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Measuring supplier performance effectively is critical in analyzing and controlling supplier performance for cost reduction, mitigating potential risk, and driving improvement in value. As pointed out by Robert, B (2004): Common and consistent measures can help companies to focus resources, identify performance glitches, develop strategies for supply chain improvements, and determine the total cost of ownership for purchased items, suppliers, and entire supply chains.
The five rights Framework
? Right Quantity
Organizations need to make a clear identification of how much do they need and how much should they buy from the materials requirements planning (MRP) perspective. MRP is driven by sales and it contains elements of bill of marterial, lead times, inventory status, safety stocks and safety lead times.
? Right Quality
If organizations intend to satisfy customer requirements, the following dimensions of product quality need to be measured: performance,reliability, durability, serviceability and features.
? Right Time
Managing on-time delivery is crucial for an organization to hold less stock. In achieving an effective delivery performance, organizations should determine what is required and when it is required, and communication effectively with their suppliers. Moreover, they should provide suppliers with feedback to encourage better service, and give priorities to suppliers who perform better.
? Right Price
As the price is commonly determined by market fluctuation, it is hard to identify a right price. In this case, cost analysis should be adopted when price analysis is impractical. Besides, organizations should make a price judgment from their knowlegy and previous experience.
? Right Supplier
Organizations should to be familiar with the background of suppliers in the following aspects: financial stability, production capacity, quailty of technical back up,quality rating and so on.
? Choosing qualified suppliers from an approved supplier list
The list comprises the suppliers that are qualified to be used and have passed through some form of assessment. As a result supplier appraisal commonly contains criteria to ensure the supplier is: financially stable , reliable, technical and engineering capability , provide goods of suitable quality and management capability. Each element can be weighted according to the standardization of the procuring company.
Over times, the emerging organizations will need to be added to the approved supplier list. There are two typical methods of acquiring evaluation information in carrying out an appraisal:
(1) Questionnaires C depending on the nature of the purchase, basic information regarding on personal qualifications and contacts etc, specific information in relation to quality tools and IT capabilities etc.
(2) Supplier visit C it includes personal attitudes, adequacy of production equipment, technological abilities of supervisory staff, housekeeping, competence of technical staff etc.
? Full investigation
This area covers the detailed information on the supplier in terms of their company structure, annual financial report, references about their customers and banks, capabilities of supervisory staff and third party approval (ISO compliancy or other certification). Additionally, organizations should endeavor to obtain information on their performance in relation to the schedules, deliveries and how their operation is configured to achieve your requirements.
? Pre-qualifying suppliers
Generally, the procurement company is only permitted to place orders with approved suppliers who have been added to the Approved Vendor List (AVL). The assessment process is standardized so that all candidates are judged by the same criteria.
After the relationship has been established between a procurement company and its suppliers, they should keep longstanding ties with each other. From a long-term perspective, there are several measures need to be implemented by a procurement company:
? Implementing Supplier Grading System to monitor the key performance indicators (KPI) in the aspects of quantity, time and price;
? Establishing multi-attribute Rating Systems to evaluate the criteria of innovation, lead times, timely delivery, quality and pries;
? Providing suppliers with feedback on performance to encourage better service;
? Evaluating inventory management regarding on lead time and over stock etc.
Case-study _ O Neills Irish International Sports Company (Appendix I)
We convert yarn into fabric in our modern Knitting and Dying plants, which is transferred to our print and sewing plants where it is made into garments. (Contents from the website of O Neills)
Yarn is the key material for O Neills and as such is crucial in influencing the overall performance of the company. Therefore, O Neills, as an international company, need to assess the global suppliers with diligent deliberation due to the fact that different countries may have different product quality and color specification indexes. Before signing contracts with suppliers, the purchasing department should strictly follow the product requirements by reviewing information on suppliers performance with regarding to the consistency on material specification.
Additionally, high-quality products with short lead time is another critical factor should be taken into consideration in evaluating global suppliers, as O Neills demonstrates that its ability to manufacture from its own fabrics allows it to specially design garments to meet the short delivery dates dictated by the market. And its aim is to produce high quality garments suitable for all sporting and leisure activities. In the circumstances, O Neills should to be familiar with the background of suppliers in the aspects of production capacity, quailty of technical back up and deliveries.
Challenges of Global Supply Base
Developing mutual trust and effective partnerships with suppliers is a thorny issue, especially when suppliers are located in different regions of the world. The ever increasing levels of harsh economic conditions in the global markets and heightened expectations of customers have brought a lot of challenges in developing a high-performance global supply base.
As a report published in the mid-2008 by analysts, the Aberdeen Group, found that over 58% of companies incurred financial losses as a result of supply base disruptions. In the context of global suppliers, there are a variety of challenges ranging from geo-political instability in the supply region to more localized factors such as legislation for safe practices. The following high profile issues provide an insight into the global challenges:
Supplier risk that is localized within the source of supply and can contains supply delays due to strikes.
Different countries may have different product quality and color specification indexes.
? Culture shock
Inadequate knowledge of the people, culture and language in foreign countries may lead to inconsistency in quality and reliability.
? Currency exchange
Foreign currency exchange risks such as fluctuations in oil price and labor costs as well as changes in exchange and tax rates.
Geological threats may result in suppliers failing to deliver goods.
? Natural disasters
Some unpredicted disasters such as hurricanes or earthquakes etc.
? Global economic downturn
According to Panjiva s analysis that demonstrates the dramatic impact of global economic collapse on global suppliers. Based on the statistics of the apparel industry in 2008 reveals that: Due to the global recession, the number of suppliers actively serving the U.S. market dropped over 70% in just three months; from 22,099 suppliers in July to 6,262 suppliers in October.
Just as a famous English proverb says Every coin has two sides. For an organization that operates on an international scale has benefited a lot in the face of accelerated economic globalization. Nevertheless, the urgent thing to do nowadays is how to overcome the adverse effects as well as rise to the challenge of economic globalization.
The Competitive Edge of Supply Base
The most promising opportunity to achieve greater profitability is using suppliers to capture value beyond price. Some forward-thinking companies are lighting the way in a multicultural marketplace by infusing supplier into their main business processes in a unique and creative manner.
Consider the world s biggest retailer: Wal-Mart and its manufacturer (Procter and Gamble, or P&G) built channel partnership in leveraging on information technology by sharing data across their mutual supply chains. And one of the contributing factors of achieving greater profitability is the reduced need for inventory. As a result, the supply chain of Wal-Mart gains better performance in terms of customer service level, financial returns, and turn-around times.
As Clark and Lee (2000) pointed out that:
With information shared among the manufacturer and the retailer, the manufacturer can use the information about the inventory level of the retailer to manage the frequency, quantity, and timing of the shipments-- instead of waiting for the retailer to place orders. This practice, referred to as continuous replenishment process (CRP), enables the manufacturer to reduce the inventory necessary and to plan the shipments more efficiently, as has been implemented by P&G and Wal-Mart.
All in all, under severe global competition, many of the companies are seeking innovative management strategy to enhance their comprehensive competitiveness. The integration of the supply chain between Wal-Mart and P&G can be regarded as a two-edged sword for mutually beneficial in the current market-place.
Supply base is like the skeleton supporting the whole supply chain system in every organization. A good supply base serves for the organizations as a secret competitive weapon to compete with others and add value in a long-term perspective. Properly selecting it, mastering it and using it to advantage are an inevitable trend for organizations to win in the current fierce global market-place.
As the globalization continues to play an increasing role in customer markets, many companies cannot escape the advantages of exploiting the great potential that purchasing and supply chain management (SCM) represents to them today. Most companies expend more than half of their sales turnover on purchasing, therefore building constructive relationships with suppliers is a key starting point for the company s short-term financial position and long-term competitive power.
The Relationship between Purchasing and SCM
The purchasing function traditionally encompasses the process of buying. It involves determining the need, selecting the suppliers, arriving at proper price, specifying terms and conditions, issuing the contract or order, and following up to ensure proper delivery (Aljian 1984). From this angle, the function of purchasing is viewed primarily on an operational activity.
Nowadays, many concepts are used in the area of purchasing. Throughout the book of Purchasing & Supply Chain Management the definition of purchasing is:
The management of the company s external resources in such a way that the supply of all goods, services, capabilities and knowledge which are necessary for running, maintaining and managing the company s primary and support activities is secured at the most favorable conditions.
The role of purchasing in the supply chain
The job of purchasing is related to primary activity as well as support activities:
? Preparing and holding negotiations with suppliers for the sake of establishing an agreement and to sign the contract;
? Determining the specification in terms of quality and quantity of the products that need to be bought;
? Monitoring of the order to assure supply;
? Selecting the competent supplier and developing procedures to select the most suitable supplier;
? Developing efficient purchase order and to place order with selected supplier;
? Continuing to evaluate the performance of suppliers.
The role of purchasing in creating supply chain risk
? The risk to the supply chain of poorly written supplier contracts
With globalization going on, its relentless drive for efficiency has led us into an increasingly complex supply chain world. Such complexity has brought along greater productivity for companies and affordable prices for customers. However, it has a dark side: A failure to guard against suppliers acting in their own interest. In other words, if purchasing fails to perform its due diligence, then such opportunism would lead suppliers to take advantage of poorly written agreements.
? The risk to the supply chain of poor quality supplier materials and services
There are varieties of requirements that must be taken into consideration in product and service specifications . As the purchasing department is in charge of determining the specification in terms of quality of the products that need to be bought, their inability to establish a clear standards will result in the poor quality of the products throughout the supply chain. These costs of poor quality or non-value-added costs are the potential risks of endangering the health of the people in the near future. Moreover, it will bring risk to supply chain of excess inventory and longer lead time.
? The risk to the supply chain of high cost supplier materials and services
In most cases the high cost materials has its own rhythm, oscillating up and down with seasonal change and economic turns. Like many materials in medicine, science, engineering and building etc. Once the purchasing department failed to determine the specification in terms of quality, the supply chain department may face carrying higher levels of inventory risk, time delays and extra cost. Additionally, if a shipment of those high-cost products were to be returned, a firm could be caught in a serious cash flow bind.
The role of purchasing in managing supply chain risk
? Managing risks using structured contracts with suppliers
Once the demand, cost and availability uncertainties are quantified using scenarios, the risks associated with these uncertainties are managed using structured contracts with suppliers. Structured contracts are binding commitments between purchasing department and the supplier, with complex combination of quantity and pricing terms . (David, S and Patrick, S 2005)
? Managing risks using long-term agreements with proven performance
It is goes without saying that finding quality suppliers and maintaining solid relationships with them is absolutely necessary in achieving the quest for maximizing long-term benefit in purchasing. From the supply chain point of view, long-term agreements with good suppliers that lead to more accurate forecasts for delivery times, minimize the risk of loss and increase opportunities to implement innovative practices.
? Increasing the use of alternate suppliers
As a famous English proverb goes Do not put all eggs in one basket. In order to mitigate supply chain risks, an effective way for purchasing department is to segregate the risk based on increasing the use of alternate suppliers. As a result of working with multiple supplies, if any of these suppliers fail to fulfill their duty, the supply chain department would avoid or reduce the loss of the risk.
Additionally, there are some other methods for the purchasing department to manage supply chain risk: minimizing the risk of potential supplier bankruptcy through financial analysis and surveillance; conducting formal supplier-risk assessment processes to understand the foreign exchange risks embedded in the unit costs; elimination of inventory across the total supply chain in order to reduce the risks of goods in stock; and integration of information about the flow of goods with supply chain department.
The Risks Created by Purchasing _ O Neills Irish International Company
O Neills is the largest manufacturer of sportswear in Ireland, offering a complete service to all their corporate customers from the design, manufacture and branding to the distribution of the entire product to suit the customer needs. Additionally, they supply a wide range of products from leisurewear to accessories which are all manufactured to the highest specification. (Contents from O Neills website)
? Different global standardization
As O Neills is an international sports company, they need to maintain a close cooperative relationship with suppliers globally. Purchasing department plays a key role in preparing and holding negotiations with global suppliers in terms of quality and quantity of the products. However, different countries may have different product quality and color specification indexes. For instance, Europe and Asia have their own specification in terms of construction, dimensions and weights or materials. Yarn is the key material in O Neill s products, which is eventually transferred into garments. If the purchasing department reaches a substandard agreement on the consistency of materials with suppliers, O Neills will incur huge loss as well as reputation damage.
? Financial issues
O Neills is an international sporting goods company that is an importer and exporter of a wide range of Sporting goods. One of the prime uncertainties in relation to sourcing globally is the financial risks. And the risk exposure is typically classified into transaction, translation and hedging. The purchasing department's lack of consideration relating to the optimization of financial processes, especially in tax optimization and foreign currency exchange will immensely injure the overall performance of O Neills. For instance, translation exposure will impact O Neill s balance sheet due to fluctuation in valuation of its assets and liabilities.
The Price Fluctuation for One Key Input in 2010 (Appendix II)
Yarn is one of the key inputs in O Neills Irish International Sports Company, as they convert yarn into fabric in their modern Knitting and Dying plants, which is transferred to their print and sewing plants where it is made into garments.
The following charts are the changes in global yarn price index, including the Chinese market during the year of 2010. It can be clearly traced in the charts that the price fluctuation trend was uneven and dramatically changing during the months of May to July and October to December.
The price difference between the peak (9th Nov: 38900 Yuan) and the bottom (3rd May: 16100 Yuan) is 22800 Yuan, which equivalents to approximately 2533 Euro.
During August to September, the price remains constant by averaging 18025 Yuan (2003 Euro) per month.
Throughout the year, 2010, O Neills would have experienced significant market price fluctuation on the material of yarn during the second quarter and the last quarter. By comparison, the price keeps stable during the first quarter and the third quarter.
It can be concluded that the purchasing department performs a very crucial and critical role in smooth functioning of an organization. Apart from improving the sales margins via realizing substantial cost savings, the seamless cooperation with the supply chain can also contribute to the enhancement of the organization s competitive edge. Over the long term developing an efficient integrated relationship between the purchasing and supply chain is an inevitable trend for organizations to achieve greater profitability in the future.