MRO Magazine

Strengthen supply chain with improved vendor relations


Industry

June 20, 2011
By PEM Magazine

Although definitions vary, supply chain management refers to the planning and control of product, from its original raw material form to the finished product’s disposition by the end customer — from cradle to grave. Optimal productivity along the entire supply chain requires solid supplier-customer relationships, efficient and effective processes, sufficient supporting technology and a value-for-money focus as defined by the end customer.

All too often, supply chain management is seen as merely an exercise in inventory reduction. It does nothing for the overall supply chain to simply force a small local supplier, hungry for business, to carry a customer’s inventory problems. Carrying excessive inventory levels just masks the customer’s refusal or inability to plan more effectively.

Another common misconception is that the main objective is price reduction. This can be observed most dramatically when large companies celebrate the saving of millions of dollars by using an e-marketplace on the Internet to seek the lowest-cost MRO products available globally. However, some of these same companies have learned the hard way that the web makes it very difficult to judge product quality and service, as well as softer factors such as compatibility of corporate culture and common vision. Alas, suppliers must be selected on the basis of total cost, not just unit price.

Steps to Improve Vendor Relationships

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1. Reduce the number of suppliers.
Using Pareto principle, determine the 20 percent of products that account for 80 percent of spare parts inventory in terms of volume and dollar value. ABC and XYZ analysis on the CMMS can be used for this determination. Once the high-volume, high-value parts are identified, determine all relevant suppliers.

In order to reduce the number of suppliers, selection criteria should be determined. Obvious criteria are price, quality and service based on analysis of supplier history captured on your CMMS, including frequency and severity of

  • over/under shipments;
  • late shipments;
  • backorders;
  • substitutions;
  • quality problems;
  • extended lead time; and
  • pricing anomalies.

Suppliers of services like HVAC and roof maintenance should also be examined. Suppliers usually perform these services when they are not one’s area of core competency and are, therefore, more cost effective to outsource.

2. Create a contract and service-level agreement.
For each of the short-listed suppliers, establish a long-term renewable contract that incorporates a service level agreement (SLA). The contract should outline the expectation for product volume or services to be purchased, as well as quality and service expectations through the SLA. In the spirit of partnership, the agreement should be two-way, including expectations of the supplier in order to meet their obligations. The document should also cover reward/penalty incentives for performance, and an escalation process describing how problems will be resolved.

3. Consider contractual variations.
Many CMMS packages will accommodate different supply schemes. The simplest variation is the blanket order: large orders at volume discounts over the long term with a short-term release schedule. Another contract variation is building in year-over-year price reductions in exchange for a longer-term contract.

One variation that seems to be growing in popularity is consignment-based supply of spare parts. From a CMMS perspective, this requires changing the trigger for generating an invoice, from the receipt of goods to the issuing of parts. Thus parts are received into inventory at zero value. A further variation is supplier-based inventory, which means all or partial stocking of materials by the vendor.

4 Determine collaborative activities for mutual gain.
Once expectations are clarified between the customer and the supplier through the contract and SLA, there may be opportunity to build on the relationship by further sharing of the following:

  • strategy;
  • performance measures/targets;
  • online real-time access to data;
  • scheduling;
  • facilities (such as moving parts inventory off-site to shared space managed by supplier);
  • product research and development (testing new products at reduced price);
  • product design simplification (such as fewer standard, interchangeable parts);
  • joint cost reduction projects like Lean and Six Sigma;
  • resources for education and problem solving; and
  • capital financing.

5. Make full use of web-based technology.
The Internet provides the opportunity for suppliers and customers to share in considerable benefits. One of the most promising opportunities is e-procurement, including electronic exchange of catalogue items, design documents, purchase orders, receiving documents, invoices and payment. Companies are enjoying between 10 and 30-percent cost reductions for purchasing tooling and spare parts electronically due to reduced lead time, fewer errors, less paperwork, decreased labour, greater adherence to standards, automated or semi-automated tracking/expediting, consolidation across multiple plants, and so on. However, for other opportunities like e-marketplace (such as e-trading, e-auction and e-quotation), one must balance greater availability of buyers/sellers and competitive pricing, with potential quality and service reductions.

6 Communicate regularly.
The greater the level of communication between customer and supplier, the easier it will be to build a mutually beneficial partnership. There are all sorts of ways to obtain feedback on how things are progressing, including satisfaction surveys, analysis of web-based help desk queries, management reports like supplier-performance history, SLA status meetings, third-party assessments and other communication tools. By understanding what needs improvement using these tools, corrections can be made for mutual gain.

7. Consider a supplier recognition program.
In order to establish supplier status (such as “gold,” “silver,” etc.), some companies have used the CMMS and more qualitative methods like surveys to track supplier performance. This provides some friendly competition amongst suppliers, which in turn drives improved performance.