Whether your business is involved in manufacturing or distribution, chances are that the number one reason why you fail to deliver to your customers on time and in full is your suppliers. Poor performing suppliers is the most common reason I hear for poor schedule performance, out of stock items and long order delays. So why are so many suppliers so bad and what can you do to improve supplier performance?
In my new book, On Time In Full: Achieving Perfect Delivery with Lean Thinking in Purchasing, Supply Chain and Production Planning I dedicate three chapters to the challenge of achieving reliable supply from your suppliers. You might be surprised to hear that the way to improve supplier performance starts with you. Here are five things you can do to improve the performance of your suppliers – and none of them involve firing the supplier!
- Listen to Your Suppliers: It seems obvious, but how often do you really have a two-way conversation with your suppliers where you really listen to them about their issues and the support they need to do a better job for you? It seems to me that many Purchasing Managers prefer to simply give directions to suppliers and tell them to “deal with it”. The supplier, who is keen to get your business, will often not challenge your requests, even if they are unreasonable. Instead they will attempt to find a way to meet your needs, often by expediting, often at high cost. Instead you need to ask your supplier what they need from you, what kind of information will help them do a great job for you and what prevents them from doing so.
- Establish a Service Level Agreement: I frequently talk to companies about their supplier relationships. They often tell me that they have long term relationships with strategic suppliers who they have worked with for years. When I go and talk to the suppliers involved, they have a completely different perspective. The suppliers often see no commitment from their customer beyond the current purchase order. As a result, the supplier is often very reluctant to make longer term commitments such as investing in additional capacity or even forward buying raw materials. A simple service level agreement outlines the agreed rules that you will do business with your supplier. Service Level Agreements often do not specify a minimum purchase quantity, nor do they usually provide the supplier with exclusive rights to your business. However, they clearly signal to your supplier your intention to deal with them over the life of the agreement. This then enables the supplier to plan their business and resources to meet your needs.
- Measure your Supplier Performance: “What gets measured gets done” certainly applies when it comes to your supply chain. Often discussions with suppliers focus on anecdotes, worst case scenarios and opinion. Often your supplier have different perspectives on the problems that you have experienced and the discussion goes nowhere. By establishing some simple and agreed metrics you and your supplier can have a much more constructive discussion about their performance. The most common supplier metrics focus on delivery in full and on time (DIFOT) and quality. DIFOT is often measured against the agreed supplier lead time, while quality may simply be the number of defects, number of credits or number of justified complaints. These metrics then need to be included in the Service Level Agreement, reported regularly and performance issues discussed and problems solved as they occur.
- Ensure Your Supplier Data is Accurate: Whether you use an ERP system to trigger replenishment of your materials or a Kanban system it is important that the assumptions and data built in to these replenishment systems are accurate. This means that your target inventory levels, safety stock, number of kanbans etc. need to accurately reflect your actual usage patterns and the supplier’s actual lead time. This information also needs to be reviewed regularly as it can change. For example, your usage can increase meaning that your stock levels of a part may be inadequate. As a result, it will frequently run out while you are waiting for replenishment. Likewise, if you have incorrect assumptions about your suppliers’ lead times built in to your replenishment systems this will frequently lead to shortages.
- Establish Routines and Be Predictable: You probably have customers that are unpredictable. You never know when they will order or how much they will order, but when they do order, you know it will be urgent. Usually you will try and move heaven and earth to meet their unreasonable and unexpected requirements, but often you will fail. The same applies to your suppliers. It is much easier for them to supply you on time and in full when your ordering is predictable and consistent. Consider ordering at frequent regular intervals such as every day or every week. Also look at ways of leveling your demand so that what you order is largely the same each week. Using the “every part every interval” scheduling routines I describe in my book can make your demand much more predictable. A high level monthly forecast can also help your supplier plan for your needs. Once your supplier understands your demand patterns they can plan their materials and production to ensure that they are ready for your orders when they come.
None of these five suggestions will cost you any money and none are difficult. However, in my experience addressing these five areas can dramatically improve the reliability of your supply chain. It will also save you a lot of difficult phone calls with suppliers and customers. Once you have the right materials in your warehouse, you are then in a much better position to provide your customers what they need on time and in full.