The biggest problems caused bysuppliers… and how to prevent them

Eric Evans

Tuesday, 28 April 2015The Webinar Will Start At 4:30 pm UAE Time

Housekeeping

• The slides will be available on our SlideShare page; the link will be emailed to you

• The recording of the webinar will be available to download; the link will be emailed to you

• Take the time to complete a post-webinar survey that will pop up at the end

• You can type your questions throughout the session

• Time will be allocated in the end for the speaker to address your questions

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Your Presenter

Eric Evans has held Director level positions in the automotive, retail, fast moving consumer goods and healthcare sectors. He is the author of three books on procurement and negotiation, and a speaker on MBA programmes across Europe and the Gulf region

As a management consultant, he has delivered improvement programmes in demand management and inventory management, and has coached organisations as they implement collaborative replenishment and customer-led approaches to demand management.

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The Agenda

The webinar focuses on three key factors:

1.Maximising the pre-contract power which the buyer has in a way which eliminates or reduces the probability of problems with suppliers

2.The steps which can be taken to ”operationalise” a contract in such a way that it becomes a practical tool for managing supplier performance

3.The approach which can be taken to optimise the number of suppliers, thus allowing a focus on fewer, better suppliers

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Typical Supplier Problems

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The World We Live In

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• Pressure to find cheaper suppliers• Supplier profitability issues• More outsourcing• Single sourcing• Need to carry less inventory• Sourcing from overseas (China etc)• Headcount reduction in Procurement• Procurement only involved late in the

process

Our Supplier Management skills

How bad could it be?

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Day to Day Problems

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Results from a 2014 survey by Eric Evans & Associates Ltd into the most commonly found supplier problems348 respondents

Percentage of respondents

Typical Procurement Solutions

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The cheapest supplier or the best?

Quality Manufacturing Information Management

Tomorrow’sSuppliers

Today’sSuppliers

Yesterday’sSuppliers

Zero defects.Total quality management.Capable processes

ISO 9000Acceptablequality levels

Consistent failure to meet specifications

Flexible manufacturingsystems.Synchronous capable

Economic batch quantities.MRP and MRPII

Inflexible.Consistent failure to meetlead time requirements.

EDI.Bar coding.Open access

Limited EDILimited access.

Directed channelsfor information

Demonstrablewillingness to work withcustomers.“Star Trek”.

“Me too” culture.Mismatch between intent and actions.

Stale and predictable.Change resistant.

Red, blue or green?

Supplier Optimisation

Fewer, better suppliers

Smaller suppliers who see your business as being more valuable

Two suppliers who have to keep fighting for the lion’s share of your business

Aggregation of volumes with others in a consortium approach

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Work with fewer, better suppliers

The same business with a smaller company

Your business with a large company

Supplier SupplierA B

?

Column1 Column2 Column3 Column4 Column5 Column6 Column7 Column8

Failure Mode and Effects Analysis (FMEA)

Risk Number Risk to be considered ProbabilityConsequence

sVisibilty Risk Value Mitigation Owner

1 Exchange rate changes 8 1 6 48CR We buy in supplier currency and hedge

2 Industrial relations dispute 3 7 7 147CC disallowing disputes as force majeure CC obliging supplier to advise on state of industrial relations

3 Ownership of supplier IPR 3 9 8 216CC Supplier to warrant IPR ownership CC Supplier to indemnify us

4 Key man dependency 7 5 6 210CC Supplier to agree long notice clause with key man

5 Late delivery 5 5 7 175 CC Liquidated damages, back to back

6 Unacceptable quality 2 9 8 144CC Uncapped damages for poor quality

7 Supplier Bankrupcy 1 9 7 63 CR We take monthly credit checks

8 Takeover of company 3 7 9 189CC Termination rights at our discretion

9Design proved to be flawed

2 9 7 126CC Uncapped damages for poor quality

10Supplier breaches confidentiality

6 8 9 432 CC Liquidated damages

Notesa) Risk values greater than 150 must have mitigation plansb) Risk values less than 150: mitigation plans are optional

c)CC stands for "Contract Clause"

d) CR stands for "Commercial Remedy"

Risk AnalysisBrainstorm of what could go

wrong

Likelihood of it happening

(0 to 10)

Consequences if it does

(0 to 10)

How much notice we will get

(0 to 10)

Risk X Consequences X

Visibility

Actions we could take

Due Diligence DetailArea to investigate How to get the data?

Physical size, staffing, geographies and capacity

Growth, profitability and cash flow summary for the last 5 years

Management and organisation structure

Extent of sub-contracting and sub-contractors used

Supply chain, stock, distribution and forecasting policies

Industrial relations record

Qualifications and training of key personnel (supervisors, for example)

Financial position

Insurance cover

Technology used

Other customers / references

Trade membership and quality and other awards (ISO9000, ISO 11000, 14000, 18000, 27000

Existing business and capacity utilisation

Look at the list on this page. It includes the typical list of things which due diligence / pre-qualification will cover. Note that for special requirements, the list may be grown.

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Supplier Audits

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Supplier Performance Measurement

Statistical process control (SPC) is performance measurement system which uses statistical approaches to monitor and control a process.

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Governance

In Summary

Once a contract has been signed, there is still a need to ensure that it runs smoothly. This is known as Governance. The amount of Governance depends upon the size and complexity of the contract.

Governance covers resolving minor and operational issues, dispute resolution, escalation, change control, senior management engagement and stage gate sign offs.

On important issues such as HSSE, for example, Governance would be used to ensure the supplier was meeting all obligations and to pre-empt any issues or problems

Operational Governance:Monthly mtgs to discuss

day to day issues

Executive Governance:Quarterly mtgs to discuss

progress & escalations

StrategicGovernance:High level &Relationship

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The Commercial Framework shapes the deal

Overview of dimensions included:

Tie

r 2

Tie

r 1

Tie

r 0

Using the ContractContracts should be practical, business documents. In terms of measurement and monitoring supplier performance, as a minimum, they should cover:•What performance measures the supplier should report on•How frequently they are measured and reported•What happens if they do not provide the measures

•What happens if the measures show the supplier is not good enough•What happens if the customer does not believe the supplier’s measures are true•Under what circumstances doe the customer receive service credits or damages•Under what circumstances can the customer terminate the contract

“It is a very sobering feeling to be up in space and to realise that one’s safety factor was determined by the lowest bidder on a Government contract”

Alan Shepherd, US Astronaut

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• It is often said that once a contract has been signed it should be put in a drawer and forgotten about. Unfortunately, contracts contain a set of promises, responsibilities, obligations and descriptions of what happens if you don’t do what you should.

• Contract operationalisation is about looking at a contract as a business document and making sure that you and the other party both honour what was agreed. In doing so, you make sure that you will not be liable for any penalties

• The next three slides identify a comprehensive process of operationalisation but only a few of these things are absolutely essential. We will discuss those things which must be done

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Contract Operationalisation:What is and why do we need to do it?

Supplier & Contract Mgt Framework

PreContract

PostContract

1. Comply withVendor Strategy

2. Involve V Mgrin sourcing process

4. Keyclauses

5. Duediligence

2. Contractclose out

1. Transition Mgt

3. Learnings capture

Contract

3. Riskanalysis

1. Commercialawareness

2. Deliverablesmatrix

3. Changecontrol

4. On-goingrisk analysis

5. Document management

6. Commsmanagement

7. Performancemgt & reporting and Continual Improvement

8. Contractreview

9. Governance

11. Escalation &dispute mgt

10. RelationshipManagement

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CustomerRating System

In Summary

1. The cheapest supplier or the best?

2. Supplier optimisation

3. Risk analysis

4. Due diligence

5. Supplier Performance Measurement

6. Governance

7. The Commercial Framework

8. Contract Operationalisation

9. Customer rating by the supplier

10. The right approach to Supplier Management

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The Supplier Mgt Profiling Tool

The following slides are taken from a Microsoft Excel tool which helps those who use it to understand how they compare on 30 aspects of supplier management against a number of World Class organisations.

Users of the software are simply asked to select a statement from four which illustrate different levels of supplier management maturity. Once all 30 aspects of supplier management have been reviewed in this way, the software produces a chart which provides a visual representation of strengths and areas where respondents may wish to consider making changes.

The following two slides show the areas covered by the software and an example of the visual output

The software is available at no cost and will be supplied by email to anyone who contacts the webinar leader at EricEv@nsLtd.net.

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The Supplier Management Profile

The tool breaks down the supplier management task into three major constituent parts and then provides an opportunity for users to assess their own organisation on these constituent parts against World Class standards as defined and used by some of the World’s leading organisations.

The tool provides a visual output (see next slide) which makes it easy to udnerstand areas of potential improvement

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Sample Output

Supplier Strategy

Risk & Opportunity

Execution

More detailed slides to add depth to the slides

used on the webinar

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How bad could it be

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In 2007, Boeing outsourced the supply chain for the Boeing 787 but hit massive problems with deliveries, and cost $2 bn to fix

Mattel had to recall 10 million of toys made in China in 2007 due to safety issues

Toys R Us let thousands of children down at Christmas in 1999 when its suppliers couldn’t meet delivery promises

A new inventory management system at supplier CISCO led to disappointed customers and $2.2bn losses

Aris Isotoner moved business to a cheaper supplier in 1994 but quality problems led to it losing half its revenue and eventually shutting down

British Airways saw its profits fall by £50m when a catering supplier went on strike

In 2013, the leading food retailers in the UK had to admit that they did not know there was horsemeat in some of their beef products, and had no idea where the food originally came from

In 1990 the British Army in Kuwait had the wrong uniforms, inadequate radios and insufficient medical equipment

In 2014 Toyota recalled almost 2 million cars

Supplier OptimisationThe "Power of One" is Experian's strategy to simplify the relationship with suppliers. "Historically we had hundreds of technology suppliers," he says. "Through the Power of One I am creating a supplier optimisation and reduction programme. I want to reduce overall spending and direct spending to strategic partners. We will never get to “One”, but we need a strong vision if we are to get down to a significant few" John Finch, Global CIO, Experian

We believe that less is more. In the past Sainsbury’s had a considerable numbers of IT suppliers and our ambition now is to reduce the number of suppliers to a few big partnerships to drive more value. That’s been happening over the last few years, when we essentially consolidated around three system integrators and a small number of hardware and software relationships. Julian Burnett, CTO, Sainsbury’s

“Oil and gas giant BP spent 65% of its $3bn annual IT budget with 3,000 suppliers in 2008, but now it outsources to only seven and has reduced its annual IT budget by $800m as a result. The seven suppliers in the ecosystem are: IBM; Tata Consultancy Services (TCS); Infosys; Accenture; Wipro; HP; and T-Systems.

BP CIO Deasy said the challenges for BP were to ensure that the suppliers give their all and work together in a collaborative ecosystem. "We had to keep all the vendors on edge to get the best out of them. But we also have to create a collaborative environment," he said. As well as boosting its internal supplier management resources with a dedicated team and taking up supplier management standard BS11000, BP has focused on getting its suppliers to perform in the face of less competition. The seven suppliers each have a core role, which BP expects them to stick to. At the same time the suppliers must collaborate as if they were one.

Kevin Summers, CIO of Whirlpool said that four years, ago GIS managed 500 IT suppliers and was a decentralised business, Now there are six strategic suppliers: IBM, Accenture, Cisco, SAP, AT&T and Microsoft. From 2007 to 2010, GIS has been working to get the infrastructure right. So far this has saved $50 million." Summers plans to evolve the IT function into a global business services function, on par with the likes of Proctor & Gamble, Coca Cola, ExxonMobile and Merck, which often top the benchmark tables for best in class IT service delivery. “IT supports 67,000 employees globally, 55,000 networked devices, 28,000 office phones, 7,800 mobile devices and 600 IT systems, as well as SAP.The inevitable start point was to reduce the number of suppliers to the point where we were working with fewer, better suppliers”

The quotes on this page all relate to major international companies looking to reduce the number of suppliers they use. The quotes are intended to demonstrate the fact that these major companies all want to work with fewer, better suppliers.

If you have fewer, better suppliers you can give each of them more business and get better deals in return. You have less suppliers to manage, and their performance levels are usually higher

The greatest potential lies with the Pareto C class suppliers

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Due Diligence, Pre-qualification & Audits

It is rare for a supplier to turn down the option of a contract. When asked if he is able to do a piece of work, the inevitable answer is yes.

Measuring the performance of a supplier who has not the capability or capacity do is piece of work is not likely to deliver good results

The answer is to carry out a due diligence / supplier appraisal study before awarding a contract

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Due Diligence can be carried out by a number of the following mechanisms:

•A detailed supplier questionnaire•References – but three selected from the suppliers list of current and recent / past customers•Financial, trade body and other references•Interviewing members of the supplier using a structured questionnaire•Visiting the supplier’s premises with a cross functional team

With all of this, a weighted evaluation scorecard should be produced by the cross functional team, which focuses on thefundamentals (finances, organisation structure, physical capacity and “tomorrow’s supplier” criteria

Where references are taken up, the customers should be asked if they would be happy to provide performance information on the supplier from recent months.

A growing practice is to ask for references from former customers – and this allows the buyer to ask why the companyno longer deals with the supplier in question

Supplier Audits

Pleased with himself that he had done a good job, the buyer reflected on the quality of the RFP,the thoroughness of his negotiationplanning and the superb price he had achieved.

A few weeks later, while driving through Abu Dhabi, he saw the road where his new supplier was based. He decided to call in and pay his respects to the people he had met (in his own office) in Dubai

Imagine his surprise when the address was a poor row of houses with expatriate labourers living there. “Oh Yes” said one, “that man comes here once a week to retrieve his mail. He is an unemployed young man with a lots of contacts and friends back in Korea” 31

Supplier Audits

1. Process & Quality Control– Specification– Design Control– Manufacturing Control– Quality Management– Material Control– Procurement Control

1. Manufacturing Resources– Capacity and Flexibility– Facilities and Capability– Labour Environment– Equipment condition and Maintenance– Patents and / or Restrictive Agreements

1. Management Policies– Leadership– Education & Training– Management Structure, Stability and Competence– Health, Safety, Security and Environment– Customer Service– Market Involvement– Business Ethics– Technical & R&D Capabilities– Compliance with Government Regulations

1. Finance– Financial Viability– Cost Control– Cost Transparency– Capital Expenditure Plans

In addition to visiting a supplier before awarding him a contract (as a due diligence or supplier appraisal activity), it may be necessary to visit a supplier from time to time once the contract has been awarded as part of the supplier monitoring process.

These audits may need to be built into the contract with the supplier. Suppliers will often resist, or want to limit the number of audits they receive. As you audit a supplier, they will want to “shadow” you to understand what you have found. Thus audits become resource-heavy for suppliers.

It is not unknown for suppliers to want to limit what you audit.

Good practice involves:•Using an audit checklist•Discussing the audit finding with the supplier•Asking the supplier for an improvement plan in line with the audit findings

The list across the page is the British American Tobacco “Business Enabler Survey Tool” (BEST Audit Package.

What would you take into account when auditing a service provider?

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Statistical Process Control

Statistical process control (SPC) is quality assurance method which uses statistical approaches to monitor and control a process.

The key is to eliminate variability and identify problems before a manufacturing process leads to the production of products which are outside of agreed tolerances.

This is achieved by charting performance against “Upper and Lower Control Levels”.

The process also defines the Process Capability of equipment with a measure known as CPK. CPK less than 1 means a machine cannot be expected to produce good quality product. The higher the CPK, the lower the variability

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Contract Mgt Activities1. Commercial awareness

It is important that colleagues who are going to come into regular contact with the supplier understand the contents of the contract, the obligations of both parties and the rights and remedies which are available to both parties. It is the vendor manager’s responsibility to ensure this information is shared in a structured way

1. Deliverables matrixContracts can be long and complicated documents, and good practice includes the creation of a deliverables matrix which highlights what the supplier is obligated to deliver, when, and the dependencies and obligations of BAT which are pre-requisites to the supplier meeting his obligations

1. Change controlIt is rare for a contract to run without some form of change or variations. A process for managing such changes should be included in the contract and followed. It will typically include a change control register, the use of standard change control forms and an agreed process which conforms to BAT’s delegated authorities structure governing approval of the changes

1. On-going risk analysisAlthough risk analysis is carried out during the pre-contract phase, it is important to continue assessing risk during the contract period. The Vendor Manager is also responsible for ensuring that risk mitigation and contingency plans are developed

5. Document managementLetters and documents to and from suppliers often have a contractual or legal significance. It is important that such correspondence is dealt with appropriately and that an audit trail is maintained of key decisions and actions. This may be achieved simply by having a good filing system and by ensuring that legal, financial and commercial colleagues are consulted where appropriate

6. Communications managementOur relationships with suppliers are usually “many to many” and it is important that the Vendor Manager is aware of the key communications which are taking place.

7. Performance management & reporting and Continual Improvement (CI)Vendor Managers are responsible for ensuring that the supplier performance is measured on key elements of the service level agreement and that the information is shared with senior management. Measurement, however is only a step towards vendor management, and the Vendor Manager needs to ensure that corrective action is taken to deal with shortcomings, and that continual improvement opportunities are progressed. As part of performance management we need to be systematically scanning for improvements and implementing CI with our suppliers.

8. Contract reviewOnce a year, or when any one of a number of trigger points are reached, the Vendor Manager is responsible for ensuring that the contract is reviewed and any necessary changes are negotiated. This will involve working closely with colleagues in Commercial and Legal

9. GovernanceOur framework includes typically three tiers of governance – operational, executive and strategic. The Vendor Manager aims to ensure that these three levels of governance take place and that the outcomes are minuted and actioned.

10. Relationship ManagementAs important as the contract is, we need to be leveraging the relationshipwith the supplier which can be more effective than simply relying on the contract. This is the role of the SRM

11. Escalation & dispute managementProblems will occur and will need to be managed either by the Vendor Manager or through an escalation and dispute resolution process. The Vendor Manager needs to be aware of the processes and the situations where escalation is appropriate

Contract

1. Commercialawareness

2. Deliverablesmatrix

3. Changecontrol

4. On-goingrisk analysis

5. Document management

6. Commsmanagement

7. Performancemgt & reporting

and Continual Improvement

8. Contractreview

9. Governance

11. Escalation &dispute mgt

10. RelationshipManagement

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Questions?