Managing Your Suppliers

Commercial Negotiation Skills

Negotiating the right deal with your suppliers doesn't necessarily mean getting what you want at the cheapest possible price - you should also consider other factors such as delivery lead times, payment terms and quality of the products and services. There are also situations that arise when we are have to do business with a particular supplier again. This section sets out guideline on how to negotiate a business deal, including setting your objectives, options strategy, understanding your supplier's position and using the right tactics.

Setting your objectives

There's a range of key considerations you need to bear in mind when setting objectives for purchase negotiation. These include:

• price
• payment terms
• delivery schedule and reliability
• quality of products and services
• after-sales service and maintenance arrangements
• warranty and life-time costs of a product or service

Before you start to negotiate, draw up a list of the factors that are most important to you. Decide what you are - and aren't - prepared to compromise on. For example, if you are ordering supplies in bulk you might want to find a supplier that will offer you a discount. Or if you are investing in a complicated piece of computer software, you might want to make sure that training is provided as part of the deal.

You should also consider what offers the supplier is likely to make and then draw up strategy on how you want to respond or to counter-offer. The key is to establish your preferred outcome. But remain realistic - if you are not prepared to compromise, the negotiations won't get far.

Remember that if you want to do more business with the supplier in the future, you should aim to strike a deal that both parties are happy with. Although getting the best possible deal in the short-term is important, a good relationship in the future may help you get even cheaper prices or other perks, such as priority delivery. Don't underestimate the importance of good will.

Understand your supplier

By conducting some basic research into a potential supplier you can work out how valuable your business is to them. Your bargaining power increases in direct proportion to your potential supplier's need for your business.

If the supplier runs a near-monopoly, it is likely to have the upper hand because it has enough business already, and you only have a few other sources to select from. However, if the supplier has a number of competitors, or is a new entrant to a particular market - you will be in a much better position. Also, the supplier may already be offering good deals in a bid to increase its market share. It may also be possible that a supplier is trying to get rid of old stock or to fill spare production capacity. You should find out as much as you can about the state of the supplier's needs.

If you are a small supplier's main customer, you will a greater leverage in negotiations. But trade carefully - if you push too far you may erode its goodwill which could damage the quality of service you get.

Negotiating at the right time can give a greater advantage. For example, the supplier may need to meet quarterly or annual sales quota. Identify the key staff in the supplier's business to negotiate with, not trying to squeeze concessions out of a member of supplier's staff who doesn't have the right authority to grant them.

It's always worth to do some background check - making sure your supplier has sufficiently strong cashflow to deliver what you want, when you need it. A credit check will also help reassure you that they won't go out of business when you need them most. Ask people or other businesses with first-hand experience of your potential supplier can give you useful advice. The supplier should be happy to put you in touch with some of its previous clients. If not, ask yourself what it is trying to hide. This is an important "health scan" if you are entering into a long-term contract.

Sometimes a manager in a business bids for contracts and then passes the account to someone else. If this is likely to be the case, make sure you're happy with whoever is being assigned to do the work - and that you'll be able to deal with the manager if any problems arise.

Develop negotiation strategy

It's essential to plan your strategy in writing before beginning negotiations as this will help you set clear goals and work out where you will draw the line, or when to walk away from the deal. Start by defining what your priorities are, such as low price, high-specification products, fast turnaround time, or a specific delivery schedule.

Think about the different offers the supplier could make and what you are willing to concede or compromise on. For example, you may decide that you will only pay the full price in exchange for fast turnaround, or a 7 by 24 hours service support.

Identify your negotiating strengths and weaknesses, and know how you might use them to get the concessions you require. You must strategize ways of defending the weaker parts of your argument and negating the supplier's main strengths.

Once you have set out your strategy, it is also essential to get your negotiating team right. Make sure everyone in the team has the skills in all the necessary areas. Make sure each member of the team is familiar with your negotiating strategy. The more confident they sound about what they want, the more likely they are to get it.

Never overlook to match the seniority of the supplier's representatives. It would be disrespectful to send a junior manager to bargain with their managing director.

Before you start negotiating, state the aspects of the deal you are happy with and the key points you want to discuss, in writing or presentation slides. Ask the supplier to do the same.

Do not indicate that there are things you are prepared to concede or compromise on too early in the negotiations. You must approach the negotiations tactfully without revealing your position. If you have enough bargaining power, insist on using your own terms and conditions of purchase.

If the supplier keeps referring to urgent deadlines or the scarcity of supply, remember they may be using pressurizing tactics. Don't allow pressure to force you into agreeing a point you are not happy with. Ask for a break if you need one, to re-strategize your position. Each time a point is agreed, clarify that you've understood it correctly and write it down.

In some trades, suppliers set artificially high prices that are then permanently discounted. If this scenario applies to your business, then ensure that any concessions the supplier gives are real. In such a case, you should already have done enough market research and updated on latest commodity prices, to counter such unfair practice.

Know your Best Alternative to a Negotiated Agreement (BATNA)

BATNAs are critical to negotiation because you cannot make a wise decision about whether to accept a negotiated agreement unless you know what your alternatives are. Your BATNA is the only standard which can protect you both from accepting terms that are too unfavorable and from rejecting terms it would be in your interest to accept. In the simplest terms, if the proposed agreement is better than your BATNA, then you should accept it. If the agreement is not better than your BATNA, then you should reopen negotiations. If you cannot improve the agreement, then you should at least consider withdrawing from the negotiations and pursuing your alternative (although the costs of doing that must be considered as well).

Before entering a negotiation, you must determine what your BATNA would be should an agreement not be possible. When would a walk-away decision likely to give you a favorable deal? Unless you can be very clear on whether you can walk away from a negotiation and what options would be available to your supplier if they will inevitably find themselves heavily pressurized to reach an agreement should the negotiation not succeed, you will leave this as your last resort strategy. A good BATNA allows you to be firm when negotiating, and provides you the power and confidence needed to walk away from a negotiation when an agreement that is mutually beneficial is not possible.

If you have done enough background check, you will know whether your supplier is desperate for an agreement. If the supplier has many options outside of negotiation, then you are unlikely to get more concessions from them, in an effort to keep them at the negotiating table. Thus making your BATNA as strong as possible before negotiating, and then making that BATNA known to your opponent will very likely strengthen your negotiating position.

A BATNA is the best outcome a negotiator can expect if the negotiation results in an impasse. Remember this:

• The more easily you can walk away from a negotiation, if necessary, the greater is your capacity to influence the negotiation.
• The more you know about the alternatives available to the other side, the better you can prepare for a negotiation.
• The decision to disclose or not disclose a BATNA depends on whether disclosing it is likely to weaken the negotiation stance of the other party.
• A BATNA prevents you from accepting an agreement that is too unfavourable or rejecting an agreement that is in your best interests.
• The better the BATNA the greater the negotiating power. Therefore improve your BATNA whenever possible.

Negotiation techniques on price

Never accept the first offer - make a low counter-offer in return. The other party is likely to come back with a revised figure. Always ask what else they can include at the given price.

If you suspect the price is exceptionally low, ask yourself why. Are the goods of sufficiently high quality? Are the goods old stock they try to get rid of? What will the warranty and after-sales service be like? You may need to ask for some time to reconsider. Get your team to investigate.

You can also try to pressure down the asking price by exposing repair costs, maintenance costs, any ongoing costs,  consumables and other expenses.

If the current state of the supplier's market means commodity, certain components or  ingredients prices are falling, point this out by presenting the latest facts and data that you have collected.

If the price includes features you don't need, try to lower it by asking to remove those features from the deal.

Applying the economies of scale to your bargaining power to get a good deal. For example, if you're a big customer of the supplier, you could ask for bulk discounts.

Also be careful that if you squeeze the price too low, or threatening to walk away from the negotiations - you may end up getting a poor deal. The supplier may have to cut costs elsewhere unknown to you, which could prove costly to you in the long run.

Remember even if you are a supplier's main customer and enjoy most of the bargaining power, forcing it to meet prices at near breakeven point or possibly force out of business, won't protect your reputation as a highly valued customer. The supplier will quickly look for other customers.

Drawing up a contract for your purchase

Once all the points have been negotiated and a deal has been agreed, a written contract must be drawn up and signed by both parties. In any situations of dispute, although verbal contracts are acceptable and legally binding, they're very hard to rely on in court.

Both parties should agree what the contract will cover. Typically it will include:

• details of price, payment terms, delivery schedule, and point of sales confirmation.
• a clause stating the supplier's right to ownership of the goods until they're fully paid for.
• a clause limiting your contractual liability.

Depending on who holds the bargaining power in the negotiations, the terms and conditions used may be your own, the supplier's or a mixture of the two. It is good to obtain legal advice when drawing up your standard terms and conditions.

Aim to get a contract that protects your interests and that shifts legal responsibility for any problems to the supplier. Notify the supplier in writing how you intend to use its supplies and ask for written confirmation. Make sure that your contract covers the level of after-sales service you require.

It's a good idea to explicitly ask about any hidden problems and to keep a written record of all assurances that you were given.

Build into the contract what will happen if there are any problems with the goods or services. For example, will the supplier replace faulty goods with a one-to-one exchange or with a credit note, or if it is the whole batch that is rejected, minimum replacement within what time period? Set to make supplier agrees on certain penalties for failure to meet your delivery times or quality standards, such as a future discount.

You should also consider including any dispute resolution or exit clause that must be followed if either party is dissatisfied with the business relationship or wants to end the contract. You should also use exclusion clauses to limit your liability in certain important areas. For example, excluding liability for death or injury, or liability for losses caused by negligence or by a third-party.

Suppliers Selection Process

Choosing the right supplier involves much more than scanning a series of price lists. Your choice will depend on a wide range of factors such as value for money, quality, reliability, delivery schedule, service, even on a total cost basis. You may want to stress your potential suppliers to commit and share your company?s standards for total quality and continuous improvement. How you weigh up the importance of these different factors will be based on your business' priorities and strategy.

Supplier selection, especially in the chemical and pharmaceutical businesses can be a cumbersome and lengthy process;   extensive auditing and approval procedures may extend over many months, or even year. However, given transparent procedures, defined responsibilities and processes, historical data, support tools, and a thorough guideline of selection checklist and criteria, it would certainly help to hasten the process of selecting the best suppliers for your business.

Supplier Status

1.1 Employees
How many employees are there?
Where are they based?
Are are all legally entitled to work in the country they are employed?

1.2. Geography
How widespread are the offices? (Head Office, Local, Regional, Global)
What are the core businesses? (products manufacturing, services, Multi-dimensional support)

1.3 Credibility
1.3.1 Reputation in the Market
Consider things like: -
     White paper publication
     Involvement in industry bodies
     Main competitors

1.3.2 Reference Clients
Who are their existing and past customers? Ask your business acquaintances or directly from your suppliers. 
You're likely to get an honest assessment of its business' strengths and weaknesses from clients who has used its services.
Are there other clients that they don't quote as references?
Have they done any work for your competitors?

1.3.3 Partners
What is the quality and range of their formal partnerships?
If this is weak do they have an informal network that can be called upon to provide additional or specialist resources?

1.4 Strategic Direction
Is it appropriate or necessary to develop a long-term relationship with this supplier? If so, do they have the vision to innovate in the way you would like?

1.5 Existing Relationship
Is there an existing relationship with the supplier?
What work has been done? (treat this as a critical reference client)
What are the terms and period for any co-operation?

Delivery Capability

2.1 Services
Can the supplier provide your required delivery schedule? or the complete range of services required for completing the project?
Examples: software design and implementation, project management, 7x24 hours service support, application hosting, etc.

2.2 Quality of Deliverables
Can they produce evidence of good quality work?
Does it comply with their standards?

2.3 Resources
Do they have adequate resources to execute the work?
Is it clear what dependence there is on key individuals?
Is there a contingency and backup plan in their resource planning?
Would they be able to support your different upsides in demand?
Are specific, named, resources allocated?

2.4 Customer Interface
Is there a suitable customer interfaces for the project?
Example: Account Management, Business Consultant, and Technology Consultant.

Business Processes

3.1 QMS and Work Procedures
Do they have robust, repeatable, measurable processes for creating their deliverables?
Do they have continuous process, products and services improvement projects?
Are projects tracking, regular reporting procedures and documentation in place?
Are they formally certified (ISO9000, 14000)?
How do they carry out projects management? Is there: -
     A formal methodology?
     Resource management within projects?
     Project tracking and progress reporting procedures?
     Change management & control processes?
     Do they fit with your own project, or product specification and control procedures, or can they be modified to do so?

3.2 Account Management
How is the relationship managed outside the context of specific contracts? e.g. where a long term partnership exists.
How are projects planned within a portfolio?
How do you take advantage of economies of scale across projects?
How do you ensure re-use of technology 'components'? (Library Management)
What complaints/problem escalation procedures exist?
How willing are they to invest in a long-term relationship?
Is there a user group? Is it independent?

3.3 Design and Build
Are there formal processes?
Do they use different industry standards than yours?
Do we understand the methodology that they will use?
Do you have the capability to interpret and sign off the design documents that they will create?

Technical Status

4.1 Infrastructure
Do they have the necessary technical infrastructure to develop the application?
Can they test in an environment compatible to yours?
Is there portability across operating systems, software applications, and hardware?
Are the system management tools used in support industry standard?

4.2 Development Environment
Do they use appropriate standard or proprietary tools?
Will the output be supportable at reasonable cost?
Will it generate re-usable modules for them and for your developers?
How productive are they? (proprietary tools may be of value here)
Do they provide the ability to review progress on-line, securely?
Is their documentation, clear enough for hand-over to others?
Under some circumstances the supplier's use of your standard development tools may also be important. Consider the ability and security of the supplier to remotely access your networks to speed up their delivery.

4.3 Security
Is their environment secure to the level required by the application and its content?

Supplier Culture

5.1 Flexibility & Commitment
How well will they handle schedule upsets, pull-in changes to requirements, etc? You can check with reference clients.

5.2 Openness
How honest are they about problems faced & how they overcome?
Are they suitably discrete about their other clients?
Do you feel comfortable with them?
Do they appear to communicate openly and freely both internally and externally?

5.3 Integrity
Do they stand by their offerings?
Are they consistent in what they say during negotiations and about their capabilities?
Are they happy to be technically and financially audited if necessary?

5.4 Understanding Your Business Goals
Does the supplier and all their support staff really understand why you want to do business with them?

5.5 Proactiveness
Do they offer sensible & appropriate advice on potential solutions?

5.6 Understanding Business Environment
Are they willing to work with other 3rd Party logistics provider and yours?
Where relevant, the supplier should commit on future expansion opportunity if your business volume with them increases.

5.7 Innovativeness
Find out whether their staff use approaches that are creative, flexible, lean and efficient, root-cause and problem-solving driven.

Financial & Commercial

6.1 Sustainability
Will they exist for the length of time we need them?

6.2 Ownership Structure & History
How new are they in the industry?
Who owns their business?

6.3 Cash Flow
Will they go broke during the project/product lifecycle?
Will they able to present their most recent balance sheet and P/L statements?
(You can try to test by checking whether they can accept payment at the end of the project, or a longer payment term).

6.4 Intellectual Property
Is there a clear agreement about the ownership of any deliverables?

6.5 Non-Disclosure
Is an appropriate security agreement in place to protect yours and the Supplier's interests?

6.6 Competitive Pricing
Do you consider daily or monthly rates, and how these may vary?
Will you consider trade off fixed price against time & materials? Consider balance between cost, time & quality.

6.7 Schedule Compliance
Do they have the ability to execute within the project time-scales or the your fixed delivery schedule.

6.8 Costs
Will you sign off a fixed cost (annual contract) or subject to your corporate monthly/quarterly currency exchange rate?
Are there variable costs ? (per call, per hour, etc).
Do they have active cost reduction and savings programs?

Other Supports

7.1 Service
What support will be required from the supplier, if any, and their specification?
What will the user helpdesk role be?
Will the solution be created in a way that permits others (e.g. internal support functions) to support it?
Do you want a standard Service Level Agreement (SLA) with various levels of service?

7.2 Availability
Have you also consider these: -
Work hours (for international support ? time zones)?
Holidays?
Response times?
Help desk functions - who, how, where?
Do they have proper call management processes?
Are the escalation procedures clear?
Are there backup systems?

Below is a sample of the supplier selection evaluation format.

Main Suppliers Selection Criteria

Instead of a long checklist, the following serves a main summary guideline that provide you with the main criteria in suppliers selection process.

Financial Stability
State it in your company policy that all suppliers must be financially sound and credit-worthy. Reports from services such as Dunn & Bradstreet can used to verify financial stability. Suppliers must be able to provide copies of most recent financial statements.

Continuous Improvement
Your suppliers must be able to fully demonstrate their processes for continuous improvement of processes, performance and/or features of products and services.

Established Business
Suppliers must be able to provide a legal company name and should be in business for a specified minimum number of years. Suppliers must be able to demonstrate revenue and profit for this period.

Proven Track Record and References
Suppliers must be able to provide references of satisfied past and current customers.

Background Checks
Supplier must provide proof in writing that it has conducted (or used an agency to conduct) criminal history checking, medical examination, verification of education, employment history, and legal right to work for all employees and contract personnel.

Quality Processes (ISO 9001, ISO 1400)
Suppliers must already established and implemented an effective Quality Management System (QMS) with defined processes and operating procedures that measure continuous improvements.

Electronic Data Interchange (EDI) and E-commerce
Suppliers should have EDI and/or E-commerce capabilities for receiving, confirming and invoicing orders. Suppliers should also have bar code technology for inventory and tracking purposes.

Insurance Requirements
Suppliers must also provide Commercial General Liability Insurance, Workers' Compensation, Employer's Liability, and other necessary industrial insurance as regulatory requirement.

Suppliers Evaluation Process

It is an essential procurement practice to periodically evaluate all of your key suppliers on the basis of their delivery (actual performance as compared to promised delivery dates), their ability to meet your rush requirements (capacity analysis and production planning), the number of rejects due to poor quality (technical and process capability), and adherence to purchase order prices (price variance). Your ability to maintain low purchase prices, combined with consistent quality and service that you received, are the key factors in your selection and renewed contract with your suppliers. Your subsequent buying decisions will be strongly influenced by the results of the periodic evaluation.

While the evaluation process is a procurement initiative, other important functions such as quality and logistics are involved. Supplier evaluations are conducted at least once a year. Operating Companies with shorter product life cycles may conduct their evaluations more frequently. As a good procurement guideline, you should aim to evaluate at least 80 percent of your company's total procurement volume. Normally, supplier evaluations are scored using a range of quantitative results between 0 and 100 points.

In cases when your major suppliers can no longer provide you the competitive prices, or they had continued to deteriorate in their products and services that they provided, you should seriously consider developing a list of alternative suppliers. Below are a few pointers guideline that you should consider.

• You should at least have a minimum of two or three suppliers you know who are capable of providing you merchandise, goods or services on short notice.
• Compare potential new suppliers in relation to suppliers you currently have and rate them.
• Consider if changes have occurred that make one of your backups or potential suppliers more attractive than your key supplier, from the business perspective.
• Evaluate whether an alternative supplier offers new products or services that could be useful in renegotiating supply relationships with the inefficient suppliers you currently have.

How do you determine which suppliers to evaluate?
 
To determine which suppliers will be evaluated, you may want to consider the following factors:

• Purchasing volume in dollars.
• Strategic importance of materials or service being purchased.
• Critical markets.
• Products purchased that are process-sensitive or having tight tolerance specification.
• Suppliers with deteriorating quality of management.
• Potential for improvement.

What functions or areas are to be evaluated?

Suppliers are usually evaluated in four main functions: procurement, quality, logistics and technology. For each of these functions, the following provide you a criteria list of the important areas that must be evaluated:

• Quality and process control.
• Technical and process capabilities
• Business workplace safety, health and environment.
• Current performance against the agreed contractual targets.
• Cost reduction programs.
• Continuous process improvement programs.
• Systems in place to sustain reliable performance and quality of service.
• Future requirements and capacity.
• Financial stability.
• Management Philosophy
• Operating Principles.
• Productivity Training programs.
• All areas of Service and Support.

Suppliers Evaluation Checklist

Below is a general Suppliers Evaluation Checklist that may be useful for you to start with, or to pick a few more areas to improve on your existing suppliers evaluation list.

1. What portion of your total product cost (COGS) does purchased material represent?
2. How are your procurement/purchasing people measured raw material inventory levels? Purchase Price Variance (PPV)? Do their measurements align with the supplier?s measurements?
3. Have strategic suppliers been identified? What is the criterion?
4. What are the number of suppliers for each commodity?
5. What are the current supplier performance metrics? How measured? Frequency of feedback? Any penalties / incentives?
   Delivery performance: To what tolerance window? Penalties for late? Goals to improve?
   Quality: How measured? Goals to improve? Are any failures, found in production, tracked? Included in %?
   Supplier Lead Times: Stable, or floating? Goals to reduce? Goals to stabilize? Cost: compared to market? Recent competitive quotes? Frequency of review?
   Working relationship: Ease of doing business? How do you measured? Incidents recorded?
   General: Supplier solvency, Risk assessment, etc.
6. What is your current Days of Supply for purchased material / components? What would you need to do to cut it into half? How well does your internal ?days of supply? (on-hand inventory) correlate to the supplier?s demonstrated lead times and reliability history?
7. Is permanent inventory reduction sufficient justification for capital spending? For expense items?
8. What percentage of the plant?s missed deliveries is caused by late or bad parts from suppliers?
9. Are the measures and expectations set for corporate approved sources in line with the objectives of the individual operating units / plants?
10. When was the last on-site process analysis done for strategic suppliers? Are regular reviews scheduled? At what frequency?
11. Is there a policy on the maximum percent of each supplier?s business that we should represent?
12. Do the suppliers measure their internal on-time completion performance? Do they have goals to improve? Do they have a process to force improvement?
13. Do key suppliers reserve capacity for customer demand fluctuations, if appropriate?
14. Do you request that key suppliers reserve capacity, and produce JIT? Contractually?
15. For major suppliers, what are the number of shifts in operation? Days of operation? Opportunity to cut lead times?
16. Are payment terms used as a carrot stick to encourage supplier performance?
17. Is the supplier stocking parts for your company? Basis for the amount stocked? Location? What are your contractual obligations to consume them, i.e. what are your downside risks?
18. What is your order policy in terms of lot sizing? What frequency of delivery? How are shipments triggered?
19. What are the limitations in terms of delivery frequency? Can you get suppliers to daily deliveries? Multiple deliveries per day? To the point of use?
20. Do the suppliers have world-class quality systems in place?
21. Does the supplier do an adequate job of capacity planning? Can they handle a surge in business? How they do it?
22. Are order entry disciplines in place, i.e. the supplier does not accept orders in excess of their demonstrated capacity?
23. Suppliers: Do all of their internal critical skilled people have adequate trained backups?
24. Suppliers: Critical equipment: Are there backups? Adequate spare parts? Is there a recovery plan in case of failure?
25. Is the supplier?s management team stable? Management competency?
26. Strategic Suppliers: Any threat of unionization? If so, do you have a protection strategy for risk of interruption of supply?
27. Is the supplier stable, i.e. Solvent? Is the supplier a candidate for acquisition?
28. Does the supplier utilize lean concepts throughout?
29. Does the supplier have a systematic process to enforce on-going continuous improvement?
30. Has the supplier?s process been certified for quality? If not, has a plan and schedule been established to do so?
31. Has a supplier disaster assessment been done: Flood, typhoon, fire, etc? Are recovery plans in place?
32. Does the supplier have adequate insurance coverage?
33. What risk mitigation strategies are in place for any union suppliers?
34. Frequency of pull-ins, push-outs requested by us, the customer?
35. Do you share your long range plans, including demand projections, with your key suppliers? If not, why not?
36. Percent of purchase currently on VMI (Vendor Managed Inventory)? Consignment?
37. Have you done a recent make/buy analysis for possible ?make internally? items?
38. Are key suppliers involved, early on, in NPI (New Product Introductions)?
39. With what frequency do we do price comparisons? Is that adequate?
40. Supplier location proximity? Percent within four hour distance? 1 day drive?
41. Critical sole-source suppliers: Are their mitigating strategies in place?
42. Freight cost & risk analysis. When are they last done?
43. Transportation: Are we adequately utilizing: Milk runs? Back hauls? Consolidation? Single sourcing? Local sourcing? Use your own trucks?
44. Supplier packaging / cost of de-trashing: Opportunities? When were they last analyzed?
45. Terms & Conditions: Adequate? Last reviewed? Is intellectual property protected?
46. Internal failures due to a vendor part: Is the data captured? How? Accuracy? % Returns? Penalties? How did you communicate to the supplier?
47. Do we have any suppliers on long term contracts? Who? Why? What terms of conditions?
48. Cancellations / Volume Reductions: Are there any supplier penalties? Contractual limitations?
49. Blanket Orders: Are cancellation terms clearly specified: Does it include the supplier?s Raw material? WIP? F/G?s? How are they determined? How are they verified? When were they last reviewed?
50. Can you hold, or fund, the raw material for your supplier, and have them produce Just-In-Time?
51. Do you use ?column pricing? i.e. price based on the quantity per individual buy or delivery? Or, are prices determined by annual ?total volume? type agreements?
52. Have you done any hedging for commodity price fluctuation; e.g. indexing? What / where are we at risk?
53. Are you taking adequate advantage of buying from distribution (for small lot, short lead time purchases)?
54. Are all core competencies (competitive differentiators) being kept in-house?
55. What supplier Kanban triggers are in place? Are they adequate? Percent failures? How measured? How are these triggers adjusted for changes in sales volumes?
56. What portion of procurement requires incoming inspection? Do we do 100% inspection, or sample? Basis for sampling plan?
57. Do you have a schedule to move from incoming inspection to certified parts / suppliers?
58. Lead time through Receiving? Receiving Inspection?
59. What percent of purchased parts and materials are on replenishment systems? To the point of use?
60. How are engineering revisions controlled?
61. Do you receive on the ?off? (2nd or 3rd) shifts? (Evenings? At night? Weekends?)
62. What is the amount of delay between receipt of material and ?available for production??
63. What supplier lean tools would need to be implemented in order to cut lead times into half?
64. Amount of excess / obsolete raw material inventory? % of total? Plans in place to reduce?
65. Root cause analysis done? Plans in place to eliminate?
66. Do you have all procurement categorized by ABC codes? Definitions? Stocking rules (days of supply) for each category? How well does your actual days of supply compare to these targets?
67. What are the Lot sizing / re-order quantity rules? Why did you set at those levels? Do you have plans to reduce?
68. Has a ?bottoms up? costing been done for purchased ?A? items? How often updated? Is this data utilized in price negotiations?
69. Who actually makes your sourcing decisions? Criteria? How often are they reviewed?
70. What is the criteria for ?Dock to Stock? parts? Dock to Line?
71. What percentage of discrepant parts / material is accepted ?Use As Is?? Is this data utilized to re-assess purchased part specifications?
72. Are ordering rules (min-max levels, order points, lot sizes, etc.) regularly reviewed?
73. Do your buyers have written procedures? Are they being followed? When / how reviewed & revised? By whom?
74. Are any of the procured parts / commodities suitable for aggregation (pooling purchases with other purchasers, typically via a third party aggregator)?
75. Our internal skilled individuals: are their adequate backups? Trained? Do you use job rotation to retain the skills?
76. Payment terms: Any pre-paid items? Progress payments? Pay on receipt? Pay on usage? Adequate controls? Review process? How well are the negotiated terms being followed?
77. The purchased product specifications: Are they accurate? Complete? NOT over-specified; i.e. costing the vendor for non-essentials? Have specs been reviewed with the strategic suppliers for cost / quality improvement opportunities?
78. With what frequency, and discipline, do you conduct on-site reviews of your ?A? suppliers? Is this frequency adequate?
79. With what frequency do your ?A? suppliers visit your company? on-site? Who (their level positions) attends?
80. Is traceability a requirement? How is it being handled?
81. Do you provide (own) any raw material for our suppliers? How is it verified / audited?
82. Overall supplier plant impressions: Are trip reports retained? Are action items recorder and followed up?
83. What are your customer?s in-house days of supply of your product (their raw material)? Why? What can you do to reduce this amount?
84. Is it standard practice that all receiving / receiving inspection to be completed ?same day??
85. What is your inventory accuracy? How is it measured? Do you practise cycle count? On the off-shifts? How is corrective action handled?
86. Do you use MRP? Order point? Min-Max Replenishment? Safety Stock Levels? VMI? What disciplines are in place? Are procedures written? Training process established?
87. Do the buyers have written procedures? Are they being followed? When and how are reviewed & revised? By whom?
88. Of the supplier?s total lead time, what percent is production time, i.e. value added time? Does the supplier have internal goals to reduce the non-value add time?

Suppliers Performance Management

Benchmarking others about best practices and key metrics is a valid approach, but need to make these would align with your company's strategies and objectives. The KPIs must also reflect ability to measure suppliers' long-term capabilities and relationship. Your suppliers performance management metrics should demonstrate these characteristics:

• Related significantly to the procurement organization's (IPO or local) strategies and goals.
• Related significantly to your customer's requirements and their own business success factors.
• Measure not only past performance but also supplier's capabilities for future performance.
• Balanced measures - such as including Kaplan & Norton balanced scorecard financial categories, critical internal operations, and customer satisfaction, and how supplier's performance affects them all.
• Reasonableness - includes only key performance indicators, not too many other areas which you might be competing for limited resources, priorities, time and efficiencies.
• Practicality - not resource-intensive, do not require extensive data collection and complex data manipulation beforehand.
• Comparability - that you can make direct comparison with past data over time, and allow consistency.
• Robust and flexibility - not when SAP is down and totally void of data and incapacitates the process to satisfy customer's needs. Think of resource alternatives.

Generally, there are two categories - the lagging indicators and leading indicators.

• Lagging Indicators - these are traditionally what most companies tracked such as materials scraps & obsolescence, quality metrics, supplier's on-time deliveries, inventory turns, accounts payable cycle, PO conversion dues, supplier's warehouse audit. These are typically events that had already occurred, and for which actions had already been taken.
• Leading Indicators - these focus measurements on supplier performance problems, supplier process and engineering capabilities, supplier's employees turnover rates, costs reduction programs without impacting materials quality, their customer satisfaction awards, etc.

The leading performance indicators would help you to look more to the possible future supplier's problems and risks than on the past ones. They are proactive, predictive, preventive, whereas the lagging performance indicators are of reactive approach. Past results are no guarantee of future performance.

Suppliers Performance Expectations

Corporate's goals and strategies are used to develop the procurement's strategy which drives the supplier performance expectations. Before you are able to develop a good supplier performance metrics, you need to understand the necessary expectations for supplier performance. Supplier performance expectations are both qualitative and quantitative statements of your business practice, process, policy, operating principles, results and actions expected from a supplier's performance in compliance to customer's requirements. Performance expectations should be measurable, attainable and related to customers. Performance expectations should be forward-looking such as expecting that supplier should have efficient process and practices, products and process improvement projects in place for its customers. Quantitative metrics, on the other hand, should capture these measurements that show the results of these practices.

Below is a list of examples that shows the areas where you can deploy procurement's and corporate's strategies to the supplier performance expectations. Typically, you expect the supplier should:

• has an approved supplier list.
• uses an established process and criteria to evaluate and approve their suppliers.
• uses only those suppliers who are on your approved suppliers list.
• has a well-documented source inspection system.
• has well-segregated areas and process that prevent defective parts from mixing with good ones.
• has effective process to overcome DPPM quality escapes.
• has documented corrective actions for all their products, process and engineering issues, and all loops are closed.
• has improvement projects in reducing costs, lead times, and to improve the quality of service to its customers.
• has leadership team that supports Lean enterprise or Six Sigma methods.
• acquires QS 9000 or ISO 9000:14000 product certifications.
• has continuous skills upgrade and productivity training programs for its employees.

The objective in planning for communication, full understanding and requirements compliance is clear - you want to align supplier performance expectations with the procurement's strategy and overall company's goals and strategies.

Suppliers Performance Metrics

Do not try to create an ultimate metrics and scorecard that measure too many things on suppliers as they become confusing and may lost sight on the priorities of corrective actions later on. They may also drain you down as measuring suppliers takes up times and resources. Pilot the scorecard with a few key metrics for key suppliers, refine the measurement process. When process had been fine-tuned, stabilized and effective, then gradually expand the KPI and also implement it to other small suppliers.

If suppliers have good performance scores, they can earn more business volume and renewal in the approved supplier status. With good scores, they will also be entitled to participate in the company's products development.

Unsatisfactory performance scores mean suppliers will be awarded less business, and can also be placed on a probation period with potential to lose its approved status. As such suppliers corrective actions on poor performance result must be tackling root-causes, implementing effective solutions and closely monitoring.

Successful implementation of EDI and integrated internet means that your suppliers would be able to log on remotely to review their performance scorecard (but not data of other suppliers). A PDF file scorecards should be sent to all the key and strategic suppliers, preferably on a weekly or a bi-weekly basis. Compile on a monthly basis would mean many opportunities that could have missed in between the weeks.

Suppliers scorecard is not a panacea for poor suppliers performance. It is just a tool, a "radar" that provides you insight, and one part of the supplier performance management process.

Below are two examples of a Supplier Performance Metric and a Performance Scorecard.

This site was created in February 2007
by William Tan