by Scott S.Elliott, Principal and Founder
Every business leader faces the "make or buy" decision many times. He or she must answer: "what are our core competencies to be kept in-house, and what should we purchase or outsource?" Most technology businesses have evolved from the "vertically integrated" concepts of the 1960s and 1970s - where supplies were only materials and commodities - to much more flexible and largely outsource-driven business models today. In the extreme, a few companies outsource almost everything, just taking orders and controlling the flow of finished goods from suppliers to customers.
Progressing along this evolution means that businesses have becomes increasingly dependent upon suppliers. What the customer receives and experiences is completely dependent upon the supplier's ability to deliver. And that ability to deliver is tied closely to how well they are managed and treated. Almost every technology business now depends upon key suppliers in its value chain. But, to their detriment, not all of these businesses handle their suppliers as well as they should.
Frequent problems with managing key suppliers may include:
- Multiple communication channels - more than one person in the company talks to a supplier, sometimes giving conflicting messages
- Lack of a standard company policy and process for dealing with suppliers - each supplier relationship may be handled a different way by different people.
- Lack of training on supplier qualification, negotiation and management
- Poorly defined policies and authority - workers may be dealing in unauthorized ways with suppliers.
- Lack of commonly understood supplier expectations and/or metrics - how does the supplier know if he is satisfying your (and your customer's) needs?
- Treating key suppliers like commodity suppliers, or worse.
The results of these problems include late or missing deliveries, unacceptable variances, poor quality, and dissatisfied customers. Beating up the suppliers may not help if the problem is in an inadequate supplier management process.
The remedy to these problems is to develop a robust and rational Supplier Qualification and Management system of policies, processes and training. The elements of this system include:
- Policies, including who may communicate and negotiate with suppliers and standards of conduct with those suppliers
- Processes for qualifying and managing supplier
- An objective framework for measuring suppliers
- Training and certification for authorized workers or agents dealing with suppliers
One framework for supplier metrics, originally developed by the Hewlett Packard company and now used widely by leading companies, represents an excellent and objective way in which to measure and communicate expectations to key suppliers. It is known as the TQRDCE system, for Technology, Quality, Responsiveness, Delivery, Cost and Environment.
In this framework, each key supplier is "measured" on six dimensions, represented here by a "radar chart". For each dimension, the supplier is scored from 0 to 5, whereby a low score represents poor performance and a score of 5 means perfection. The number of axes or dimensions and the name of the axes may be changed to reflect what parameters are most important to the scoring company and its customers.
In this diagram, our supplier management team has decided that a score of less than 2 on any axis is unacceptable, and a score of 3.5 or greater is not just acceptable but preferred. After doing a scoring exercise, a typical set of supplier scores may appear as the dotted-line trajectory as shown. The team may then decide to work with the supplier on improving his on-time delivery performance, while complimenting him on his quality.
Of course, a lot of work goes into deciding what elements to score and how to score them. But once it is established, this framework works exceedingly well in qualifying and communicating with key suppliers. Now they know objectively where they stand with respect to expectations and where they need to improve to boost satisfaction and business.
There can be no better way to treat a key supplier (or anyone else, for that matter) than to let him know, with openness and objectivity, where he stands. The more important a supplier is to your success, the more honestly and openly you should treat him. You may even want to invest money or resources to help a key supplier improve along some dimension that is important to your (and his) success.
In other words, treat these suppliers like family - only better.