Vendor Development and Supply Chain Management

Vishwanathan Bharathan
Assistant Professor
Doddappa Appa Institute of MBA
S.B.College Complex, Gulbarga-585103

What is supply chain management?

Supply chain management is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service, manufactures that product or service and delivers it to customers.

The following are five basic components for supply chain management.

1. Plan-This is the strategic portion of supply chain management. You need a strategy for managing all the resources that go toward meeting customer demand for your product or service. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers.

2. Source-Choose the suppliers that will deliver the goods and services you need to create your product or service. Develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And put together processes for managing the inventory of goods and services you receive from suppliers, including receiving shipments, verifying them, transferring them to your manufacturing facilities and authorizing supplier payments.

3. Make-This is the manufacturing step. Schedule the activities necessary for production, testing, packaging and preparation for delivery. As the most metric-intensive portion of the supply chain, measure quality levels, production output and worker productivity.

4. Deliver-This is the part that many insiders refer to as "logistics." Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments.

5. Return-The problem part of the supply chain. Create a network for receiving defective and excess products back from customers and supporting customers who have problems with delivered products.

Of the above Five components, SOURCING becomes the most significant one, which inter-link all other components.

The objective of sourcing is the identification and selection of the Supplier whose costs, qualities, technologies, timeliness, dependability and service best meet the firm's needs. Strategic Sourcing is a systematic process that directs a Supply manager's plan, to manage and develop the supply base in line with a firm's strategic objectives. It is the application of current best practices to achieve the full potential of integrating suppliers into the long-term business process.

What is Vendor Development?

Vendor development is one of the popular techniques of strategic sourcing, which improves the value we receive from suppliers. Vendor Development can be defined as any activity that a Buying Firm undertakes to improve a Supplier's performance and capabilities to meet the Buying Firms' supply needs.

Buying Firms use a variety of activities to improve Supplier performance, which includes,

* Assessing Suppliers' operations
* Providing incentives to improve performance
* Instigating competition among Suppliers
* Working directly with Suppliers either through training or other activities etc.,

The Key areas identified for detailed study under the present paper are:

1. Importance of Sourcing in Supply Chain Management
2. Best Practices in Vendor development
3. Collaboration between Customer and Supplier
4. Supplier Development Processes
5. Supplier Development Project Charter
6. Barriers to Supplier Development activities
7. Analyze & understand a Real-time Organization's Supplier development Program

1. Importance of Sourcing in Supply Chain Management

* Sourcing in recent years has become much more proactive than it once was.
* To day, professional supply manager work with the organization's engineers in an effort to ensure that the firm's supply base will support the firm's technology requirements now and in an uncertain future.
* The Organization's information system allows supply managers to study the aggregation of its supply requirements.
* The professional supply managers then determine the most appropriate type of buyer-supplier relationship for each relevant commodity class, study their existing supplier base, and plan action to ensure that the base will meet the organization's needs efficiently and effectively.
* These activities, frequently called ' strategic sourcing' form the key components of World Class Supply Chain Management (WCSCM).

2. Best Practices in Vendor development

Following are few of the Best Practices in Vendor development if adopted successfully would enable World Class Supply Chain Management (WCSCM).

* Creating dedicated supply developments teams…
* Teaching a supplier on the tactics of self-development, after initial guidance from the supplier development team…
* Focusing on underlying causes of long cycle times…
* Involving suppliers in new product and process development at the buying firm…
* Providing on-line training programs and off-line education programs to suppliers…
* Conducting frequent improvement-focused seminars for suppliers…
* Creating supplier support centers at their locations itself…
* Loaning-out process engineers and quality managers to share their expertise with suppliers…
* Setting 'stretch goals' to encourage radical change as well as continuos improvement schemes for suppliers…
* Improving proper metrics for supplier development improvements…
* Sharing the savings from supplier development activities with suppliers…
* Last, but not the least, Improving the supplier's supply management system…

3. Collaboration between Customer and Supplier

WCSCM requires a commitment to collaboration between customer and supplier. The commitment must be approached with mutual benefit in mind. Effective supplier development is more than getting cost reduction for a particular part; it means helping suppliers remove wasteful costs from their processes. The strategic intent is to create win-win situation wherein both the buyer and supplier gain.

* Collaboration requires COMMITMENT on the part of the buying firm
- to provide financial assistance for supplier investment needs,
- to share all savings from supplier development projects,
- to educate supplier on waste management techniques, improve quality, better delivery, reduce cycle-times, reduce costs etc.,
- to treat supplier as if, they are a department within the buying company

* Collaboration requires COMMUNICATION on the part of the buying firm ,
- to ensure that supplier is well informed of all aspects of the supplier development programs.
- to provide a very transparent feed-back system available to suppliers on their reaction to all supplier development initiatives of the buying firm

* Collaboration requires MEASUREMENT mechanism
- to ensure that all members of the supplier development programs, are benefited
- to ensure success of the collaboration efforts, there must be transparency in sharing accurate costs of both the parties.

* Collaboration requires TRUST building measures between the parties
- to ensure that mutual beliefs and trust between the two organizations personnel must be present, while sharing all confidential information.

4. Supplier Development Processes

A generalized process for managing supplier development projects is presented in following six phases;

Phase-1: Initiating the Project
The main activities are to develop and confirm a preliminary supplier development charter, define the supplier's processes, assess the cusomer's needs and assess the business environment.

Phase-2: Mapping and measuring
In this phase, the team maps the supplier's process and determines the measurement required. Deliverable from this phase include: process maps, a final project charter and a baseline of "before" process improvement status.

Phase-3: Developing the Process
In this phase, a project implementation plan that addresses performance gaps in current processes and identifies measures to bridge the same. The following critical activities occur in this phase: create solutions, select solutions, develop new processes, plan implementations and so on.

Phase-4: Achieving Results
The Project team executes the implementation plan, conducting any necessary simulations, pilots and releases the outcomes. The deliverables from this phase are a new, lean process that has been implemented, documented and is actually demonstrating results.

Phase-5: Controlling the Process
In this phase, plans and documents are created to ensure consistent implementation of the process with minimized variation. Ongoing metrics are defined to allow review of the process. A closed-loop corrective action procedure system is identified to review the process, address gaps in performance, and continuously improve performance. The deliverables from this phase are a process control plan and a corrective action plan.

Phase-6: Recognizing the team
The final phase provides team recognition. Activities are organized by the project team, project champion and process owners to promote the success of the project. In this phase, the team shares the lessons learned and best practices with the suppliers.

5. Supplier Development Project Charter

The supplier development project charter is a dynamic document that is continually updated during the planning, execution and completion of a supplier development project. It generally consists of the following sections:

* Business's Case-A Business case to financially assess the projects estimated savings and other benefits.
* Situation and goals – a qualitative and quantitative description of the current situation and the goals for improvement are documented.
* Mission/Vision- The Project's mission and Visions statements need to be identified to be able to communicate quickly to others on the areas of development, the team is trying to achieve.
* Project scope- Clarifying project scope helps to assure the team has narrowed the project focus by refining its understanding of the activities required to complete the project.
* Schedule and Deliverables-A common approach in this section is to provide for developing PERT (Program Evaluation and Review Technique) or Gantt Chart
* Assignments and roles- this sections simply documents who is responsible for what activities.
* Signatures- Signatures are required from the upper management of all participating companies as well as key participants when establishing the charter as an official document.

6. Barriers to supplier development

There are many barriers to effective supplier development, such as,

* Poor communication and feedback
* Complacency
* Misguided improvement objectives
* Credibility of customers
* Misconception regarding purchasing power
* Lack of clarity and commitment
* Lack of a unified approach
* Misaligned sourcing and performance metrics
* Concealment problems
* Initiative fatigue
* Resource limitations
* "Blame the supplier" culture
* Lack of trust
* Confidential issues
* Legal issues and
* Imbalance of power in the relationship.

7. Supply Chain Management at Ashok Leyland limited, Chennai (Case study)

Based on the above Key areas of supplier development identified, an attempt has been made in this study to understand the supplier development program followed in a Professional Organisation in real times. It has been found that the Automobile Giant Ashok Leyland Ltd, Chennai, has got one of the very successful Supplier development Program as part of its World-Class Supply Chain Management.

Mission Statement of the Company: "Our Vendors are our valued partners in our business development and we shall work with them in a spirit of mutual co-operation to meet our business objectives."

* Vendor Development and Strategic Sourcing are handled by Corporate Materials Department (CMD).

- CMD identifies the vendors, rates the vendors based on feedback received from Supplier Quality Assurance Cell, sends drawings / specifications, calls for quotes with detailed break-up of operation-wise costs, and negotiates the price at which the parts will be supplied.

- In addition to CMD at Ennore, and the two Units at Hosur, there are Materials Management Departments (MMDs) for scheduling based on unit production plan.

* Vendor Development of Strategic Sources

- Strategic Sourcing is central to the integrated Materials Management function. Ashok Leyland's policy is to develop a vendor base committed to continuous improvement to meet quality, cost and delivery standards.

- Ashok Leyland considers its vendors as partners in progress and believes in establishing mutually beneficial relationships. Ashok Leyland provides necessary technical assistance in the form of Project and Production Engineering, to maintain quality levels. In addition, where required, Ashok Leyland also helps vendors financially.

* Becoming a Vendor to Ashok Leyland is easy, involving just four steps

- Fill the Questionnaire. As this provides the basic inputs required for preliminary study, applicants need to provide as much information as possible.

- If Ashok Leyland needs the item you would like to supply, CMD will inform Ashok Leyland's Supplier Quality Assurance Cell (SQA) for an on-site assessment. Otherwise, the Vendor information is stored for future reference.

- If SQA approves the vendor, then CMD will send the drawings for SQA cleared components to the Vendor for obtaining a quotation. If, instead of approving the vendor, SQA recommends improvements to facilities, the Vendor is given adequate feedback and a re-survey is undertaken at a mutually agreed future date.

- If the Vendor matches Ashok Leyland's expectations in terms of price, quality and delivery, then CMD places a trial order with the Vendor. Both on-line and off-line inspection may be carried out at the time of processing the trial order. Based on the outcome of the trial order, CMD may place the Vendor in the Approved Vendor List.

* Some of the relevant points to note

- Ashok Leyland's Purchasing Philosophy is to maximize bought-out parts. Over 90% of the parts are bought-out.

- Ashok Leyland believes in global sourcing. Consistent with its operational needs, AL would consider both domestic (Indian) as well as international vendors. Global sourcing is normally resorted to overcome local constraints - in the form of technology, quality, capacity or cost effectiveness.

- Ashok Leyland would consider new suppliers for required components, based on Vendors' ability to meet our specification, price and delivery schedules.

- Vendors are required to have a strong manufacturing base with adequate engineering support for their own product development activities, as needed by the category of product, viz Proprietary, Bought Out Finished (BOF), Bought Out Rough (BOR) and Sheet Metal items. Castings and forgings are to be received in fully finished/machined condition, progressively. Ashok Leyland could make available to the vendors necessary technical expertise, wherever possible and needed, particularly with regard to developing the manufacturing process.

- As QS 9000 certified company, Ashok Leyland's Vendors are expected to have a good quality system, meeting ISO 9000 requirements. Ashok Leyland would be willing to help Vendors in the preparation for ISO certification by offering necessary technical guidance.

- Vendors' quality system should encompass, at the minimum Cost effective process, Assured process capability, Continuous improvements based on customer feedback, Compliance of all statutory /legal/ commercial requirements of Ashok Leyland.

- A stage of development where the Vendor can come under Ashok Leyland's self-certification system tractability - first-in first-out basis and Ashok Leyland has established a transparent periodically audited Vendor Rating System. Ashok Leyland places emphasis on optimizing the inventory and Vendors are required to progressively meet "Just-in-Time" requirements. Delivery modes as well as packaging are required to minimize the handling/loading and unloading time.

- Though not a must, Ashok Leyland would prefer a manufacturing / assembly / support base at close proximity to the production units. Ashok Leyland encourages its vendors to participate in their e-servicing project starting fiscal year 2004-05.

8. Conclusion:

Supplier development is one of the most powerful approaches that a firm can engage in / on the path to World-Class Supply Chain Management. The focus should be on developing suppliers to become self-sufficient at Developing, Implementing and maintaining World-Class performance. Also supply management becomes the key to supply chain management ONLY through development efforts, that go beyond the first tier of suppliers.


* David N.Burt, University of San Diego, Donald W.Dobler, Stephen L.Staling - "World Class Supply Management – the Key to Supply Chain Management" Tata McGraw-Hill Publishing Company Limited
* - 26k
* Darwin Executive Guide-Supply Chain

Vishwanathan Bharathan
Assistant Professor
Doddappa Appa Institute of MBA
S.B.College Complex, Gulbarga-585103

Source: E-mail April 14, 2005




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