SUPPLIER PERFORMANCE MANAGEMENT A CASE STUDY OF A MANUFACTURER

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1 International Journal of Management (IJM) Volume 6, Issue 10, Oct 2015, pp , Article ID: IJM_06_10_004 Available online at ISSN Print: and ISSN Online: IAEME Publication SUPPLIER PERFORMANCE MANAGEMENT A CASE STUDY OF A MANUFACTURER Vignesh Ravichandran Bachelor of Engineering, Mechanical Engineering PSG College of Technology, Coimbatore, Tamil Nadu-India Pradip Kumar Krishnadevarajan Research Scholar, Karpagam University, Coimbatore, Tamil Nadu-India Assistant Director, Global Supply Chain Lab, Texas A&M University, USA S. Balasubramanian Professor, Department of Mechanical Engineering University, Rathinam Technical Campus, Coimbatore, Tamil Nadu-India N. Kannan Professor, St. Mary s School of Management Studies, Chennai, Tamil Nadu-India ABSTRACT Supplier performance management is a critical area of focus for various companies. Managing suppliers effectively can help with better return on inventory, drive profitable growth and impact customer service. This paper is a case study of a manufacturer with a broad line of innovative and technologically superior compressed air systems. The case study applied draws its methodology from Pradip Kumar Krishnadevarajan, Vignesh Ravichandran, S. Balasubramanian and N. Kannan. Supplier Management: A Framework for Selection, Evaluation and Performance, International Journal of Management, 6(9), 2015, pp Key words: Supplier, Supplier Management, Scorecard, Performance Management, Selection, Evaluation, Relationship Management, Key Performance Metrics, Framework. Cite this Article: Vignesh Ravichandran, Pradip Kumar Krishnadevarajan, S. Balasubramanian and N. Kannan. Supplier Performance Management A Case Study of A Manufacturer, 6(10), 2015, pp editor@iaeme.com

2 Supplier Performance Management A Case Study Of A Manufacturer 1. INTRODUCTION The case study in this paper is about a pressure vessel division of an air compressor manufacturer in India. The company is a leading air compressor manufacturer with a broad line of innovative and technologically superior compressed air systems. The company offers a complete range of compressed air solutions from oil-lubricated and oil-free rotary screw compressors, oil-lubricated and oil-free reciprocating compressors and centrifugal compressors, to dryers, filters and downstream accessories. The pressure vessel division manufactures air receivers and air-oil separators for storing the compressed air. The pressure vessel division deals with two types of inventory; the inventory that appears in the bill of materials (BOM) and those that do not appear in the bill of material, known as the consumables inventory. For instance, items such as dishes, shells, pipes etc. are listed in the bill of material and also specified in the manufacturing drawing. Items such as welding wire, steel shots used in shot blasting, waste cloth etc. cannot be specified in the bill of material and get consumed in the manufacturing process. The entire consumables inventory and some of the items for bill of material inventory are directly procured from suppliers/vendors. 2. CHALLENGE The pressure vessel division purchases consumables from suppliers by striking a balance between cost and quality. The division purchases about 294 items from about 47 suppliers. As the manufacturer purchases items in large quantities and varieties from a wide range of suppliers, grading or analyzing the performance of every supplier is essential for the company to remain profitable. This is important for the company as inventory involves locking up of a substantial part of the capital investment (working capital). At present, the manufacturer does not have any elaborate method to track the performance of their suppliers except for tracking the lead time and order completeness. Production line stoppage is a key challenge and occurs due to the non-availability of inventory. This is due to the fact that there is always a certain level of expectation misalignment between the manufacturer and the supplier in issuing the complete order on-time. Measuring supplier performance is vital to the manufacturer as well as the suppliers. When the manufacturer tracks their suppliers based on key metrics, they can differentiate between a reliable and a relatively poor performing supplier. The manufacturer will certainly be tied to the more reliable supplier in terms of business expansion and growth. For instance, the company may analyze various suppliers based on their lead time and on time delivery. In order to insure against the uncertainties, the company may purchase a critical item such as welding wire, from more than two suppliers. In this case, ranking suppliers based on certain criteria will prove to be useful for the company. If a supplier is found to exceptional based on the metrics, they can reduce or eliminate the number of duplicate suppliers (supplier rationalization or determine the right number of suppliers). This will also help them reduce costs and obtain larger discounts from suppliers by increasing their purchase volume (spend). Further, sharing the results with suppliers will help them identify their relative standing. Although the suppliers meet their manufacturer representatives on a monthly basis, due to lack of proper tracking methodology, the manufacturer is unable to convince suppliers about their shortcomings. In order to retain their competitive edge and to remain profitable, categorization of their suppliers is required editor@iaeme.com

3 Vignesh Ravichandran, Pradip Kumar Krishnadevarajan, S. Balasubramanian and N. Kannan 3. SOLUTION FRAMEWORK The proposed solution for the manufacturer is discussed in this section. Although the manufacturer captures and records the data necessary for supplier analysis based on various parameters as mentioned earlier, until now, there has not been any structured classification of their suppliers, except that they are monitored for their committed lead time. The framework used by the company is drawn from Pradip Kumar Krishnadevarajan, Vignesh Ravichandran, S. Balasubramanian and N. Kannan. Supplier Management: A Framework for Selection, Evaluation and Performance, International Journal of Management, 6(9), 2015, pp FRAMEWORK CUSTOMIZATION For any company that is undertaking this exercise for the first time, ranking their suppliers on all 32 factors may not be possible. It may not be necessary for the company to rank the suppliers based on all the metrics, as it may be irrelevant for them. Hence, the factors and metrics mentioned in the solution framework (Pradip Kumar Krishnadevarajan, Vignesh Ravichandran, S. Balasubramanian and N. Kannan, 2015) are treated as a guideline in performing supplier analysis and management. Category Convenience Customer Service Financial Growth Innovation Inventory Quality Risk Illustration 1: Supplier Framework for the Air Compressor Manufacturer Critical Data Available Reliable Online Ordering Services and Technical Support On-Time Index Order Completeness Lead Time Shipping Variability Order Visibility and Tracking Hits (Number of Orders)** Number of Stock-outs Spend (Cumulative) Spend (Individual)** Return Policy Gross Profit % Gross Profit Currency Payment Terms and Discounts Quote Responsiveness On-Time Invoicing Index Product Penetration Growth (Spend) Growth (Spend Trend) New Product Contribution New Products Forecast Assistance Inventory Turns Inventory Rank and Slow Move Items Reverse Inventory Potential Gross Margin Return On Inventory Investment Inbound Accuracy Inbound Quality Invoice Correctness Number of Customers Warranties Price Visibility Pricing Variability Factors / Metrics Qualification Process editor@iaeme.com

4 Supplier Performance Management A Case Study Of A Manufacturer The availability of data is the most basic criteria for analysis. As supplier analysis is performed for the first time, the scope of analysis is limited by the non-availability of data. With the available data suppliers are analyzed based on the following metrics. Also these metrics align with the short term goals of the company. The suppliers are analyzed under three categories namely, customer service, financial and growth (highlighted in illustration 1). Under customer service, suppliers are ranked based on lead time, shipping variability, on-time index and order completeness. Under financial, they are ranked based on spend (Cumulative and individual spend). The other factors are not considered because, either impertinent to the short term goals or there is no data available for consideration. Under growth, the factors considered are hits and product penetration. The solution framework has been customized for the pressure vessel division as shown in illustration 1. There are a total of 34 factors (metrics) in illustration 1. It can be noticed that two new factors are added to the original framework (Pradip Kumar Krishnadevarajan, Vignesh Ravichandran, S. Balasubramanian and N. Kannan, 2015) that had 32 factors. The two new factors that the pressure vessel division of the air compressor manufacturer added are hits (numbers of orders to each supplier) and spend (currency spent with each supplier). The factors are first qualified using a 2-step approach prior to applying the supplier management framework. Available The first step is to see if data is available for a particular factor. In illustration 1, data for Pricing Visibility and Variability is usually not tracked in the system consistently. Data for this factor is often not available. Hence, these two factors do not qualify for the next step in the qualification process. Reliable The second step is to see if the factor applies to all suppliers and also see if the factor can be used. Take quote responsiveness, for instance, if only 10% of suppliers provide quotes on a routine basis then 90% of suppliers might be penalized if this metric is used as part of the supplier management framework. Data is critical and available but in this case not reliable. 3.2 SUPPLIER ANALYSIS The ranking factors, criteria and weights are shown in illustration 2. Illustration 2: Ranking Factors, Criteria and Weights Category Factors / Metrics Ranking Criteria A B C D On-Time Index =100% 75%-85% 50%-75% <50% 20% Factor / Metrics Weight Category Weight Customer Service Order Completeness =100% 50%-99% 25%-50% <=25% 20% Lead Time <3 Days 3-6 Days 6-9 Days >=9 Days 30% 100% 50% Shipping Variability 0-25% 25%-50% 50%-75% 75%-100% 30% Financial Spend (Cumulative) Top 80% Next 10% Next 5% Last 5% 75% Spend (Individual) >10% 5%-10% 1%-5% <1% 25% 100% 30% Hits (Number of Orders) >= <10 60% Growth 100% Product Penetration >35% 10%-35% 2%-10% <2% 40% 20% 21 editor@iaeme.com

5 Vignesh Ravichandran, Pradip Kumar Krishnadevarajan, S. Balasubramanian and N. Kannan Customer Service Under the customer service category (illustration 2), the factors considered are lead time (average), shipping (lead time) variability, order completeness and on-time index. Lead time is found by averaging the recorded lead time for various deliveries of a supplier over a period of 1 year. Shipping variability is found by dividing the standard deviation of lead time with the average lead time. Order completeness is measured by dividing the received quantity by the total quantity ordered. On-Time index is determined by dividing the number of on time or earlier deliveries by the total number of deliveries. The suppliers are ranked as A, B, C or D based on the following criteria. For lead time, the suppliers with average lead time less than 3 days are ranked A, between 3 and 6 days as B, between 6 and 9 days as C and more than 9 days as D. Similarly, the suppliers with shipping variability less than 25% are ranked A, 25% - 50% as B, 50% - 75% as C and greater than 75% as D. The suppliers with on-time index of 100% are ranked A, 75% - 85% as B, 50% - 75% as C and less than 50% as D. Similarly, the suppliers with 100% order completeness are ranked A, 50% - 99% as B, 25% - 50 % as C and less than or equal to 25% as D. The relative importance of the ranks are A 40% B 30% C 20% and D 10%. In order to determine a single rank for each supplier, relative weights are attached to the various metrics and combined into a single final rank. The weights used in this case are, lead time and shipping variability 30% each and order completeness and on-time index 20% each. The reason for giving more weights to the first two factors is that the performance of the supplier in those factors is directly related to the level of inventory that the company needs to maintain. Financial Under financial category (illustration 2), suppliers are analyzed based on cumulative spend (currency) and individual spend. The cumulative spend is determined and the suppliers are ranked as A, B, C or D based on the following criteria. The suppliers who contribute to 80% of the spend are ranked A, next 10% as B, next 5% as C and the last 5% as D. Similarly, the suppliers whose individual spend is greater than 10% are assigned the rank A, 5% - 10% as B, 1% - 5% as C and less than 1% as D. The relative importance of the ranks are A 40% B 30% C 20% and D 10%. In order to obtain a single rank for financial category, the cumulative spend is assigned a weight of 75% and individual spend is assigned 25%. The reason for higher importance to cumulative spend is to focus on suppliers with whom the company spends 80% of the total amount spent. Growth Under growth (illustration 2), suppliers are ranked based on hits and product penetration. Hits represents the periodicity or the number of times a given supplier is accessed in the period under consideration. Product penetration indicates the level of involvement of the supplier with the company; the ability of a supplier to supply a variety of items. Hits are determined by the number of invoices of a supplier in the period under consideration. Product penetration is determined by dividing the number of products supplied to the total number of products the company buys from all their suppliers. Suppliers who are accessed more than 20 times a year are assigned rank A. Similarly, the suppliers with hits from times are assigned B, times C and less than 10 times D. Suppliers with product penetration percentage of greater than 35% are ranked A, 10% - 35% B, 2% - 10% C and less than 2% D. The relative importance of the ranks are A 40% B 30% C 20% and D 10%. To obtain a 22 editor@iaeme.com

6 Supplier Performance Management A Case Study Of A Manufacturer single growth rank, hits and product penetration are given weights of 60% and 40% respectively. A higher emphasis is placed on hits, because, it is important for the company to promote the suppliers who are accessed often, as they are considered more reliable and the product they supply has high demand. Although product penetration is assigned a lower importance, this factor is important to the company in order to rationalize suppliers and aggregate the spend currency, as it would be convenient for the company if a supplier is able to provide a broad range of products. The final rank is obtained by assigning weights for the three categories namely, customer service, financial and growth. In this case, customer service is assigned a weight of 50%, financial 30% and growth 20%. Customer service is given more importance due to the fact that the factors in the category are most important for the company to meet customer demand. As mentioned earlier, those factors directly affect capital that is locked up in inventory. For instance, if majority of the suppliers have high shipping variability, safety stock levels would increase, which directly increases the spend. Financial comes next in the order of importance with 30% weight. Financial is the next major concern as the company will need to concentrate on the suppliers who contribute to a major portion of spend. This is important for the company to remain cost effective. Finally, growth is given 20% weight. Although an important factor, growth is given less importance, as this is the first time the company is undertaking the exercise of ranking their suppliers. The importance of growth will increase as the company performs this exercise consistently. The final supplier score is determined in a similar way as explained in the solution framework. The ranking criteria are summarized in illustration CORRELATION ANALYSIS Correlation analysis is performed among all eight factors considered for supplier ranking. A high positive correlation of 92% exists between hits and product penetration. This signifies that the suppliers who are accessed more number of times during a given period are the suppliers who supplied most of the items purchased from various suppliers. A high negative correlation of 98% exists between individual spend and cumulative spend. This signifies that the suppliers with high cumulative spend have low individual spend. The results of the correlation analysis are summarized in illustration 3. Illustration 3: Correlation Analysis of Factors Used for Supplier Ranking FACTORS Lead Time Shipping Variability Order Completeness On-Time Index Product Penetration Spend (Cumulative) Hits (No. of Orders) Spend (Individual) Lead Time 100% Shipping Variability 3% 100% Order Completeness 9% 5% 100% On-Time Index 13% -21% 26% 100% Product Penetration -4% 32% 2% -2% 100% Spend (Cumulative) 13% -37% -5% 15% -16% 100% Hits (No. of Orders) -3% 39% -1% 0% 92%** -38% 100% Spend (Individual) -9% 38% 5% -15% 25% -98%*** 47% 100% ** - A POSITIVE correlation exists between "His" and "Product Penetration" *** - A NEGATIVE exists between "Spend (Individual) and "Spend (Cumulative)" 23 editor@iaeme.com

7 Vignesh Ravichandran, Pradip Kumar Krishnadevarajan, S. Balasubramanian and N. Kannan 3.4 SKEWNESS ANALYSIS The result of the analysis is said to be skewed if the suppliers are concentrated in any one or two of the ranks. In case of order completeness, the suppliers obtained either A or D ranks. None of the suppliers are ranked as C or D. This indicates that the ranking based on order completeness is skewed. The ranking based on product penetration is also skewed. Out of 47 suppliers under study, only one each have obtained A and B ranks. The rankings based on other factors have been distributed fairly well among the four ranks and are not skewed. The summary of correlation analysis is shown in illustration 4. Illustration 4: Skewness Analysis of Individual Factor Ranks Category Customer Service Financial Growth Factors / Metrics Number of Suppliers by Rank A B C D On-Time Index Order Completeness Lead Time Shipping Variability (Customer Service) Spend (Cumulative) Spend (Individual) (Customer Service) Hits (Number of Orders) Product Penetration (Customer Service) FINAL SUPPLIER RANK TOTAL NUMBER OF SUPPLIERS FINAL RESULTS The results of the analysis are shown in illustration 4. It can be seen that in the customer service category there are no suppliers with rank D. About 87% of the suppliers have obtained either A or B ranks. This shows that the performance of the suppliers as per the criteria set by the company is satisfactory in this category. The results will vary if the criteria are made much more stringent in future analyses. In the financial category, majority (about 66%) of the suppliers have obtained either C or D ranks. This shows that majority of the suppliers contribute to the last 10% in the cumulative spend and less than 10% of the individual spend. Careful consideration reveals that about 34% of the suppliers account for about 90% of the cumulative spend and greater than 5% of the individual spend. 34% of the suppliers account for a substantial portion of the amount spent on inventory by the company. Under the growth category, about 57% of the suppliers have obtained C or D ranks. This reveals the buying pattern of the company over time. The company has accessed majority of the suppliers for less than 15 times in a year. This shows that either the company has duplicate suppliers for a single product or the company buys items in large quantities to reduce the carrying cost. Also the suppliers who have been accessed less number of times are those who are unable to offer a broad product range. Only few suppliers are able to supply a variety of products demanded by the company. Finally, considering the overall rank, about 76% of the suppliers have obtained C or D ranks and 24% of them A or B ranks. These results are not much encouraging as majority of the suppliers have not performed well under the given criteria. Although the suppliers have done well in customer service, their ranks in other categories have affected their overall performance significantly. Illustration 5 shows the relationship between 24 editor@iaeme.com

8 Supplier Performance Management A Case Study Of A Manufacturer number of suppliers and percentage of total spend. It can be inferred that about 77% of the suppliers with C or D ranks account for about 66% of spend and 24% of the suppliers with A or B ranks account for 33% of the spend. This result is not according to the principle. Furthermore, the company spends substantially more on the suppliers who do not perform well and vice versa. Illustration 5: Final Results Number of Suppliers Percentage of Total Spend 48.9% 64.1% 24.8% 27.7% 8.5% 14.9% 8.4% 2.7% A B C D 3.6 DASHBOARD Illustration 6 shows an interactive dashboard created to view the results. When a supplier number is selected from the dropdown list, the dashboard displays the details of the ranks and the values obtained by the supplier in each vertical and also the final rank of the supplier. The factors and the weights assigned are also displayed. Illustration 6: Supplier Management Dashboard 25 editor@iaeme.com

9 Vignesh Ravichandran, Pradip Kumar Krishnadevarajan, S. Balasubramanian and N. Kannan 3.7 STRATEGIES AND DISCUSSION The results of the analysis have shown that majority of the suppliers have obtained either C or D ranks. Furthermore illustration 5 reveals that the company spends a substantial amount (spend) on such suppliers. This is not a good condition for the company that wishes to remain competitive by cutting down costs. The company needs to improve spend with suppliers ranked either A or B, so that they account for 80% of spend. The company should take cognizance of the fact that about 50% of the suppliers have obtained the rank C. Such suppliers have the probability of being shifted from C to B if they improve their performance considerably. These results need to be shared with the suppliers, briefing them on the methodology adopted and the criteria employed for mutual benefit and profitability of both parties. 4. CONCLUSION This analysis serves as a starting point for supplier management in the company. The results when shared with the suppliers will help them understand and set their business priorities. The suppliers also are given a chance for introspection. This will lead to a substantial improvement in the supplier company relations. The company will now be able convince the suppliers using an objective-data driven approach and demonstrate the areas that need improvement. REFERENCES [1] Pradip Kumar Krishnadevarajan, Vignesh Ravichandran, S. Balasubramanian and N. Kannan. Supplier Management: A Framework for Selection, Evaluation and Performance, International Journal of Management, 6(9), 2015, pp [2] Christine Kowal Chinelli, Carlos Alberto Pereira Soares, Orlando Celso Longo and André Bittencourt Do Valle, Transportation Project Performance Management, International Journal of Management, 4(6), 2013, pp [3] Mr. Mohammed Rafeeq, Mr. Nizamuddin.F, Ms. Asma.S and Mr. Zameer Ahmed, Orlando Celso Longo and André Bittencourt Do Valle, Performance Management: Desired Leadership Skills For Building Organizational Excellence, International Journal of Management, 5(8), 2014, pp [4] Dr.L.Vijay, B.Jayachitra, Effectiveness of Performance Management System International Journal of Advanced Research in Management (IJARM), 2010, 1(1), pp [5] C. P. Aruna Kumari and Dr. Y. Vijaya Kumar, An Effective Way To Optimize Key Performance Factors of Supply Chain Management (SCM), International Journal of Advanced Research in Management (IJARM), 2013, 4(3), pp editor@iaeme.com