Assessing Critical Supplier Performance & Risks

Why Your Company Needs To do a Better Job of Supplier Evaluation… 5 BIG Reasons

Global Suppliers are Farther Away
Lead Times are Longer
JIT Eliminates Buffers
Less Inventory is In the Pipeline
Suppliers are Harder To Get To Know

Supply-Chain Disruptions Can Seriously Impact Long-Term Shareholder Value, Profitability & Share Price Volatility

Download Our GDI Supplier Assessment Practice - Business Development Presentation

Disruptions have a debilitating impact on performance and companies often do not quickly recover from disruptions. Companies continue to operate for AT LEAST two years at a lower performance level after experiencing significant supply-chain disruptions.

7% lower sales growth, probably the result of poor customer delivery performance that was ultimately caused by the raw material supply disruption
11% higher costs-of-goods
14% higher inventory
10.5% decrease in stock value in the year following the disruption with a lingering 1.77% decrease the second year after the disruption
In the year after the disruption, the share price volatility is 13.5% higher when compared to the volatility in the year before the disruption

Kevin Hendricks, Associate Professor of Operations Management at University of Western Ontario & Vinod R. Singhal, Professor of Operations Management at Georgia Institute of Technology

"Proactive & thorough due diligence of critical Suppliers is a new necessity in the global supply world where distances can be great, supply complexities can be even greater & consequences of poor supply can be devastating to the bottom line."

- Alan G. Dunn

Supply-Chain Disruptions

Could These Types of Disruptions Happen To Your Company?

Defense Industry Precision Machining Company

The Disruption:

The company had to accept the return of many machined components because they failed certain critical quality standards. The failures occurred not in production, but in the quality of the incoming raw materials. The failures were significant factors in the customer awarding subsequent years’ contracts to the company’s competitor.

Direct Causes of Supply-Chain Disruption:

While the company had an incoming inspection process, they had no way to tangibly and proactively assess their metal supplier’s manufacturing process. This resulted in batches of material being certified by their supplier as meeting metallurgical standards, when in fact, the batches didn’t meet specifications.

How Risks Could Have Been Managed:

The company failed to assess the supplier’s quality management process. If they did, they would have observed numerous process deficiencies and accordingly, would not have accepted the supplier’s certifications.

How GDI would probably have rated the Supplier:

Large Transportation Equipment Manufacturer

The Disruption:

The company’s sole source chassis supplier was on the verge of bankruptcy. The Supplier refused to ship chassis to its supplier without additional advanced payments, ultimately forcing our company to acquire the supplier at a premium price to resolve the problem.

Direct Causes of Supply-Chain Disruption:

The supplier was not economically viable. Its dysfunctional business model, excessive debt load, high union wage rates, and substantial inefficiencies mandated a bankruptcy. There was no other way to save the supplier.

How Risks Could Have Been Managed:

The company should have assessed the supplier’s economic viability YEARS before the problem became a problem. This would have allowed ample time to dual source the chassis.

How GDI would probably have rated the Supplier:

Automobile Manufacturer

The Disruption:

After the 1995 Kobe, Japan earthquake, virtually all this automobile manufacturer’s assembly plants in Japan had to shut down due to an inability to get brake-shoes from their sole-source supplier.

Direct Causes of Supply-Chain Disruption:

The company had trimmed its brake-shoe supply-chain to a single supplier without fully understanding the risks derived from such a supply model.

How Risks Could Have Been Managed:

The company failed to understand its supplier’s catastrophe management plans and capabilities. This should have been assessed BEFORE a multi-year supply agreement was negotiated.

How GDI would probably have rated the Supplier:

Global Electronic Assembly Company

The Disruption:

In 2000 and 2001, the entire world- wide electronics industry experienced a shortage of tantalum capacitors because a leading PC manufacturer began hoarding these devices at the same time new applications for tantalum capacitors developed in cell phone design. The company was forced to shut down entire product lines in their contract manufacturing business.

Direct Causes of Supply-Chain Disruption:

Supply effectively dried up overnight because the company did not understand the world-wide growing need for one of its critical components. This forced the company to redesign the $0.25 capacitor and replace it with a $1.25 alternate part. This resulted in a 5- fold increase in capacitor costs as well as a significant shipping shortfall in 2000 & 2001.

How Risks Could Have Been Managed:

The company failed to understand the tantalum capacitor industry’s volume ramp-up as a result of new demands for old products. If they understood this, they could have begun their redesign efforts sooner when they had time on their side. Perhaps they could have discovered an alternate part that was less expensive than the replacement part they quickly and unfortunately, had to settle with.

How GDI would probably have rated the Supplier:

Global Cell Phone Manufacturer

The Disruption:

In 2000, The company failed to ship >$1.1 billion in cell phones because a fire at a semiconductor supplier’s plant seriously disrupted the company’s inbound materials and production.

Direct Causes of Supply-Chain Disruption:

The company had trimmed its supplier base and did not establish appropriate safety stocks to buffer emergencies in a buffer-less manufacturing environment. Further, the company did not insist that their supplier maintain consigned inventory stocks in a building separate from manufacturing.

How Risks Could Have Been Managed:

The company failed to understand the supplier’s internal manufacturing points-of-disruption. If they did, they could have rationally determined the safety stocks needed to adjust for the quantified risks. This should have been assessed BEFORE a supply agreement was negotiated.

How GDI would probably have rated the Supplier:

Precision Measurement Equipment Manufacturer

The Disruption:

The company had to shut down an entire factory and lose over two weeks of production because its power supply vendor was suffering cash-flow problems and could not pay their downstream suppliers. This in turn led to a shortage of critical components to their factory and ultimately missed deliveries to their customers.

Direct Causes of Supply-Chain Disruption:

The company reduced its power supply vendor base to two suppliers. The largest of the suppliers had economic viability issues. The smaller of the suppliers had ramp-up difficulties. The result was a significant and lingering shortage of parts, which ultimately resulted in a market share loss.

How Risks Could Have Been Managed:

The company failed to understand the weaknesses of each of these suppliers. Had they thoroughly assessed each of these suppliers, they would have adjusted safety stocks and perhaps given the smaller supplier more business to provide them with an incentive to scale up their production capabilities in times of emergency.

How GDI would probably have rated the Supplier:

Three Levels Of Assessment

GDI’s Unique Methodology to Comprehensive Supplier Performance & Risk Assessments… Structure, Formal & Clinical

Level-1:
Minimum Assessment

Supplier’s Economic Viability
Supplier’s Production Processes, Methods, Tooling, Equipment & Facilities
Supplier’s Management of Product Quality
Supplier’s Manufacturing Planning & Scheduling Capabilities
Supplier’s Inventory Management Capabilities
Supplier’s Purchasing Management Capabilities
Supplier’s Ability to Integrate with Customers
Supplier’s Logistics Management Capabilities
Supplier’s Customer Service Capabilities
Supplier’s Leadership & Critical Support Teams Capabilities
Supplier’s Talent Management Capabilities
Supplier’s Catastrophe Planning & Management
Supplier’s Delivered Cost Information, including “Should-Cost” & “Could-Cost” Insights

Level-2:
Comprehensive Assessment

(added to Level-1)

Supplier’s innovation Sharing with Customer’s Capabilities
Supplier’s Product & Process Engineering Capabilities
Supplier’s Data Integrity & Information Sharing Capabilities
Supplier’s Suppliers Capabilities
Supplier’s Project Management Capabilities
Supplier’s Impacting Supplier Legal Issues
Supplier’s Human Resource Issues

Level-3:
Progressive Assessment

(added to Levels 1 & 2)

Supplier’s Corporate Citizenship
Supplier’s DEI Stewardship
Supplier’s ESG Stewardship
Supplier’s Climate Change Stewardship
Supplier’s Corporate Governance & Ownership

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Assessment Deliverables

Specific Deliverables at the End of the Assessment (4 Volumes)

FOUR “volumes” are completed in each Comprehensive Supplier Risk & Performance Assessment. Our client receives three of the volumes. The assessed Supplier receives the 4th volume.

Comprehensive Supplier Risk & Performance Assessment Example

Volume 1… Executive Summary – Supplier Risk Profile.

This volume summarizes the Supplier’s risk profile and describes how the Supplier scored in each of up to 25 risk categories. A summary of our recommendations for modifying the terms of conditions between our client and the Supplier is also provided.

Volume 2… Economic Analysis of Supplier.

This volume provides an in-depth analysis of the Supplier’s economic condition and risks driven from that condition. We provide this as a separate volume due to the confidential nature of the information.

Volume 3… Comprehensive Supplier Risk & Performance Assessment.

This volume provides the details behind our assessment in each of the 23 performance and risk categories. Within each category, we describe the diagnostic routines we executed, the methods of interpretation and a summary of critical risks

Volume 4… Unbiased Supplier Improvement Plan.

This volume summarizes our findings in a manner that the Supplier can understand and build an improvement plan from. Since we compete a thorough analysis of the Supplier, it seems only reasonable that the Supplier should be left with a summary of their risks and some suggestions for making them a better Supplier to our client.

Each volume is professionally indexed, printed and bound.

Samples of Supplier Assessment Engagements

Where the Global Supplier Action Is & Where We Have Experience:

Manufacturer of Critical Railroad Support Products

Client’s Critical Supplier: Supplier of near-net-shape steel forging, located in south-east India.

Our Engagement: Performed a Level-1 Assessment.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented a “CRITICAL RISK” to our client. The supplier was retained but only after committing to significant investments in production planning systems, finished goods safety stocks, staffing improvements and implementation of shared performance metrics. Subsequently, the supplier’s on-time delivery increased from <60% to 98.4%. Client’s global inventories reduced by >₹13.2 million.

Manufacturer of Commercial Airplanes

Client’s Critical Supplier: Supplier of precision machined landing gear bearings and seals, located in Brazil.

Our Engagement: Performed Level-1 Assessment.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented a “MANAGEABLE RISK” to our client. The supplier was retained after committing to moderate investments in deployed finished goods safety stocks and a small reduction in price, resulting in an inventory reduction exceeding R$40 million, and a COGS reduction of >3%.

Large Producer of Corrugated Paper Products

Client’s Critical Supplier: Supplier of mixed pulp used in manufacturing brown paper base, located in western Canada.

Our Engagement: Performed Level-1 Assessment.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented a “MODERATE RISK” to our client. The supplier was retained after committing to moderate investments in centralized safety stocks, new and retrained staff in logistics planning, an upgrade in shipping vessels, and quarterly firm pricing. These supplier improvements reduced our client’s inventories by >7% and inbound logistics costs by approx. 15%.

Multinational Lubricants Producer

Client’s Critical Supplier: Supplier of critical solvents and preservation chemicals used in manufacturing of mission-critical petroleum-based lubricants, located in southern Texas.

Our Engagement: Performed Level-1, Level-2 and ½ of Level-3 Assessments.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented a “MINOR RISK” to our client. The supplier was retained after committing to some additional pre-ship testing, resulting in elimination of rejects in the client’s receiving function. This excellent supplier was also allowed a .90% price increase to cover the new testing costs.

Multi-National, Multi-Plant Manufacturer of Machined Polycarbonate Products

Client’s Critical Supplier: Supplier of pelletized glass-filled polycarbonate raw materials. Our assessments took us to 6 plants in Australia, China, Indonesia, and Spain.

Our Engagement: Performed Level-1 & Level-2 Assessments at each of 5 supplier plants.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented a “CRITICAL RISK” to our client. The supplier was retained after committing to reducing our client’s supply to just two plants (the highest performing and least risk plants), down from six plants. The client also agreed to establish two safety stock locations in the U.S. and one in Europe near our client’s manufacturing plants, resulting in a reduction of >€166million in deployed inventory. Prices were held stable for three years and the client was awarded a three-year supply agreement, resulting in >3% reduction from budgeted purchasing spend.

Manufacturer of Semiconductor Manufacturing and Test Equipment

Client’s Critical Supplier: Supplier of milled quartz, located in Turkey.

Our Engagement: Performed Level-1 & Level-2 Assessments.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented a “SUBSTANTIAL RISK” to our client. The supplier was terminated and replaced due to an inability to improve its performance and reduce its supply risk. Our client received a ₺23.55 million rebate for unused inventories due to supplier’s late deliveries.

Medical Device Manufacturer

Client’s Critical Supplier: Supplier of micro-miniature electric connectors, located in Tijuana & Mexicali, Mexico.

Our Engagement: Performed Level-1 Assessments at each of 2 supplier plants in Mexico.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented “No RISK” to our client. The supplier was retained and awarded a three-year supply agreement. As a courtesy, our client provided the supplier with operational improvement ideas that our consultants identified.

Pharmaceutical Manufacturer

Client’s Critical Supplier: Supplier of insipient ingredients, located in Almaty, Kazakhstan.

Our Engagement: Performed Level-1 Assessment.

Engagement Results: Utilizing our proprietary Supplier Risk Continuum^SM, this supplier presented a “MANAGEABLE RISK” to our client. The supplier was retained after committing to increase consigned safety stocks at each of our client’s factory sites, resulting in >€18.0 million in inventory reductions. Also, supplier committed to shipping in sterile bulk containers resulting in >€4.7 million annual logistics savings.

Assessing Critical Supplier Performance & Risks

Why Your Company Needs To do a Better Job of Supplier Evaluation… 5 BIG Reasons

Supply-Chain Disruptions Can Seriously Impact Long-Term Shareholder Value, Profitability & Share Price Volatility

Supply-Chain Disruptions

Three Levels Of Assessment

Assessment Deliverables

Samples of Supplier Assessment Engagements

Manufacturer of Critical Railroad Support Products

Manufacturer of Commercial Airplanes

Large Producer of Corrugated Paper Products

Multinational Lubricants Producer

Multi-National, Multi-Plant Manufacturer of Machined Polycarbonate Products

Manufacturer of Semiconductor Manufacturing and Test Equipment

Medical Device Manufacturer

Pharmaceutical Manufacturer

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