Supplier Value: How to Define and Integrate the Value of Your Suppliers. Working Paper from the Supply Management Institute's series Purchasing and Supply Management [1 ed.] 9783896443311, 9783896733313

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SUPPLIER VALUE HOW TO DEFINE AND INTEGRATE THE VALUE OF YOUR SUPPLIERS

Working Paper from the Supply Management Institute's series Purchasing and Supply Management Supply Management Institute SMI™ Univ.-Prof. Dr. Christopher Jahns

A collaborative publication from Verlag Wissenschaft & Praxis

The German Library - CIP-Affiliation The German Library lists this publication in the German national bibliography; detailed bibliographic data is available on the Internet at http://dnb.ddb.de.

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SMG™ Publishing AG ISBN 3-907874-31-5

Verlag Wissenschaft & Praxis ISBN 3-89673-331-1

Printed in Germany

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■ 7 years experience as a top management consultant and executive coach.

■ Chairman of the board of the Supply Management Group SMG™, St. Gallen, Switzerland and the LCC™ The Logistics Consulting Company, St. Gallen, Switzerland.

■ 3 book publications, numerous essays in magazines and compilations, 71 references in encyclopedias, 11 published working books, 6 university working books, 3 international/national honors for publications.

■ Executive Director of the Supply Management Institute SMI™ - an International Research and Training Center for Purchasing, Logistics and Supply Chain Management and member of a global research network with prominent universities and research institutes.

■ Head of SVI-Endowed Chair of Purchasing, Logistics and Supply Chain Management at ebs European Business School, International University, Schloss Reichartshausen, Germany.

Authors: Univ.-Prof. Dr. Christopher Jahns.

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■ Currently working on a doctoral thesis about strategic supplier value assessment.

■ University studies at University of St. Gallen (HSG), Switzerland and at Lancaster University, School of Management, United Kingdom.

■ Experience as management consultant in several areas such as purchasing, logistics and outsourcing with projects in Switzerland, Germany and the United States of America.

■ Research Associate at the SVI-Endowed Chair of Purchasing, Logistics and Supply Chain Management at ebs European Business School, International University, Schloss Reichartshausen, Germany.

■ Head of Competence Center Strategic Supply Management at the Supply Management Institute SMI™ - International Research and — Training Center for Purchasing, Logistics and Supply Chain Management.

Authors: Roger Moser, lie. oec. HSG.

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Study Results & E x a m p le s ...............................

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Rent & Risk S h a rin g ..........................................

Strategy, Sourcing, Integration, Performance

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A 4-Step Process

3.5 Problems of Rent & Risk-Sharing Initiatives

3.4 Prerequisites of Rent & Risk-Sharing Initiatives

3.3 Supply Risk Management

3.2 The 4 Basic Supply Risk Management Actions

3.1 Defining Supply Risk

3.. Supplier Value Integration

2.2 Supplier Value Assessment: Examples

2.1 The Role of Supplier Value Management in Purchasing & Supply Management

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1.3 The Influence of the Supply Strategy on Supplier Value Management

2.. Supplier Value M anagem ent

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Bottom Line Impact, Top Line Impact, Risk Position

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1.2 The „ex post" and „ex ante" Perspectives of Supplier Value Assessment

1.1 Defining Supplier Value

Value M anagem ent

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1.. Supplier

Content.

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An Execution Process for Early Supplier Involvement

The Early Supplier Involvement Maturity Grid Methods of Early Supplier Involvement Success Factors and Barriers for Early Supplier Involvement An Organizational Framework for Successful Early Supplier Involvement

4.3

4.4

Products & Processes

Early Supplier Involvement Stages

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4.2

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4 Supplier Value Integration

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achieve significant competitive advantage through specific supplier values delivered to our products and customers. /z (Head of Strategic Sourcing, EADS)

■ Supplier relationships of all kinds are getting more and more important for the competitiveness of a company.

■ There is no proprietary supply network for a company. Passive and active roles in the supply network are changing for a specific company, depending on the position in the tier-system and on the possibilities of partnerships.

■ Successful companies are those that can manage best their relationships within a supply network or supply chain.

■ In the future, companies will be competing more in the form of supply networks and independent supply chains rather than company vs. company.

■ The competition structures are changing dramatically as the companies' degree of value added are constantly decreasing to less than on average 30%. At the same time, the interdependence between buyers and suppliers is growing.

The growing interdependence between companies is an important sign of the changing competitive environment.

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Material Flow

Example:

Airbus and Boeing - overlapping in engines, electronics, avionics, tires etc.

Material Flow

Example:

Near-vertically integrated manufacturers-retailers such as Zara in fashion apparel

Example:

Material Flow

___

Competition between partially overlapping supply networks

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Automotive supply networks of the United States with many OEMs sharing common suppliers

Source: Rice, James B. and Richard M. Hoppe: SC vs. SC. In: Supply Chain Management Review 2001. No. 5, p. 47-54.

Competition between completely overlapping supply networks

Competition between completely disconnected supply chains

Suppliers play different roles depending on the competition structures between companies.

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Technological innovation

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Higher quality of delivered products

Cost reduction

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Benefits from suppliers in 2003

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importance

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Source: BVL (ed.): Trends and Strategies in International Procurement. Berlin 2003, p. 27.

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The supplier relationship focus is moving from the classical dimensions price, quality and time to innovation, flexibility and joint activities.

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Responding companies in %

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Source: Jahns, Christopher: Supply Management. Neue Perspektiven eines Managementansatzes für Einkauf und Supply. St. Gallen und Sternenfels 2005.

Implementation of Purchasing IT-Systems Development of Purchasing Visions Operational Purchasing Purchasing Organization Management of Lead-Buyer Functions Purchasing Auditing Optimization of Internal Customer Relationships Management of Employees with Purchasing Tasks Human Resource Management in Purchasing

Management of Supply Networks

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Negotiation of Contracts

Optimization of Purchasing Conditions

Development of Purchasing Strategies

Procurement Marketing

Purchasing Process Optimization

Design related Cooperation with Suppliers

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________ Supplier Management

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Rating: belongs to supply management tasks _____

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The rating of supply management tasks shows the importance of supplier related activities within the purchasing & supply management function.

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Source: Jahns, Christopher: Supply Management. Neue Perspektiven eines Managementansatzes für Einkauf und Supply. St. Gallen und Sternenfels 2005.

Other Replies

Allocation of Process Responsibility

Introduction of a Process-oriented Organization Prerequisite for the Establishment of E-procurement Technologies Build-up of an integrated Process Management Model from internal Customers to external Suppliers

58%

67%

Supply Strategy Implementation Instrument

64%

68%

Process Transparency

Optimization of Supplier Interfaces

Optimization of Purchasing-related Processes

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Improvement of Process Quality

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Optimization of Process Run-Times

Optimization of Processes outside the Purchasing Function

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___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ----------- -----------

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Responding companies in %

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Reduction of Process Costs

Rating: reasons for the continuous improvement of supply processes

Continuous improvements not only aim at cost and run-time reduction or quality improvements but also at the optimization of the interaction with the suppliers.

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second phase of the discussion the buying firm and the supplier agree on the necessary optimization actions and the consequences if they fail.

The results of the assessment process are communicated to the suppliers in a personal discussion - the supplier gets the chance to explain negative points and images.

The supplier assessment is done by a cross functional team (purchasing, logistics, quality assurance and R&D) to ensure an objective assessment.

The mm-profile supplier assessment focuses on the past perform ance of the suppliers neglecting the strategic needs o f the future.

The mm-profile supplier assessment process integrates all im portant parties (purchasing, other internal departments and suppliers) and fosters the interaction and communication.

Soft facts: Organization Level, Emotional Level, Power Level, Communication Level

•

Source: Hildebrandt, Holger und Udo Koppelmann: Beziehungsmanagement mit Lieferanten. Konzepte, Instrument, Erfolgsnachweise. Stuttgart 2000, p. 25-42.

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Hard facts: Quality, Price, Time etc.

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■ The mm-profile supplier assessment system includes hard and soft facts

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■ The mm-profile process:

____________________________________________________________________________________________ S A C H S

Example: supplier assessment system at Sachs AG

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Source: Hildebrandt, Holger und Udo Koppelmann: Beziehungsmanagement mit Lieferanten. Konzepte, Instrument, Erfolgsnachweise. Stuttgart 2000, p. 57.

...volume concentration and decrease of material costs

..concentration on the most capable supplier leading to...

Intensifying the competition through..

9 Material Fields

Material Field Specialist Circle

_______________________________________________________

company program for economic and technical _____________________empowerment of suppliers____________________

competes

___________________________________________________________________ __________________________________________________

Example: the competes program at Robert Bosch GmbH focuses on the technical and economic empowerment of its suppliers.

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Logistics

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Potential Assessment

Robert Bosch GmbH Supplier Assessm ent Criteria

Example: the supplier assessment criteria at Robert Bosch GmbH differentiate between the future potential, the past performance and the current offer of a supplier. BOSCH

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commodity/commodity group, it can be evaluated separately for each

•If a supplier of a commodity/commodity group has contact to more than evaluated by each Siemens business unit.

•Siemens always evaluates a supplier & commodity/commodity group combination.

Source: Hildebrandt, Holger und Udo Koppelmann: Beziehungsmanagement mit Lieferanten. Konzepte, Instrument, Erfolgsnachweise. Stuttgart 2000, p. 95-96.

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_________________________Evaluated suppliers (annual or bi-annual)________________________

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Example: the supplier assessment system at Siemens AG is mandatory for all suppliers covering 80% of the purchasing volume, future main suppliers and suppliers delivering strategic products and services for a business unit.

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Agreements _____ _____________

Cooperation, Service & Support

s ra egic requirements

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Technology _____ Roadmap_____ I ___________________

Innovation and

Sub-criteria are defined by each business unit and evaluated in cross-functional teams

Cooperation, Service & Support

Environmental

Qua|ity

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.,. r . . . ^ Compliance with Initiatives for Cost Quality System Logistics Strategy specific Reductions________________________________ and Systems__________ requirements

Logistics Performance

Quality Performance

Total Costs and Prices

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Example: the Siemens AG has standardized its assessment concept company­ wide on the first two levels (categories & criteria).

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Change from Transaction to Interaction oriented Relationships

Cultural

■ Most rent & risk-sharing initiatives are based on the following basic steps:

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Inform ation Sharing as a necessary Prerequisite

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The development of a rent & risk-sharing initiative requires a lot of time and resources.

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■ A measurement system that measures the activities of the supplier and buyer and their impact on product/service costs and product/service performance needs to be in place

■ In order to agree on a rent & risk-sharing agreement, buyer and supplier need detailed information about the cost and usage structure of the relevant activities

■ If you can't measure it, you can't share it!

Step O: The build-up of a measurement system is the basis of every rent & risk-sharing collaboration between buyers and suppliers.

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Product standardization would be possible but the buying firm wants diversity

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Products or services that have no foreseeable usage in the buying firm make it difficult to agree on rent & risk-sharing agreement(s)

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■ The most suitable items for rent & risk-sharing agreements are MRO products as their usage is not particularly dependent on the use of other products and costs and their benefits are quite easy to determine -> a good pilot project for rent & risk-sharing agreements

•

■ Some products or services are not suitable for rent & risk-sharing agreements

•

■ Some products or services can't be influenced by the supplier

Step @: The definition of included/excluded products and services forces the supplier and the buyer to thoroughly analyze the activities discussed and to learn more about the significant processes.

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Baselines can be developed for established products and services based on historical data

case of new product or process development

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limit the risk of the supplier to a specific level for the first time

Supplier: guarantee a specific level of cost reductions for the first time

• Buyer:

■ The agreement is more likely to succeed if supplier and buyer can quickly establish a trusting relationship

■ The necessary cost information from the buyer is difficult to get if the supplier is not considered a true partner -> a cultural change in the buying firm has to take place

■ The time necessary to evaluate sufficient data for a fair rent & risk-sharing agreement can range from weeks to years

■ The supplier's experience from other companies can be a valuable source of benchmarking data for the buying company that should be used to optimize processes and products

•

• Experiences from other projects have to be used in

■ If possible, supplier and buyer should know the relevant numbers such as past average product usage and usage variation or detailed cost information to create a fair rent & risk ­ sharing agreement

Step ©: Supplier's experience based on historical data from the buyer or other companies provides a useful tool to analyze the buyer's current processes and to define baselines.

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■ A dispute resolution often used mechanism for a buyer and supplier relationship is mediation followed by binding arbitration -> managers are motivated to resolve disagreements amicably

■ The agreement should be reviewed on a regular basis. Baseline is redefined accordingly.

Agreement

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■ Only a fair rent & risk-sharing agreement is likely to have long-term success:

■ Failure is less likely if representatives from buyer and supplier are involved in the measurement process and if they communicate on a regular basis

Step 0: Agreement on measurement responsibility for costs and benefits, on detailed rent & risk-sharing and on dispute resolution mechanisms.

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The supplier may educate a part of the buyer's personnel in order to achieve joint cost reductions

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■ The buyer has to adapt its working culture to make an interaction oriented relationship possible -> change management

The supplier may co-locate a part of its personnel at the buyer's facilities to learn about the buyer's product use

•

■ Organizational education and buy-in are crucial for the successful implementation of a rent & risk-sharing agreement

■ Supplier and buyer may have to adapt their organizational (buying) structure to the specific needs of the rent & risk-sharing agreement

Step ©: The initiation of the rent & risk-sharing plan needs careful buy-in of the buyer's and supplier's employees.

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How can the buying firm make it more comfortable?

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What are the buying firm's strategic priorities (cost leadership or differentiation)?

It is difficult to fully reward the supplier for time and other expenses incurred to develop a new product or service and to reduce the costs for the new product/process development at the same time

-

Suppliers are capable of defining and accepting reward targets, but less comfortable with managing risks

Source: Monczka, Robert M. et al.: New Product Development. Strategies for Supplier Integration. Milwaukee 2000, p. 195-196.

•

•

■ Specific problems of rent & risk-sharing agreements are:

Most suppliers are more than willing to share the benefits, but have a less clear understanding and willingness to share the risks of new product/process development efforts.

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Buying firms can develop a memorandum of understanding at the beginning that addresses alternative courses of action in the case of market-induced, buyer-induced, or supplier-induced changes

Buying firms can develop a formal process plan with total goals defined by a cross-functional team that is used in the concept development and supplier selection phases of new product/process development

I

Buying firms can clearly communicate project requirements and conditions to prevent misunderstandings

Buying firms can offer the integrated supplier the first right to match price on a competitor initiative after the integrated supplier's initial production contract is completed

cost sharing information

a Buying firms can establish a set time to compensate development costs based on open-book

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^Buying firms might find ways to eliminate, minimize or bear risks before the start-up of the integrated team (e.g. assist the supplier in preliminary financing and production planning)

Buying firms can work with suppliers to analyze and understand possible risks

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Suppliers are often willing to share benefits and to take risks if they can recognize the buyer's own commitment.

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K

cost risk for initial development and for

High non-recurring

•

Price development risk . volume risk

•

•

Risk Exposure

/

\

k

-------

..

____

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k

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Policy)

____

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•

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such countries ehg.ble as offsets for EADS ,n

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1 /

/

/

\

\

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is sold. / classes. Business done bv suoDlier

t0 market redu|rements. purchasing in the same currency in which product

their parts, inch modifications. Pricing model according

investments, Suppliers take care of

f° r ^ e 'r non-recurring

Suppliers are responsible

Risk Sharing Elem ents

Opportunity & risk flow-down minimizes EADS risk exposure.

Currency risk / • Offset requirements _____ / resulting in penalty Regiona ya ue___________________ risk or loss of sales sales support / opportunities Offset requirements

Sales volumes Currency evolution

development

needs

changes of customer------

,

for new programmes

Development efforts

—

•

•

’

•

Sales M arket Profile

►

ads

Terms & conditions for supply markets along material

-----------------------

Example: EADS' global business perspectives require sharing of end consumer market opportunities and risks with its suppliers. + EADS

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Tier

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^ules apply throughout the whole supply chain

;

Tier

Requirement for a unique and harmonized supplier strategy across the supply chain

Prime

Example: EADS' enhanced risk and revenue sharing approach requires a flow ­ down of risks and opportunities from the end consumer to the first supplier throughout the whole supply chain. eads h

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the bottom line impact of a buying firm through reduced development or production costs etc.

• ...

• ...

Supplier Value Potential

the risk position through the detailed knowledge of the supplier

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the top line of a buying firm through the integration of the supplier's superior customer knowledge or shorter concept-to-customer cycles and better customer understanding etc.

• ...

■ Early supplier involvement can improve...

■ Early supplier involvement is an approach which is increasingly used to integrate supplier value into the buying firm.

Early supplier involvement is a specific approach to integrate supplier value.

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e.g. Chinese walls between host resident engineers from different customers

High costs of cultural barriers

Concept-to-customer cycle time reduction mainly in mature industry segments Change of relationship type causes problems in buying and supplying firm Lock-in, technology or customer knowledge dependency on suppliers

•

•

•

Breach of trust leads to financial, organizational and information risks

-

Protection problems of market relevant proprietary know-how

•

•

•

■ Risks of early supplier involvement

The potential benefits and risks of early supplier involvement are manifold.

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Engineering & Design

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Prototype/ Ramp-up

Early Supplier Involvement Process Stages

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Full-Scale Operations

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L________________________ experience_________________________________ /

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Involve \ ______________________________________ supplier(s) in problem solving________________________ /

Business/ Technical Assessment

2

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\ Information \ /___________________________ sharing_______________________________/

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Give supplier(s) \ an active role on the project team______________ /

Jointly establish clear metrics \ L_____________________________ and targets__________________________ /

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The early supplier involvement execution process can start at any early involvement stage.

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only a small part of the development is contracted out to the supplier, but the development risk is quite high.

-

The buying firm should ask the supplier to provide the necessary technical information as soon as possible.

- Such parts often

determine the further progress of the development project and therefore the buying firms need information from the supplier at an early stage to know - what is possible and what not.

Necessary actions:

• Starting point:

•

I I I

Starting point: supplier responsibility high, development risk high -> a large part of the development is contracted out to the supplier and the development risk is quite high.

■ Critical developm ent projects

•

•

■ Strategic developm ent projects

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Supplier involvement portfolio: the normative strategies for strategic and critical development projects.

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Routine Development

Critical Development

Mostly face-toface Group Meetings Mostly Fax, Mail and E-mail

One-way Traffic, at Supplier's Initiative

Two-way Traffic

Technical (& Status) Information

Status Information

Purchasing

R&D (Purchasing)

Purchasing (R&D)

Mostly Telephone and Fax

One-way Traffic, at Buyer's Initiative

R&D operation; Joint Management Marketing

Involved Functions in Communication (from Buyer's Side)

Preferably face-toPurchasing Meetings

Market (& Technical) Information

Communication Medium

Two-way Traffic face Group

Direction of Communication

Technical & Commercial Information

Content of Communication

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Informing each other about Changes

Independent Development by Supplier

Focus on obtaining Information

Development

Close Co­

Focus of Collaboration

scaring

Source: Wynstra, Finn and Eric ten Pierick: Managing supplier involvement in new product development: a portfolio approach. In: European Journal of Purchasing & Supply Management 2000. Vol. 6, p. 56.

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The information sharing process determines much of the overall \ supplier involvement success. /

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Companies often have a strong "not invented here" culture

•

Prevention of a "not invented here" culture

•

Source: Monczka, Robert M. et al.: New Product Development. Strategies for Supplier Integration. Milwaukee 2000, p. 157-170.

Installation of linked information systems

of buyer and supplier personnel

•

• Co-Iocation

■ Specific actions are:

■ The organization and processes of the buying firm should be focused on the objective to realize the maximum of the possible supplier value

The responsible managers have to prevent shadow engineering or disregards of supplier inputs

•

■ With the supplier established as part of the project team in step 1, it seems that involving the supplier in decision-making and problem solving during the early stages would be a natural process but

Realize the possible supplier value and prevent the "not invented here” syndrome.

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Selective: keep the number of performance measures to a minimum

Understandable: use performance measures that are clearly defined and easy to understand

Acceptable: achieve supplier's "buy-in" to performance measures early on

•

•

•

■ Post audits with suppliers support the identification of lessons learned and opportunities for improvements

Relevant: make sure performance measures are based on competitive priorities

•

■ Suitable performance measures have the following attributes:

■ Supplier and buyer also need to keep track of technological and other developments occurring outside of the relationship in question in order to avoid risky developments

■ The supplier's performance must be monitored right from the start of his involvement

■ Performance measures should not simply be used to put blame on a supplier but to drive development effort, encourage continuous improvement, identify problems and provide justification for terminating the relationship in case of continued nonperformance

Monitor resuitsX

\

____________________ __ _______ _______________________________________________________

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Performance measures should be aimed at identifying the true value added of the extensive effort of integrating suppliers.

—

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Source: Monczka, Robert M. et al.: New Product Development. Strategies for Supplier Integration. Milwaukee 2000, p. 171-173.

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nPrimarily causes

Primarily effects

Mixed cause and effect

\.

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Causality flows from one characteristic to another with an equal and opposite flow

h □

TA

Specificity

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jX > < T ^ ^7

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S u p p h e rs ^ j

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7

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Supplier Tiering

_______

x

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Special focus on trust: trust development processes imply a wrong connotation since trust is an effect and results from many causes.

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Creates competitive advantage, particularly by removing intercompany waste

Involves areas such as working on common quality standards, using the same paperwork system, shared transport or employing intercompany communication methods such as EDI

•

•

Includes the offering of specific assistance to the suppliers in areas such as factory layout, set-up time reduction etc.

•

Source: Hines, Peter: Network sourcing. A discussion of causality within the buyer-supplier relationship. In: European Journal of Purchasing & Supply Management 1996. Vol. 2 No. 1, p. 15-16.

Includes the dissemination of customer strategies, so that suppliers can plan their processes more effectively

•

• Refers to the activities made by a

customer to help improving the strategies, tools and techniques employed by suppliers to improve their competitive advantage, particularly by removing intracompany "waste"

■ Supplier development

Refers to the activities made by customers to mould their suppliers into a common way of working

•

■ Supplier coordination

Supplier coordination and supplier development are useful methods to develop a trusting relationship between supplier and buyer.

InUTnatiunal l.’nixentity

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