SUPPLIER DEVELOPMENT NEWSLETTER. investing in competitive advantage

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1 SUPPLIER DEVELOPMENT investing in competitive advantage This newsletter provides an overview of supplier development, based on knowledge gained in numerous assignments. The seven most important supplier development tools are introduced. A case example illustrates how to assess the status quo of supplier development in an organization. The case describes how to take the organization to the next level, based on internal and external best practice. The newsletter is concluded by addressing some of the prerequisites of supplier development such as A well-defined core competence mapping and technology strategy Supplier evaluation methods to ensure the right choice of suppliers and the appropriate level of co-operation Sound contract agreements to govern close supplier co-operation The trend to streamline operations to excel at core competencies and outsource non-core activities is unbroken. The value added by automotive companies has now fallen to a level below %. This emphasizes the importance of developing and maintaining a capable supplier base. Solving supply problems developing suppliers are often the best solution If problems arise in the supply chain due to suppliers not delivering according to requirements, there are in principle three alternatives to proceed: Find a new supplier Do it yourself and in-source Develop the supplier As the number of capable suppliers with specific competences especially when delivered components are complex is often limited and switching costs are high, a supplier switch is often not feasible or advisable. Contradicting and reversing implemented Make-or-Buy strategies is only a last resort, takes time and is likely to increase costs. Developing the supplier to be able to work with your company is in most cases the most promising way forward. Knowing from experience that the suppliers that you invest in usually are the ones to cause you the least problems in the long run should also motivate this step. As suppliers usually benefit both in terms of strengthened strategic relationships and sharing of benefits, this co-operative approach should also be the most promising one for them. Investing in supplier development avoiding competitive and supply chain risks Supplier development is however not easy. Having a clear core competence and technology strategy is necessary. A solid evaluation of your suppliers capabilities and potential is another prerequisite to apply the supplier development efforts in the right areas. Finally, a supplier development organization with methodicallyand technically competent personnel is needed, and the right processes and tools must be established. Supplier development requires the investment of time and money to realize benefits in the long-term. This requires true commitment from management, both at the buyer and the supplier. Not investing in supplier development or failing to do it successfully does in turn lead to substantial risks. Likely consequences of failing to monitor and develop suppliers are: Not realizing cost advantages (e.g. from low cost country sourcing) Supply quality issues due to faulty components and ultimately high quality assurance costs Production interruptions due to no or bad delivery High non-conformity costs (e.g. scrap, rework, warranty costs, lost reputation and sales) Q

2 7 SUPPLIER DEVELOPMENTTOOLS USING THE PROVEN APPROACHES Leaders in manufacturing industry are working systematically with supplier development. According to Triathlon experience seven supplier development tools are within the toolboxes of the best-in-class companies. Tools covering the product life cycle focus on early phases The seven supplier development tools cover the complete product life cycle, which is shown in Figure. Risk analysis (FMEA) activities at the initiation of product development projects are an example for the use of early phase tools. In later stages of the product lifecycle, e.g. value analysis can be applied to improve the products and cut costs. However, most of the tools are not exclusive to specific lifecycle stages and can with slight adjustments be applied with success in different stages. APQP & PPAP Collaborative product and manufacturing process development Both APQP and PPAP aim to prevent costs due to late problems in development and industrialization. Advanced Product Quality Planning (APQP) is a framework of methods and processes (e.g. FMEA) used to develop products. APQP serves as a guide in the development process and enable collaboration between suppliers and buyers. The Production Part Approval Process (PPAP) is the hard proof of APQP. It principally involves gathering of all data generated throughout the APQP, presenting it according to prescribed method and format for review. Supplier Evaluation Model Assessing supplier capability The supplier evaluation has the purpose to assess the supplier capabilities to develop and produce according to the needs and requirements specified. Different areas of competence are assessed against generic requirements, and rated according to specified principles. Supplier Make or Buy Studies Ensuring supply according to capabilities Having suppliers to perform a make or buy assessment on parts of the product / component that they supply has proven to improve quality and cost. It is in some cases beneficial to let parts of the supplied product be manufactured by another sub-supplier, or letting the buying organization source this part for its supplier. Managing performance Measuring quality Performance management activities include measuring quality (e.g. PPM), keeping supplier scorecards, conducting audits and escalating poor performance according to a defined process. Supplier performance / cost seminars Taking action in case of poor performance Suppliers that are repeatedly showing poor performance are invited to workshop activities. Using quantitative data, checklists, root cause analysis and other methods, the reasons for poor performance are investigated. Plans detailing corrective actions are defined and a follow-up procedure is agreed upon. 6 Production Improvement processes giving expert advice Supplier development organizations who give advice to their suppliers on-site have been able to reduce production cost, increase quality and realize collaborative benefits. Realizing such collaborative benefits requires experience and qualified supplier quality engineers with a thorough understanding of lean methods. In addition, knowledge of the technologies and manufacturing processes within the supplier s domain is essential. 7 Value analysis Improving the cost / performance ratio together Value analysis is about performing function cost analyses and improving the cost performance ratio, e.g. through concept adaptations, down-specification or streamlining of production processes. Implementation Making it work in your organization Although there are many successful cases of tool implementations to learn from, none of the described tools will work off-the-shelf. The right choice of tools, and the tool and process design depend on the maturity of your supplier development organization, the nature of relationships with your supplier and the specific business challenges. An example of an assessment of maturity is outlined on the next page. New product New supplier New project. Managing performance Product life-cycle. Supplier make or buy studies 7. Value analysis. Supplier performance / cost seminar Maintenance phase 6. Production improvement process Figure : Seven SD tools in the product lifecycle. Supplier evaluation model. Supplier make or buy studies. APQP & PPAP R&D phase Q

3 Increasing the maturity of supplier development Leveraging internal and external best practice Many organizations use some or even all of the seven main supplier development tools. The maturity of supplier development practice, i.e. the use of the tools and the quality of implementation, vary however not only between organizations but also between business areas and sites inside a single company. Triathlon has developed a benchmarking methodology starting with a quick maturity assessment. The assessment is for many clients followed by the development and implementation of the best elements of internally developed practice and acknowledged external best practice to increase supplier development performance. Supplier Development Maturity World class Efficient Improved rations are often geographically spread. In such an environment the maturity of supplier development activities and the tools employed are often widely varied. The activities are not up to par with acknowledged SD Maturity Supplier evaluation APQP & PPAP Production improvement process Supplier performance/cost seminar Site Site external best practice. For a client in such a situation, Triathlon assessed the maturity of methods, practices and tools used throughout the European operations using the maturity levels presented in Figure. Assessing maturity making the benchmark For the previously mentioned client Triathlon performed a quick maturity assessment based on Triathlon benchmarks in the use of the seven main supplier development tools and practices in the organization. All European sites were audited and benchmarked, as exemplified in Figure. This quick maturity assessment is equally applicable to other companies. The maturity levels are based on known industry standards and best practice that Triathlon has observed in its assignments. After the quick assessment, Triathlon concluded potential for improvements in several of the development tools before obtaining best practice levels. Digging deeper identifying good practice The analysis went one step deeper, however. For each of the seven supplier develop- Site Site Site Site Site Site Site APQP Maturity Design review Flowchart Design and Process FMEA* Control plan Starting out varied levels of maturity in the organization Organizations are often active in different business areas and serve different client groups and industries. In addition, the opement tools, the audit was based on several performance criteria. The audit therefore quickly showed in which parts of the supplier development tools the organization had good or even best practice, even though the overall maturity score for the tool in question was average. See Figure for an example. Developing the tools applying a best of benchmark approach Based on the scores in the performance parameters per tool, good internal solutions could be identified. These best of benchmark building blocks could then be used as a basis for further tool development. The areas that were weaker in performance could be complemented with external best practice building blocks based on Triathlon experience. Making it stick deploying the toolset The very competitive toolset could be deployed using detailed tool descriptions, a supplier development handbook and comprehensive training sessions with practical examples. Site Site Site Site Site Site Site Site Site Controlled Established Supplier make or buy studies Value analysis Managing performance Site... Site Site... Work and inspection instruction Measurement System Analysis Statistical Process Control Site Site Site Figure : SD process maturity levels Figure : Maturity of SD tools per site Figure : Good practice elements in a specific SD tool Q

4 SUPPLY STRATEGY Applying the lever at the right angle Supplier development efforts are time- and resource consuming and they often have longterm pay-offs. Therefore, the efforts must be chosen with care, i.e. the supplier development levers must be applied in the right place. First, a clear core competence and technology strategy is needed to decide in which areas to engage. Second, methodical supplier evaluation will help to identify the suppliers with development potential. Third, the right level of co-operation with the suppliers in the supplier base must be decided. Fourth, an appropriate contractual framework must govern the relationship with the suppliers. Competence areas Figure : Core and non-core competence areas Systems Sub-systems Components Parts Core Non-core Core competence and technology strategy knowing where to engage yourself A thoroughly prepared core competence analysis, as well as a well thought-through core competence and technology strategy are essential for focusing supplier development on the suppliers of core components and technology. A core competence analysis is usually done by a cross-functional team involving for example product management, product development, sales, and sourcing. The aim is to differentiate core competence areas to strategically engage in from noncore areas that do not warrant the same level of engagement. The principle is shown in Figure. Many OEMs and engineering companies have their core competence mainly on system level. However, there are core technologies and components on a lower level in the system architecture that are of vital strategic importance. Deep knowledge at the OEM and within their strategic supply alliances is required to secure a competitive advantage. An example for this could be knowledge in latest generation rugged, high performance circuit boards for companies in the defense sector. Being ahead in the development cycles in this area is an advantage that is hard to match for competitors, even with substantial effort. Supplier evaluation selecting the right suppliers The right suppliers to co-operate with in strategically important sourcing areas do not only need manufacturing competence. They must have a high level of technical competence, and the processes to develop technologies and components that fulfill the buyer s need. They must be active and have facilities in the right strategic markets. In addition, the suppliers need to have robust and stable supply processes, starting from their own supplier base, continuing to manufacturing and delivery. In-depth, on-site analyses by experts in different competence areas ranging from PD and project managers to manufacturing, supply chain and sourcing experts are usually required to validate initial pre-selections of suppliers to closely co-operate with. Areas to cover in a supplier evaluation are summarized in Figure 6. Degree of co-operation deciding how close to interact The relationships with suppliers will vary. From some suppliers parts will be sourced that are just manufactured according to the buyer s specification. Supplier development will focus on delivery capabilities in industrialization, manufacturing and delivery. With other suppliers however, relationships will stretch far into the development process and components will be developed by the supplier in close co-operation with the product development organization of the buyer. Contract framework building juridically sound relationships Engaging in supplier development activities and close supplier co-operation requires proper contractual agreements. Framework agreements must govern the boundaries of long-term relationships and set the fundamental rules. More specific agreements will then detail the individual cases of co-operation. Critical elements of the contracts are among others the handling of intellectual property rights and rules for sharing benefits that are achieved. If cost benefits are achieved through the buyer s engagement, there must be a clear guideline on how the buyer will participate in this benefit. Cost Competitiveness Sourcing & Supplier Base Manufacturing & QA Processes Project Management System Supply Global Footprint Figure 6: Areas of supplier evaluation Technology Management Product Development Financial & Market Performance Q

5 Triathlon Consulting Group Klippan A, SE- Göteborg Sweden Phone: +6 () 7 9 Fax: +6 () 7 9 Box 9 SE- Stockholm Sweden Phone: +6 () Triathlon Consulting Group Triathlon is a growing management consultancy dedicated to strategy, operations and finance with a prestigious track record. Our clients are large and medium-sized companies within the manufacturing, high-tech and professional service industries. By combining innovation and best practice, we develop distinctive and substantial value to our clients through long-term relationships and genuine understanding of their business needs. In our assignments we preferably work in teams together with client personnel so that we transfer our knowledge to the client organization. Strategy Developing strategies and governance to reach objectives Operations Improving operations by combining innovation and best practice Finance Setting up business structure and control to support strategy and operations Need a success story of your own? Triathlon develops your business Q