Rutgers Intro to Supply Chain Prof. Raman

Supplier Relationship Management (SRM) definition

SRM is often a part of the rollout of Strategic Sourcing and is typically used with suppliers

SRM is often a part of the rollout of Strategic Sourcing and is typically used with suppliers

- provides HIGH VOLUMES of a product/service (high spend)
- provide lesser quantities of a CRUCIAL PRODUCT/SERVICE
- serve many BUSINESS UNITS OF A COMPANY or organization
- where INTENSIVE ENGINEERING, MANUFACTURING and/or LOGISTICS interaction is essential

SRM Traditional Supplier vs. Supplier Relationship Sales and Procurement Supplier to Buyer

TSM: competition on price
SRM: partnering focused on value creation

TSM

TRANSACTIONAL

SRM

Strategic

Successful Strategic Partnerships**

STRONG Supplier Partnerships
- important to achieving WIN-WIN competitive performance for the buyer and supplier
- a STRATEGIC PERSPECTIVE(LONG TERM) instead of a TACTICAL perspective. (SHORT)
-a MUTUAL COMMITMENT over an EXTENDED TIME to work together to the MUTUAL BENEFIT of both parties, SHARING relevant information and the RISKS AND REWARDS of the relationship"

10 Keys to Successful Strategic Partnerships

1. Building Trust

2. Having a Shared Vision and Objectives (Cost, quality)

3. Developing Personal Relationships

4. Establishing Mutual Benefits and Needs

5. Gaining Commitment from Top Management

6. Managing Change

7. Information Sharing and Lines of Communication

8. Understanding and Influencing Capabilities

9. Continuous Improvement

10. Measuring Performance

KEYS: 1. Building Trust

- With trust, partners are more WILLING to WORK together, find compromise solutions to problems, work toward achieving long-term benefits for both parties, and go the extra mile.
**Trust is earned. It is also easily lost, and almost impossible to regain once lost!

KEYS: 2. Shared Vision & Objectives

- Both partners must SHARE THE SAME VISION and have objectives that are not only clear but mutually AGREEABLE
- the focus must move beyond tactical issues and toward a more strategic path to corporate success

KEYS: 3. Personal Relationships

- strategic partnerships begin with the development of personal relationships btwn key people at each company
- it is ppl who COMMUNICATE and make things happen

KEYS: 4. Mutual Benefits & Needs

- partnership should RESULT IN A WIN-WIN situation, which can only be achieved if both companies have COMPATIBLE NEEDS
- an ALLIANCE MUCH LIKE A MARRIAGE, and if only one party is happy, then the "marriage" is not likely to last

KEYS: 5. Commitment from Top Management to Support Strategic Partnership

- commitment must start at the highest management level
- partnerships tend to be successful when top executives are ACTIVELY SUPPORTING AND PARTICIPATING in the partnership

KEYS: 6. Managing Change

- companies must be PREPARED TO MANAGE CHANGE that comes with the formation of new partnerships e.g. CHANGING WAYS OF WORKING

KEYS: 7. Information Sharing & Establishing Lines of Communication

- both FORMAL AND INFORMAL lines of communication should be set up to facilitate free flow of information

KEYS: 8. Understanding Capabilities

- key suppliers must have the right TECHNOLOGIES AND CAPABILITIES to meet cost, quality, and delivery requirements in a timely manner (*CURRENT AND IN THE FUTURE)

KEYS: 9. Continuous Improvement

- making a SERIES OF SMALL IMPROVEMENTS over time results in the elimination of waste in a system
- buyers and suppliers must be WILLING TO CONTINUOUSLY IMPROVE their capabilities in meeting customer requirements

Continuous Improvement Cycle

Plan, Do, Check, Act

Plan EXPLAINED

identify each specific improvement that is needed, what change is necessary to make the improvement and, then plan for that change

Do EXPLAINED

implement the change on a small scale to see if the change improves the process before moving forward with full implementation

Check EXPLAINED

use data to analyze the results to see if the change made a positive impact

Act EXPLAINED

if the change was successful, implement it on a wider scale and continuously assess your results. if the change did not work, then most likely the root cause was not identifed, or the change was not the correct solution, and you may need to begin the cycle all over

KEYS: 10. Measuring Performance

- YOU CAN'T IMPROVE WHAT YOU DON'T MEASURE
- measures related to quality, cost, delivery, and flexibility are used to evaluate suppliers
- metrics should be: 1. understandable 2. easy to measure and 3. focused on real value-added results (S.M.A.R.T objectives)
- a multi-criteria approach is best (ex. scorecard)
- TOTAL COST OF OWNERSHIP is made up of all costs associated with the acquisition, use, and maintenance of a good or service

S.M.A.R.T.

Specific, Measureable, Achieveable, Relevant, Time-oriented

Benefits of Strategic Partnerships with Suppliers

Benefits for Buyers and Suppliers

Benefits for Buyers

- increased operating EFFICIENCIES
- lower COSTS of purchases
- enhanced SERVICE
- incremental REVENUE
- improved QUALITY
- preferred access to the supplier's BEST PEOPLE
- influence over SUPPLIER INVESTMENTS and technology
- preferred access to supplier IDEAS
- increased INNOVATION from and with suppliers
- sustainable COMPETITIVE ADVANTAGE

Benefits for Suppliers

- increased operating EFFICIENCIES
- lower COST of sales
- increased MARGINS
- incremental REVENUE
- greater VISIBILITY into buyer's purchasing plans
- increased scope of business
- opportunities to develop, pilot, and dshowcase INNOVATIVE SOLUTIONS
- longer term buyer commitments; greater predictability of FUTURE BUSINESS
- sustainable COMPETITIVE ADVANTAGE

Supplier Evaluation

- a process to identify the best and most reliable suppliers
- sourcing decisions are made on data and facts not on perceptions or opinions (through the use of defined criteria)
- frequent evaluation can help
- avoid surpises and maintain good relationships (hold regular review meetings)
- suppliers should be allowed to provide constructive feedback to the customer

Supplier Evaluation: Performance Criteria

- it is important to actively monitor a supplier's performance and provide VISIBILITY AND FEEDBACK on supplie perfromance at each stage of the evaluation process

Supplier Evaluation relevant metrics

- PRICE performance
- life cycle COST
- product QUALITY
- DELIVERY performance
- contractual COMPLIANCE
- participation in PRODUCT DEVELOPMENT initiatives
- level of cooperation in THIRD-PARTY PRODUCTION MANAGEMENT
- support of ETHICS and SUSTAINABLE practices

Supplier Evaluation: Weighted-Criteria

The Weighted-Criteria Evaluation System
1. Select the KEY DIMENSIONS OF PERFORMANCE mutually acceptable to both buyer and supplier
2. Monitor and collect PERFORMANCE DATA
3. Assign WEIGHTS to each of the dimensions
4. Evaluate PERFORMANCE measures btwn 0 and 100
5. Multiply DIMENSION RATING BY WEIGHT and sum of overall score
6. Classify suppliers based on their overall score, e.g., CERTIFIED, PREFERRED, ACCEPTABLE, CONDITIONAL, DEVELOPMENTAL, UNACCEPTABLE, etc.
7. Audit and perform ONGOING CERTIFICATION REVIEW

Weighted-Criteria Evaluation System Example

Overall Supplier Rating:
1. Delivery- OTIF 40%
2. Quality- 40%
a. Number of SCARs- 50%
b. Defects PPM- 50%
3. SCSS- 20%

Weighted Criteria Evaluation System Abbreviations

OTIF= On Time In Full
SCSS= Supplier Cost Savings Suggestions
SCAR= Supply Chain Action Report
PPM= Parts Per Million

Weighted Criteria Evaluation System Point Breakdown

Overall Point Score:
PREFERRED: 90-100
ACCEPTABLE: 70-89
DEVELOPMENTAL: 0-69

Preferred Definition

work with these suppliers in maintaining a competitive position and on new product development

Acceptable Definition

require a plan from these suppliers outlining how they will achieve preferred status

Developmental Definition

require corrective actions from these suppliers on how they will achieve an acceptable level. look for alternative suppliers if these do not achieve acceptability within a fixed period of time, e.g., 3 months

Performance Measure Formula

Rating % X Weight = Final Value %
Rating Scale: 0-100%
Weight Scale: 0-1 but the total must equal 1.0 (or 100%)

Supplier Certification Normal QA Process

Send PO to Supplier, Supplier produces product, supplier checks quality, supplier ships product, buyer receives product, buyer checks quality, QUALITY GOOD?:
YES: accept the shipment
NO: supplier produces product and start the process over again till satisfied buyer

Issues caused if quality is not good

- cost of rework and shipping (both ways)
- delays in production or consumption
- possible stockouts
- strained buyer-supplier relationship

Why Certify Suppliers?

to ensure quality before the product is shipped by the supplier and to avoid duplicate quality testing by the buyer.

Supplier Certification Programs (SCP)

one of the key elements for building a strong strategic supplier partnership is having a WELL-DEFINED and ESTABLISHED SCP
- a certified supplier is a source that, through prior experience and qualification, can provide material of such quality that it needs LITTLE, IF ANY, RECEIVING INSPECTION OR TESTING before going into approved stock or into the production process.
- administration of a CSP requires careful planning and long-term attention

Benefits of Supplier Certification Programs

1. REDUCING the amount of time and labor necessary for the buyer to conduct INCOMING INSPECTIONS of products and materials from certified suppliers, creates cost savings
- buyer trains supplier on approved test methods so that supplier can test product before shipment, and provide a CERTIFICATE OF ANALYSIS (COA)
OTHER BENEFITS OF SUPPLIER CERTIFICATION
2. Building long-term relationships
3. Recognizing Excellence
4. DECREASING the supplier base
a. certified suppliers are more reliable and therefore, you don't need as many suppliers

Supplier Certification

SCP programs are also used as VERIFICATION that select suppliers operate, maintain, improve, and document effective procedures that relate to the buyer's requirements for supply elements such as cost, quality, delivery, flexibility, etc.

SCPS EXPLAINED

- these programs can be used to help differentiate one supplier from another and may be used to identify STRATEGIC SUPPLIER ALLIANCE candidates
- as part of their overall certification process, companies may develop INTERNAL certification programs, and/or require EXTERNAL certifications from an organization such as the International Organization for Standardization (aka ISO)

Internal Certification Programs

Example of Criteria used for an internal Certification Program
- Supplier has NO incoming PRODUCT REJECTIONS for a specified time period
- Supplier has NO incoming LATE DELIVERIES for a specified time period
- Supplier has NO significant NEGATIVE QUALITY related incidents for a specified time period
- Supplier is ISO 9000 CERTIFIED or has SUCCESSFULLY PASSED a recent on-site quality system evaluation
- Supplier consistently meets a MUTUALLY AGREED-UPON set of clearly specified QUALITY PERFORMANCE MEASURES
- Supplier has a fully DOCUMENTED PROCESS AND QUALITY SYSTEM with cost controls and continuous improvement capabilities
- Supplier's processes are determined to be STABLE AND IN CONTROL

External Certification

International Organization for Standardization (known as ISO) is the world's largest developer of voluntary international standards.
- Founded in 1947, today ISO has MEMBERS FROM 163 COUNTRIES and about 150 people working full time for the Central Secretariat in Geneva, Switzerland.
- ISO certification is highly sought after as it represents achieving and maintaining a STANDARD OF EXCELLENCE verified by an independent third party organization.
Benefits of ISO Certification:
- Greater market potential
- Compliance to procurement bids
- Improved efficiency and cost savings
- Higher level of customer service
- Heightened staff moral and motivation

ECP Two ISO standards commonly used for SC

ECP Two ISO standards commonly used for SC

ISO 9000

- a series of MANAGEMENT AND QUALITY STANDARDS in design, development, production, installation, and service
- companies wanting to sell in the global market seek ISO 9000 certification

ISO 14000

- a family of STANDARDS FOR ENVIRONMENTAL MANAGEMENT
- the benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill

side note about ISO standards

there are more than 21k, but 9k and 14k are by far the most widely used and can be applied to any type of business

ISO 9000 EXPLAINED

there are eight (8) QUALITY MANAGEMENT PRINCIPLES on which the ISO 9000 series quality management system standards are based:
1. CUSTOMER FOCUS
2. LEADERSHIP
3. INVOLVEMENT OF PEOPLE
4. PROCESS APPROACH
5. SYSTEMS APPROACH TO MANAGMENT
6. CONTINUAL IMPROVEMENT
7. FACTUAL APPROACH TO DECISION MAKING
8. MUTUALLY BENEFICIAL SUPPLIER RELATIONSHIP

1. CUSTOMER FOCUS

understand current and future customer needs

2. LEADERSHIP

establish unity of purpose and direction of the organization

3. INVOLVEMENT OF PEOPLE

people are the essence of an organization

4. PROCESS APPROACH

a desired result is achieved through a managed process

5. SYSTEMS APPROACH TO MANAGEMENT

managing interrelated processes

6. CONTINUAL IMPROVEMENT

performance improvement is a permanent objective

7. FACTUAL APPROACH TO DECISION MAKING

decisions are based on facts and data

8. MUTUALLY BENEFICIAL SUPPLIER RELATIONSHIP

interdependent benefits create value for both an organization and its suppliers

External Certification ISO

ISO certified suppliers are PREFERRED by procurement departments because...
- they have to confirm to an externally defined SET OF STANDARDS for quality and delivery of service
- they are easier for procurement to INITIALLY QUALIFY and PERIODICIALLY AUDIT
- they are usually more OPEN TO SHARING supply chain info
- they WELCOME BUILDING RELATIONSHIPS with their customers
- they have formal processes in place for CONTINUOUS IMPROVEMENT of their products, services, and processes
- certification is done by an INDEPENDENT THIRD PARTY agency
- firms have to be RE-CERTIFIED every three(3) yrs

Supplier Relationshop Management (SRM)

the process of strategically PLANNING for, and MANAGING, all INTERACTIONS WITH THE THIRD PARTY ORGANIZATIONS (i.e. suppliers) that supply goods or services to an organization, in order to MAXIMIZE THE VALUE of those interactions
- most procurement professional view SRM as an ORGANIZED APPROACH to defining what they NEED AND WANT from a SELECT GROUP OF KEY SUPPLIERS
- establishing and managing the company-to-company link to obtain those needs
Plan, SOURCE, Make, Deliver/Return, Enable

Evaluating & Selecting Key Suppliers

With a robust Supplier Evaluation process to select key suppliers with whom to develop a collaborative relationship, purchase cost becomes RELATIVELY less improtant
- the assumption is that excellent suppliers will be able to drive costs out
- "squeezing" suppliers to generate a lower annual purchasing spend hurts strategic relationships! BUT UNFORTUNATELY, IT IS OFTEN STILL DONE!( PROFIT LEVERAGE EFFECT)

Key Supplier Selection

KYS is typically conducted by cross functional team using evaulation forms or scorecards.
- weighted techniques are often used

Why develop suppliers?

so that they can provide the products and services reliably, with quality at the right price when you need them

Why develop suppliers? EXPLAINED

while suppliers may be good in meeeting your needs in general, they may have some of the following issues:
- quality not consistently good
- delivery performance may not be stellar
- customer service may be inadequate
- documentation may have errors or mistakes
- product innovation may be lacking
- working relationsjops may not be robust
- cost of reowrk, returns, defects may be too high
- may not have funds to invest in their business

Supplier Development (SD)

- SD is the BUSINESS, TECHNICAL AND FINANCIAL ASSISTANCE given to existing and potential suppliers to improve quality, delivery and overall performance.
- In simpler terms, it can be described as a BUYER'S COMMITMENT AND ACTIVITIES TO IMPROVE A SUPPLIER'S CAPABILITIES

SD programs (SDPs) should be DESIGNED TO ACHIEVE

- LOWER supply chain total COST
- INCREASED PROFITABILITY for all sc participatns
- INCREASED product QUALITY
- near-perfect ON-TIME-DELIVERY at each point in the sc

SD Additional Info

- A SDP must be aimed at improving supplier's performance, NOT BULLYING THEM INTO CHARGING LESS or simply auditing and rewarding them
- SD is all about providing suppliers with what they NEED TO BE SUCCESSFUL in the sc to meet ur needds

Two of the Most Important Functions of a SDP

1. PROVIDING INFO abt products, expected sales growth, etc. Suppliers need to become EXTENSIONS OF THEIR CUSTOMERS
2. TRAINING SUPPLIERS in the application of GMP (Good Manufacturing Practices), lean and six sigma / quality tools
a. asking suppliers to lower their price w/o giving them the knowledge on how to lower their costs is not sustainable in the long-term

SD Process Steps

1. Identify CRITICAL PRODUCTS AND SERVICES a company buys
2. Identify the SUPPLIERS of those critical products and services
3. Form a CROSS-FUNCTIONAL TEAM internally to work w/ the supplier (e.g. SCM, Marketing, R&D, Finance)
4. Identify what ISSUES or GAPS exist and what specific IMPROVEMENTS need to be made
5. Meet with the supplier's TOP MANAGEMENT to get their support and involvement
6. Define details of the AGREEMENT and the ACTION PLAN
7. Monitor the STATUS of the projects / action plan and MODIFY strategies as necessary

Tapping into Strategic Supplier's Knowledge

Strategic Sourcing partners offer the opportunity for a company to extend their intellectual capabilities by involving their external partner base in product development
1. EARLY SUPPLIER INVOLVEMENT (ESI)
2. VALUE ENGINEERING

1. Early Supplier Involvement (ESI)

Key suppliers become more involved in the internal operations of the buyer's company, particularly with respect to new product and process design, concurrent engineering, and design for manufacturability.
- SS's are asked to add their knowledge and expertise to the company's new product developmental process

2. Value Engineering

activities help the buyer's company to reduce cost, improve quality and reduce new product development time beginning with the initial design

Why recognize suppliers?

To MOTIVATE them to PERFORM AT THEIR BEST in meeting YOUR NEEDS for products and services EFFICIENTLY AND EFFECTIVELY

Supplier Recognition Programs (SRPS)

A program to recognize suppliers who achieve the HIGH PERFORMANCE STANDARDS necessary to meet customer expectations
- the SUCCESS OF THE BUSINESS can depend on the quality and performance of the company's suppliers
- it is always a good practice for a company to have innovative SRPs in order to RECOGNIZE their achievements and REWARD them for their EXCEPTIONAL PERFORMANCE AND SERVICES

SRPs Three Attributes

1. Companies should RECOGNIZE and CELEBRATE the achievements of their best suppliers
2. Award winners exemplify TRUE PARTNERSHIPS, continuous improvements, or organizational commitment, and excellence
3. Award-winning suppliers serve as ROLE MODELS for other suppliers

Benefits of SRPs

a properly developed and led SRP will make MAJOR CONTRIBUTIONS TO THE ORG, its suppliers, and to its customers and stakeholders.
- There are several key benefits of these programs that make them valauble for a business org
1. MOTIVATED SUPPLIERS
2. IMPROVED SUPPLIER LOYALTY
3. ENCOURAGE SUPPLIERS TO ADAPT TO THE COMPANY'S CULTURE
4. HELPS TO CREATE ENTRY BARRIERS FOR COMPETITORS

1. MOTIVATED SUPPLIERS explained

A SRP can motivate suppliers to excel in terms of their quality, pricing, and delivery commitments; if a company wants to retain and drive a supplier to excel, there should be a motivation plan designed to reach them

2. IMPROVED SUPPLIER LOYALTY

supplier support is important to ensure that customer delivery commitments are maintained

3. ENCOURAGE SUPPLIERS TO ADAPT TO THE COMPANY'S CULTURE

if the company treats its suppliers as a PART OF THE FAMILY and engages in SRPs periodically, it can help to bring the suppliers closer to the CORPORATE VALUES, ETHICS, and PRINCIPLES of the company

4. HELPS TO CREATE ENTRY BARRIERS FOR COMPETITORS

if the suppliers trust the company, they may be more inclined to sign deals of EXCLUSIVITY w/ the company for certain crucial components

5. ENCOURAGES SUPPLIER PARTICIPATION IN PRODUCT INNOVATION

recognition to suppliers also brings about their enthusiasm to work closely with the company or new product development

Supplier Relationship Management System (SRMS)

- when considering a SRM program there are several TECHNOLOGIES available to support it.
- the reason for a computer system is to provide a MORE COMPREHENSIVE AND OBJECTIVE VIEW of a supplier(s) performance
- it is important to recognize that an SRM system can only be implemented in line w/ the ASSOCIATED BUSINESS PROCESS CHANGES
- the SRM system is part of the process, NOT THE WHOLE PROCESS BY ITSELF

MORE COMPREHENSIVE & OBJECTIVE VIEW

- a system will help in identifying and addressing supplier performance issues
- a system can also be used to help make sourcing decisions

Five(5) Key Characteristics to consider in Development & Implementation of SRM system

1. AUTOMATION
2. INTEGRATION
3. VISIBILITY
4. COLLABORATION
5. OPTIMIZATION

1. AUTOMATION

meant to handle routine transactions like placing orders, delivery, inspection, etc.

2. INTEGRATION

spans multiple departments, processes, and softward applications (ERP, e-procurement, testijng & QA)

3. VISIBILITY

of information and clear and concise process flows

4. COLLABORATION

through information sharing w/in an org and w/ suppliers

5. OPTIMIZATION

of processes and decision making

Trends in SRM

1. ALIGNMENT OF SRM W/ SS
2. FOCUS ON CROSS-FUNCTIONAL ENGAGMENT
3. FOCUS ON INNOVATION
4. INVESTMENT IN PEOPLE & "SOFT SKILLS"

1. ALIGNMENT OF SRM W/ SS

many companies are determining their negotiation strategies by tying them to their category management strategy, and to their SR goals

2. FOCUS ON CROSS-FUNCTIONAL ENGAGEMENT

a best practice for strategic supplier relationships involves SRM teams at both the company and at the supplier, each led by a relationship manager, who form a steering committee to lead the process.

3. FOCUS ON INNOVATION

companies that engage in more innovation w/ suppliers, report higher ROI

4. INVESTMENT IN PEOPLE & "SOFT SKILLS"

treat suppliers w/ courtesy and respect. be candid, and able to disagree w/o being disagreeable. hold both sides to the same standards.

Procurement Enabling Technologies

- CONTRACT MANAGEMENT SYSTEMS(CMS)
- PROCUREMENT/ERP SYSTEMS
- ELECTRONIC DATA INTERCHANGE (EDI)
- VENDOR & SPEND ANALYSIS TOOLS (e.g. Tableau, Power BI)

CONTRACT MANAGEMENT SYSTEMS (CMS) EXPLAINED

- repository of contract terms and conditions
- contract renewals
- master service agreements

PROCUREMENT/ERP SYSTEMS

- vendor information and catalogs
- purchase requistions (PR) and purchase orders (PO)
- vendor receipts and invoice processing

ELECTRONIC DATA INTERCHANGE (EDI)

- delivery forecasts (DELFOR)
- PO transmissions
- advance shipping notification (ASN)
- invoices and payments

VENDOR AND SPEND ANALYSIS TOOLS

- vendor performance reporting (VPR)
- spend analysis by category/sub-category