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  • Avoid the Pitfalls in Supplier DevelopmentRobert B. Handfield,Daniel R. Krause,Thomas V. Scannell &Robert M. Monczka

    Reprint 4123

    MassachusettsInstitute of Technology

    Winter 2000

    Volume 41Number 2

    MIT

  • Firms gain com-

    petitive advantage

    by improving the

    performance of

    suppliers and by

    sidestepping the

    snares common to

    such efforts.

    Sloan Management ReviewWinter 2000

    Handfield Krause Scannell Monczka

    37

    Avoid the Pitfalls in SupplierDevelopment

    Robert B. Handfield Daniel R. Krause Thomas V. Scannell Robert M. Monczka

    Robert Handfield is the Bankof America University Distin-guished Professor of SupplyChain Management, College ofManagement, North CarolinaState University. DanielKrause is assistant professor,Department of BusinessAdministration, Utah StateUniversity. Thomas Scannell isassistant professor, Departmentof Management, WesternMichigan University. RobertMonczka is Professor Emeritus,Michigan State University,and research professor,Arizona State University.

    As manufacturing firms outsource moreparts and services to focus on their owncore competencies, they increasingly ex-pect their suppliers to deliver innovativeand quality products on time and at acompetitive cost. When a supplier is inca-pable of meeting these needs, a buyer hasthree alternatives: (1) bring the outsourceditem in-house and produce it internally,(2) change to a more capable supplier, or(3) help improve the existing supplierscapabilities.

    All three strategies can work. The choiceoften depends on price, volume, or thestrategic nature of the procured item. Forlow-value-added, nonstrategic commodi-

    ties, the cost of changing to a new suppli-er is low, and switching may be the bestoption. At the other extreme, when anunderperforming supplier provides aninnovative product or process technology(that may be of sustainable long-termadvantage to the buyer), the buyer maywish to protect this potential advantageand bring the work in-house by acquiringthe supplier. In those cases that lie be-tween these two extremes and even attimes including these extremes the bestoption may be supplier development.

    We define supplier development as anyactivity that a buyer undertakes to improvea suppliers performance and/or capabili-

  • ties to meet the buyers short-term or long-term sup-ply needs. Buying firms use a variety of activities toimprove supplier performance, including assessingsuppliers operations, providing incentives to improveperformance, instigating competition among suppli-ers, and working directly with suppliers, eitherthrough training or other activities.1

    Supplier development requires both firms to commitfinancial, capital, and personnel resources to the work;to share timely and sensitive information; and to cre-ate an effective means of measuring performance.Thus, this strategy is challenging for both parties.Buyer executives and employees must be convincedthat investing company resources in a supplier is aworthwhile risk. Supplier executives must be con-vinced that their best interest lies in accepting directionand assistance from their customer. Even if the twocompanies mutually agree that supplier developmentis important, success is not a foregone conclusion.

    Although difficult, supplier development can be animportant cornerstone in the deployment of a trulyintegrated supply chain. The average manufacturingfirm spends over 50 percent of its revenues on pur-chased inputs.2 With companies continuing to increasethe volume of outsourced work across industries,3

    this percentage is likely to rise. Consequently, suppli-ers will have a greater impact on the quality, cost,technology, and delivery of a buying companys own

    products and services, and thus on its profitability. Thedirect effect of supplier performance on a buyersbottom line highlights the importance of optimizingsupply-chain performance. Thus, we propose thefollowing.

    Continuous long-term improvement of supplier per-formance is only achieved by (1) identifying wherevalue is created in the supply chain, (2) positioningthe buyer strategically in line with value creation, and(3) implementing an integrated supply-chain manage-ment strategy to maximize internal and external capa-bilities throughout the supply chain.

    We believe that improved supplier performance willnot be realized or sustained unless buyers recognizeprocurement and supply-chain management (SCM) assources of competitive advantage and align their SCMstrategy with their overall business strategy.4 Any per-formance improvements gained without this strategicalignment are likely to be short term and perhapsonly tactical in nature. Some companies with success-ful supplier-development programs suggest that first

    Sloan Management ReviewWinter 2000

    Handfield Krause Scannell Monczka

    38

    It is best to view supplier development

    as a long-term business strategy that is

    the basis for an integrated supply chain.

    Real-Life Supplier-DevelopmentExperiences

    Our findings are based on a survey funded bythe Global Procurement and Supply ChainBenchmarking Initiative (GEBN) at MichiganState University and case studies funded jointlyby the Center for Advanced Purchasing Studies(CAPS) in Tempe, Arizona, and the Center forInternational Business Education and Research(CIBER) at Michigan State University.

    The GEBN study examined processes thatorganizations use to develop suppliers, as wellas the obstacles to success. Approximately200 companies participated in a long-termresearch initiative that involves responding toa series of benchmarking surveys. These sur-vey efforts focused on critical procurementand supply-chain-management strategy areas.The response rate for the supplier develop-

    ment study was 41.5% (83/200) and includedfirms from the following industries: industrialproducts (38%), services (14%), consumerdurable goods (13%), consumer nondurablegoods (8%), capital goods (2%), and other(25%). The surveys varied in length, but gener-ally required between 10 and 20 hours to com-plete. Survey questions were qualitative(requiring in-depth descriptions of companypractices) and quantitative (including Likert-type scales and categorical questions). Toaddress survey questions comprehensively,responding managers needed to consultdesign and production engineers, buyers, qual-ity managers, inventory controllers, and others.

    CAPS and CIBER funded detailed case studiesof the problems encountered during supplierdevelopment. The researchers conductedinterviews with purchasing executives, engi-neers, quality managers, and operations man-

    agers in several organizations worldwide. Thisfacilitated comparing supplier-developmentpractices within the same industry, but in dif-ferent countries. The study targeted electron-ics/electrical and automotive industries,because they are highly competitive, experi-ence high rates of technological change thatshorten product life cycles, and have largeglobal firms that produce multinationally.These characteristics contribute to their needfor world-class suppliers and force participat-ing firms to continuously improve productquality and reduce product costs.

    The collected data was diverse, soresearchers constructed a "meta-matrix" tosummarize each major process associatedwith each code and concept for each site.They refined these conceptual linkages inorder to develop recommendations for avoid-ing the pitfalls described in this article.

  • addressing easy-to-fix supplier problems helps buildmomentum. This is true. However, it is best to viewsupplier development as a long-term business strate-gy that is the basis for an integrated supply chain.The first step, therefore, is to successfully implementsupplier-development programs. This study addressesthe pitfalls that impede such efforts.

    This article presents survey data and examples drawnfrom case studies of electronics and automotive com-panies in the United States, the United Kingdom,Japan, and South Korea. These examples illustratespecific supplier-development practices and examinehow these companies avoided or mitigated commonpitfalls in assisting their suppliers. (For details of thestudy, see Real-Life Supplier-DevelopmentExperiences.)

    We begin by describing a process map that manyfirms intuitively employ. We found that, althoughmost firms are able to identify suppliers requiringdevelopment, relatively few are completely successfulin their supplier-development efforts. Then weexplore the most significant pitfalls in supplier devel-opment and present strategies used to avoid them.Our goal is to provide general guidelines for supplier-development efforts.

    A Process Map for Supplier DevelopmentAfter scanning supplier-development strategies usedin more than sixty organizations, we developed thefollowing seven-step generic process map for deploy-ing these initiatives.5 Other case studies of supplier-development efforts describe variations of this model.6

    Most of the organizations studied deployed the firstthree or four steps, but they were less successful withthe remaining steps.

    Step 1: Identify Critical CommoditiesNot all companies need to pursue supplier develop-ment. Some may already be sourcing from world-class suppliers because they have made effectivesourcing decisions and supplier selections. Or theirpurchases may be so small in proportion to total

    costs or sales that investing in suppliers is neitherstrategically nor financially justifiable. Therefore, man-agers must analyze their situation to determinewhether supplier development is warranted,7 and, ifso, which purchased commodities and services requirethe most attention.

    To focus the effort, a corporate-level executive steer-ing committee must assess the relative strategicimpor