All organizations must develop supplier evaluation and measurement systems to identify the best-performing suppliers. Then a stronger business relationship can be developed with those suppliers to achieve the organization’s goals (Monczka et al., 2020).
To prevent supply base risk, a buying company needs to utilize a supplier performance measurement system. Thereby, continuously managing and improving supplier performance (Monczka et al., 2020). For supply managers, a risk must be evaluated relative to its cost exposure and the probability of its occurrence (Monczka et al., 2020).
The cost base system is one of the most thorough and least subjective supplier measurement systems. It’s built around the calculation of a supplier performance index (SPI) which is demonstrated as SPI = (Total Purchase + Nonperformance Costs) / Total Purchases (Monczka et al., 2020).
When implementing a supplier performance index-based system, the critical process is to identify and record the appropriate costs incurred whenever a supplier fails to perform as expected (Monczka et al., 2020). A challenge for a manager, who is tasked to track a supplier’s performance, is to develop a performance index. Expenses may vary greatly and the magnitude of database information creates a challenge when processing the supplier performance index.
When developing suppliers, rationalization and optimization should always be processed together (Monczka et al., 2020).
The first step for supplier development is to replace both marginal and small-purchase volume suppliers with suppliers which have better performance (Monczka et al., 2020). Supplier development results in fewer quality and delivery problems when compared to managing many suppliers. (Monczka et al., 2020).
In the supplier reduction phase, challenges include: supplier dependency, absence of competition, financial loss or operational disruption (Monczka et al., 2020). To overcome supply disruption risk, buyers could source from a single supplier with multiple production facilities. Buyers can also select suppliers with multiple capabilities, to practice cross-sourcing. (Monczka et al., 2020).
When implementing a supplier development process, there are eight steps involved. The first and second steps involve a buying company identifying critical commodities and suppliers for development. The third step requires forming a cross-functional development team to develop the supplier. The fourth step requires the buyer to meet with the supplier’s top management team and to utilize the three relational building blocks for supplier improvement. The building blocks are strategic alignment, measurements, and professionalism. In the fifth step, during top management meetings, the buying company should identify the suppliers’ key areas, opportunities, and probability for improvement. In the sixth step, the two parties jointly set achievable goals between each other, define key metrics, and develop cost-sharing mechanisms. In the seventh step, the two parties need to agree regarding the specific measures and metrics on key projects and the joint resource requirements. The eight step requires monitoring the status of projects routinely and modifying strategies on on-going projects as appropriate (Monczka et al., 2020).
When developing suppliers, challenges can be categorized in three different areas: buyer-specific barriers, buyer-supplier interface barriers, and supplier specific barriers (Monczka et al., 2020).
Buyer-specific barriers usually occur due to a lack of rationalization and optimization from the buying company. Additionally, there may be a lack of top-level support for financing supplier development in terms of dollars, resources committed, and time. To overcome this, a buying company should only engage in supplier development after the senior management recognizes a need for it (Monczka et al., 2020).
Buyer-supplier interface barriers occur when a lack of sharing of sensitive information about costs and processes occurs on the part of either the buyer or supplier (Monczka et al., 2020). For this challenge, the buying company needs to improve the relationship with their suppliers by building trust to enhance their partnership.
Lastly, there are supplier-specific barriers. This is a lack of supplier recognition of the potential benefits from development. The challenges primarily come from supplier attitude and poor resources. The suppliers are either too proud to accept help, do not see value in improving quality, or do not see the need to improve delivery performance. To overcome this, the savings from development must be real and readily achievable in order to get supplier to sign on (Monczka et al., 2020).
Over all, relationship management is critical to supplier development success (Monczka et al., 2020). Successful supplier development requires a strong, collaborative relationship and mutual commitment between the parties (Monczka et al., 2020).
References
Monczka, R., Hanfield, L., Giunipero, L. Patterson, J., (2020). Purchasing and Supply Chain Management, 7th Edition. Cengage
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