Minimizing 'risk suppliers'

Alternative procedures to ensure series production

A major objective of the purchasing department is to continuously lower a company's expenditures. Accordingly, purchasing regularly scrutinizes the level of terms and conditions for the existing suppliers. What is the most effective way here?

Professionally managed invitations to tender are an effective means in this respect. When the purchasing department has identified an attractive alternative through tenders, it must qualify the supplier in a next step. Although a lot of time and costs are invested in building up such an alternative supplier, purchasing will often find, in its future day-to-day business, that the new supplier does not maintain a constantly high level of the quality measured during the evaluation. And soon there will be the worst-case scenario: When the purchased materials are useless, production losses will be the result. If purchasing is unprepared for such an incident, there will be major damages – especially with regard to tool-bound products or special, custom-made products.

Before this backdrop, methods with a practical orientation are presented below which will contribute to minimize the probability of such a stalemate or deadlock situation. Both causes of the problem will here be taken into account: Either the supplier does not have the adequate process maturity ("supplier cannot"), or the supplier's performance motivation has dropped ("supplier will not").

During the stage of the invitation to tender (A), the purchasing department should take enough time – jointly with the engineering and technical departments – to explain to the supplier the specifications and all other parameters affecting the price. Right from the start, the expected quality level must be communicated to the supplier, and accordingly also how extensive the selection procedure will be. Keeping that knowledge in mind, the supplier can then deliberately decide whether he wants to make the investment of preparing a tender. Likewise, it pays to request reference samples at this early point in time already. The expert will be able to derive from it the initial evidence as to whether the supplier actually has mastered the required manufacturing procedures.

After the evaluation of all tenders, a preliminary selection (B) must be made. In addition to the usual commercial and technical selection criteria, it is recommended to have intensive talks with a reference customer. Moreover, the purchasing department must check whether the supplier uses the requested qualities and methods as a standard or whether resources and experiences required for it need to be first established or developed. To verify such information, purchasing should also find out the supplier's production capacity and its current rate of utilization.

Auditing (C) on location is indispensable for functionally relevant articles. During the audit, purchasing jointly with the engineering department should evaluate the entire value added process from incoming goods to outgoing goods and check for quality-relevant sources of error (with special emphasis on batch traceability). Based on these findings, a risk map can be prepared jointly with the supplier, and the onset probabilities of the identified risks can be assessed. For relevant weak areas, audit team and supplier should then jointly establish methods for error avoidance or error remedy, respectively.

For evaluation (D), the purchasing department requests samples from successfully audited suppliers. Many companies will limit themselves, in this respect, to the examination of a small number of samples (pre-series). However, it is absolutely indispensable to also evaluate a larger batch (zero series) so that it can be ensured that the supplier had actually prepared the samples in production and not in its laboratory. In practice, it has been shown that another audit during the production of the zero series will provide more in-depth knowledge and insight regarding the supplier's performance capability ("analyze at full speed"). Moreover, it is important to understand the evaluation as an iterative process: Within a reasonable framework, the supplier must be given even repeatedly the chance of optimizing its articles.

Following the evaluation concluded, purchasing and engineering must jointly decide on the acceptance or release (E) of the supplier. A bad advice would be the motto "We put already so much money into the supplier; now, something just has to come out of it". Much rather, the guiding principle should be: "We shouldn't throw still more bad money after bad money" (sunk costs). If the decision is made for the new supplier, it should once again be made very clear to the supplier what the perspective is, but especially what the conditions of their collaboration will be. The supplier should realize that no dependency relationship exists towards it and that it continues to be replaceable if its quality drops.

If the alternative supplier is released as a series supplier (F), now at the latest will be the time to seek talks with the existing supplier. In such talks, the supplier should certainly not be alienated. Much rather, the reason for the decision is to be explained, and the supplier should also be given the opportunity to keep its volume with a corresponding adjustment of terms. And only then will the purchasing department be able to build up the new supplier step by step without the existing supplier dropping out (such changes frequently fail due to an implementation plan which is inadequately timed). Finally, as a precautionary measure, the inventory of the old supplier should be increased in the early stage of the supplier change.

Niklas Panchyrz (Senior Partner) and Tilman Keller (Senior Consultant)

Imprint & Privacy Policy – Kerkhoff Indirect Procurement GmbH – +49 211 6218061-0 – Elisabethstr. 5 – 40217 Düsseldorf