing, and Honda, make a point of delivering supplier awards not only to upper management at a fancy banquet, but also to the workers on the shop floor. “It’s one thing for the boss to say that quality is important, but another thing entirely for the customer to come out and say it,” says Jerry Schiedt, corporate purchasing director for Miller Brewing Company in Milwaukee. “When we actually visit a plant to present an award to the folks who made the award possible, then we build a relationship with the company and the folks on the floor who do the work to ensure the quality of the products we buy.”6
Many companies use some type of supplier certification systems as the focal point of their supplier management system. These systems rate and certify suppliers who provide quality materials in a cost-effective and timely manner. For example, the Pharmaceutical Manufacturers Association defines a certified supplier as one that, after extensive investigation, is found to supply material of such quality that routine testing on each lot received is unnecessary. Certification provides recognition for high-quality suppliers, which motivates them to improve continuously and attract more business.
The details of supplier certification processes vary by company. For instance, Florida Power and Light has a three-tier certification program.7 Vendors (another term for suppliers) can be certified as a “Quality Vendor,” “Certified Vendor,” and “Excellent Vendor.” To become a Quality Vendor, a supplier’s products or services must meet basic requirements of quality, cost, delivery, and safety. In addition, the supplier must have a quality improvement process in place and be able to demonstrate that this has achieved significant improvements. It must also have an audit system to certify the process and the results. To become a Certified Vendor, the supplier must have demonstrated the use of statistical process control and prove that its processes can meet FPL’s specification requirements. It must also be able to document capability and have a plan for continuous quality improvement. To achieve Excellent Vendor status, suppliers must demonstrate the ability to exceed FPL’s specification requirements, employ reliability assurance techniques, and show that quality improvement is a central part of their management system.
At the Gillette Company, the supplier certification program begins with Gillette identifying those suppliers with a proven ability to meet its specifications.8 Once a supplier is selected to participate, Gillette expects them to establish a pre-production planning system to assess the capability of their process to meet Gillette’s specifications. Feedback is offered in the form of recommended changes that will improve quality, reduce cost, or facilitate ease of manufacture.
Supplier certification programs can be time-consuming and expensive to administer. One approach to avoiding unnecessary audit costs and helping to assure buyers that specified practices are being followed is to create a uniform set of standards–an independent and transportable supplier qualification system, such as ISO 9000.