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The headline of one of my previous articles, “The Most Unenviable Job in Purchasing,” sums up my negative view of a purchasing department’s strategic sourcing function. In my experience, the solitary focus of strategic sourcing has been piece-price. And there is always someone who will offer a lower price.
What’s wrong with this approach, of course, is that there are other desirable supplier capabilities that can positively impact OEM customer internal costs, as well as position them to increase revenues/profits through satisfying incremental demand—i.e., demand that was not forecast. And these are largely ignored in today’s source-selecting strategy and process.
One negative result of the piece-price focus has been that at the executive level, purchasing is primarily seen as a tactical—not strategic—function. Consequently, supply management’s primary performance criteria are primarily based on annual purchased material cost reduction, which only further entrenches strategic sourcing’s focus on piece-price reduction.
I was going through some of my old documents and ran across the 25 criteria my purchasing group used, circa 2000, in source selection. The date, here, is significant since at this time most purchasing organizations in our industry—and industry in general—based sourcing decisions on lowest quoted piece-price, along with any associated transportation costs. We, however, did not.
I thought you’d find a review of this document interesting, so below I will outline the general approach, as well as provide examples of each of the three categories.
“Musts” are supplier capabilities required for a potential source to be considered.
“Needs” are highly desirable supplier capabilities that can provide strong differentiation between potential sources.
“Wants” are supplier capabilities that, while important, provide less differentiation among potential sources.
Musts
Financial strength: It must be confirmed up front that potential sources will be around for “the long run”. Consequently, they must have a positive balance-sheet history.
Ballpark competitive pricing: Pricing must always be a consideration in source selection—but not necessarily the primary factor, unless what is being purchased is a commodity. In other words, the lowest quoted price is not necessarily—and quite often it is not—the best criteria for ensuring a supplier-based competitive advantage.
Capacity: I’ve seen many companies placed in a situation where a potential source could produce acceptable prototype parts out of their engineering shop but lacked the manufacturing wherewithal to actually provide production quantifies. Capacity can be a particularly important factor when the demand in a customer’s market is highly seasonal. It is even a more important consideration where a significant amount of a potential supplier’s business is with customers in that same seasonal market.
On-site support availability: There will always be design, quality and order-fulfillment issues that come up as part of ongoing production. Quick-response onsite supplier support is usually the quickest and most effective way to identify and resolve the root cause of the problem. Not having this support readily available increases the risk of production stoppages, or even worse, increases warranty or damaged-in-marketplace reputation issues.
Service-part support: In addition to cost and availability, a supplier must contractually agree that they will not produce and sell “will fit” parts that can be used on our products. They most also demonstrate capability to support short-fuse service part requirements.
Needs
A history of effective collaboration: This is an easy evaluation when a potential source is an incumbent supplier. For potential new sources there are also considerations that can be an indicator of whether a supplier has a focus on collaboration. For instant, do they offer early supplier involvement in design review? Or do customers have easy access to supplier internal functions, such a design, manufacturing and quality.
Read more of Paul Ericksen's supply chain management articles.
A focus on continuous improvement: This implies more than just having an internal continuous improvement function. It also includes a supplier’s willingness to share access to their year-to-year cost reduction history. In addition to their internal efforts, suppliers should be able to provide a general history of their suggestions for design changes related to annual customer product cost reduction goals.
Process approach to quality: Here the issue is whether a potential source assures the delivery of parts-to-spec either through inspection or through definition of process capability, i.e. a statistical evaluation of whether a manufacturing process will maintain “on target and in control” production to design specifications. The latter approach can be provided at less supplier cost and provides better assurance of quality while, at the same time, providing the customer the opportunity to reduce their receiving inspection costs and allow delivery of parts directly to their point-of-use.
Cognizance and application of current technology: There will always be instances where parts can be manufactured most effectively with older “tried and true” processes. But suppliers should also be aware of and evaluate newer manufacturing technology that may be more effective and/or result in processing cost reduction.
Short-fuse order fulfillment agility: Forecasts historically have error in predicting market dynamics. Consequently, supplier manufacturing and order fulfillment agility can reduce both supplier and OEM customer costs, as well as better position an OEM to support unanticipated demand, either in volume or SKU.
Wants (or Nice-to-haves)
- Shorter tooling lead times
- Shorter lead times on prototype parts
- The use of returnable containers
- Daily—or frequent—deliveries
- Knowledge of a customer’s industry
- Experience in producing products with similar features and specifications
- Etc., etc., etc.
As I mention in a recent article, the supply chain in my division outperformed those in my employer’s other divisions. While much of this was based on working with strategic suppliers in a collaborative manner, another big factor was using a more comprehensive source selection process.
Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
