Taking Control of Supplier Quality

Five best practices for implementing a successful supplier governance program

Published: Friday, December 7, 2012 - 10:53

The vital supply chain networks used by companies are expanding and evolving at an unprecedented pace. At the same time, companies face enormous pressures to improve supply chain efficiency, reduce costs, and mitigate the risks involved in supplier compliance with organizational policies, codes of conduct, regulations, and even local laws.

Companies must consider and manage a variety of supplier engagement activities, understand and evaluate supply chain dependencies, proactively exchange supplier information in a more collaborative environment, and make more informed decisions based on the resultant data or “supplier intelligence.”

The concept of supplier governance represents a growing challenge for organizations, especially those that deal with hundreds or even thousands of suppliers around the globe. There are many different supplier control frameworks and methodologies. Achieving effective supplier control requires a fresh look at the people, processes, and technology involved. The new global standard for supplier governance is an agile, multifaceted model composed of disciplined processes, optimized key resources, versatile tools, and complete stakeholder visibility.

The five best practices described here will help business leaders evaluate their supplier quality operations and create a foundation for greater supply chain integrity and improvement.

Supply chain pressures

Managing the supply chain is like chasing a moving target. As with any organization, suppliers change their locations, people, ownership, and infrastructure. This creates perfect conditions for internal systems to develop redundant and duplicate data.

Coupled with this, globalized supply chains are becoming the norm, which means that companies must consider physical distance, lead time, cultural and local knowledge factors, and local and global economic conditions that can affect supplier stability.

From an internal perspective, most organizations in quality-critical industries have an excellent internal network of quality experts. Unfortunately, these resources are finite, and too often bogged down in nonvalue-adding activities such as traveling to global supplier locations.

Another challenge of the supplier quality function in larger organizations is to stay connected. Many organizations maintain a largely decentralized supplier quality function to remain responsive to individual divisions, operations, or even plants. Unfortunately, this leads to a lack of information sharing and standard practices that could offer economies of scale across the organization.

The tools and techniques of the supplier quality function also need to be in sync with the supply chain. Companies still operate processes that are facilitated by email and isolated data repositories.

Increasing supply chain diversity also increases risk. Reducing that risk means increasing the number, frequency, and duration of supplier evaluations (typically quality system audits). Even without increasing the scope of the audit function, the natural growth and diversification of the supplier base will outpace the structure and resources of a static supplier audit program.

Best practices for supplier governance

There are several ways to help the supplier quality function address the above challenges inside organizations and supply chains:

Harnessing data

Integrating supplier data in supplier scorecards, dashboards, or profiles enables supplier quality managers to make informed, risk-based decisions, usually about how much money to invest.

Broadly speaking, these integrated data cover:
• Compliance—rating the supplier infrastructure (e.g., systems, processes, resources)
• Performance—monitoring elements such as on-time delivery, price, and quality
• Criticality—measuring the effect of supplier performance on the supply chain, based on questions such as, “What is the intended use of their product?” These considerations play a major role in determining the amount of attention to give each supplier, and the standard to which it must be held.
• External factors—viewing the supply chain from an industrywide perspective to identify scenarios such as resource shortages, regional instability, or even an increase in criminal activity (e.g., counterfeiting or raw material adulteration)

Mining and integrating the above data come under the broad heading of data analytics. Leading companies are extremely good at prioritizing and directing limited supplier resources because they make good use of data analytics. Without these data, companies are at risk of over-allocating resources to good performers, and under-allocating resources to poor performers. Understandably, many companies focus their efforts on strategic or well-performing suppliers; however, many industry leaders set aside a significant portion of their resources to handle their worst-performing suppliers—i.e., those with the greatest potential for improvement.

This prioritization of resources is consistent with a “risk-based approach” to supplier quality, wherein suppliers with higher risk attract greater attention and resources.

With an integrated supplier quality view, it is possible to develop “supply chain intelligence.” These data help companies identify the gaps and improvement areas within their supply bases. Most companies collect supplier data in one way or another, but few tie it together effectively.

Optimizing supplier quality infrastructure

Leading companies leverage a modernized and optimized supplier evaluation process which is driven by and feeds into their data analytics. These companies approach supplier evaluation in the same way that they approach their manufacturing environment—with an eye on quality and improvement.

It’s important to foster consistency in supplier quality tools and practices. This requires an emphasis on commonalities rather than differences. Leading companies look at how many tools can perform essentially the same thing, and how many of the same tools can be used differently. They look at sharing tools, resources, and results, and avoiding “doubling up” supplier audits.

Supplier audits are the result of many events involving multiple stakeholders inside and outside the company. An auditor on-site at a supplier location is but the tip of the iceberg. The steps involved in audit preparation include audit justification/prioritization, supplier liaisons, legal approvals, supplier history reviews, auditor coordination, and pre-audit briefings. Following the audit, there may be immediate action to be taken (in the case of critical findings), reports prepared, content reviewed, and corrective action managed through to closure.

By mapping this process, companies can find ways to optimize audit steps and roles (e.g., re-assigning auditors to more value-added activities rather than administrative tasks). In addition, supplier audits as a risk management tool can be made more effective (e.g., defining broader internal action based on poor supplier audit results).

In acknowledging that supplier audits are part of a larger governance process, companies will be able to map the process for control and improvement. The addition of checkpoints in the audit will allow companies to track the progress of the audit easily. Basic questions such as, “Has another division of our company already performed an audit we can use?” and, “Are there any areas that require added attention?” will help with auditor coordination and produce audit reports with more “teeth.”

For supplier quality management systems to be effective, it’s important that they are configured for both visibility and control of this process. It’s also possible to automate many parts of the process that have traditionally been manual (e.g., monitoring responses and escalation).

Broadening supplier evaluation

Companies want to optimize their supplier audit investments by increasing the scope of the audits. Quality audits, by definition, evaluate a supplier against a standard. They are essential—mandatory in many cases—and productive if done properly. But the main issue with these audits is that they often look at only one of the many management systems that affect business reliability and performance. Factors such as safety, human resources, risk management, capability, and strategic planning are generally not considered.

In keeping with a risk-based approach, broader supplier assessments are generally reserved for key strategic suppliers. Generally, suppliers are assessed not only for their use to a company, but also for improvement and enhanced partnership.

Companies that focus on enhancing the overall quality picture of their key suppliers achieve the benefits of a lower cost of quality through reduced “detection” costs (e.g., receiving inspections) and cost avoidance (e.g., recalls). They’re also better able to address critical issues in the company or industry. For example, in the healthcare industry, critical issues may include:
• Prevention of cross-contamination
• Documented process robustness
• Appropriate use of standards for materials and products based on specifications
• Change management
• Customer-complaint management

Managing corrective action needs

Just as with supplier audit programs, supplier corrective action requires a detailed and well-managed process. It should be viewed as an essential “second half” of the supplier control process—the first half being the evaluation.

There must be a robust—and ideally, highly automated—process for managing corrective actions, most of which should be happening at the supplier level. A good corrective action management process mimics the steps outlined in the chosen corrective action methodology—e.g., the eight disciplines (8D) problem-solving approach—with roles, actions, deadlines, and approvals embedded.

As in risk-based auditing, the extent of corrective action management will be a reflection of the risk and effect of the finding or cause. For high-risk findings or suppliers, it’s not unusual to see companies enforcing a “person in-plant” to assist with remediation planning and execution, or subject-matter expertise.

Good corrective action management extends beyond the boundaries of internal systems. Many leading companies package their supplier corrective actions with tools that help the supplier successfully close out the corrective actions. This starts with an explanation of what is required, including examples. Follow-up is predetermined, automated, measured, and if necessary, escalated.

Partnering for improvement

It shouldn’t come as a surprise to suppliers that they will be required to participate in a supplier evaluation program. This is a foundation for partnership and should be written into purchasing agreements, along with an agreed quality plan and expected performance level(s).

A mutual commitment to quality involves a greater exchange of quality-related data. Companies and suppliers should strive to capture the data once, and maintain a single “authoritative” repository that may be accessed (or integrated) as required.

Visibility is a byproduct of this shared approach. Suppliers see what is required of them and how they are doing, while internal stakeholders also see the same information. The most efficient way to collect critical data is by capturing it once at the source. That source is largely the suppliers, which ideally should feed performance information into a collaborative environment, allowing all stakeholders to access the information and use it as a basis for strategic decisions.

Suppliers that embrace this concept of taking responsibility for data collection at its source will find it to be a win-win scenario. They will improve and see more business, while their clients will see better quality and an overall reduced cost of quality.

Although some companies have introduced a supplier portal to facilitate purchasing transactions, few have taken it to the level of sharing quality data in both directions—e.g., providing multi-aspect supplier scorecards, self-assessments, and exchanges of everything from pre-audit background information to corrective actions.

Although sharing data is one example of supplier partnering, so too is sharing expertise. For instance, a supplier isn’t always going to know the right way to approach a remediation activity or improvement effort. Leading companies will match their supplier’s commitment to improvement with an equal commitment of technical resources (usually a quality engineer) and program resources. This ensures that the supplier has a clear road map, source of direction, and feedback. With direct involvement in the improvement process, leading companies will be better equipped to adapt to, or possibly influence, change in their supplier’s environment.

Recap

Supplier governance will always be challenging, given the pace of changes inside and outside the organization, and the limited resources available to control them. Companies can effectively manage these challenges by focusing on the following five supplier quality areas:
• Harnessing data
• Enhancing the supplier quality infrastructure
• Broadening the scope of supplier evaluation
• Managing supplier corrective action as a process
• Partnering with suppliers for improvement

As each of these five areas affect each other, it is best for companies to link them together to create a more integrated and effective system of supplier governance. In addition, partnering with key suppliers will help companies hit their goals of lower risk, improved supplier quality, and lower costs.

About The Authors

Gerard Pearce

Gerard Pearce is executive vice president of SQA Services Inc., a Los Angeles-based company specializing in global supplier quality management. Pearce has more than 20 years’ experience in combining the fields of quality, supply management, and technology. He published The Purchasing Revolution in 1999 and served on the committee of the World Congress of the International Federation of Purchasing and Supply Management. He is heavily involved in shaping and implementing the global outsourcing quality strategy for SQA’s Fortune 500 clients in a variety of industries, including medical device, pharmaceutical, aerospace, and high technology. 

Phil Jamison

Phil Jamison is the solutions manager, professional services at MetricStream Inc., developer of enterprisewide governance, risk, and compliance (GRC) and quality solutions in Palo Alto, California. He has more than 30 years experience in supplier quality engineering and management. He developed and implemented strategic supplier quality processes and tools for major contract manufacturing companies and holds Green Belts in design for Six Sigma, Six Sigma, and lean Six Sigma. Jamison has traveled the world conducting supplier audits, implementing corrective actions, and training suppliers in process improvement techniques.