ASQ CQE Certified Quality Engineer – Section I – Management and Leadership (18 Questions) Part 7

52. 1H Supplier Management Techniques – Introduction

Next topic in management and leadership is supplier management. In supplier management, we will be looking at three broad topics. Number one, techniques. Number two, improvement. And number three, risks related to supplier. Let’s start with the first topic, which is techniques. In techniques, we will be talking about applying various supplier management techniques, including supplier qualification, certification and evaluation.

Before we talk about these things, which are supplier qualification, certification and evaluation, let’s understand what are the problems, what are the issues related to supplier management? What are the challenges? If we just take an example of Boeing, which we have here on this slide. Boeing intended to reduce the plane seven, eight, seven development time from six to four years. And they wanted to reduce the development cost from 10 billion to 6 billion.

So that was their plan. And for that, what they did was they increased the outsourcing to 70%, which was generally 30% to 50%. So 70% of the component or 70% of the development process, they outsourced. And this outsourcing was done at a much earlier stage at the engineering and construction stage of the plane, which was much longer before the actual definition of the product was defined. So if you want to buy something, if you want to outsource something, you need to have a clarity on what you want to buy. The specification needs to be clear.

So these outsourcing was done much earlier, even before the definition of the product was developed, and that led to over budget and the development of this plane got delayed by three years. And this information is coming from Forbes. com. So this is one example where supplier management has gone wrong because the order was placed much earlier, before Boeing knew what they are ordering or the product was defined. So before the definition, the product was outsourced. So what are the challenges here? What can go wrong in supply chain? There are a number of things which can go wrong at supply chain. Let’s look at what could go wrong at supplier end. At the supplier end, there could be natural disaster. There could be fire in the company, manufacturing company.

There could be unrest strike the country in which this facility is there. There could be some economic failure, currency fall. All these things could happen, for example, at the supplier. And things could go wrong in the transit when the component is being delivered to you from your sub supplier. Things could go wrong there. Things could go wrong when you receive something because you receive something which is defective and which could lead to your own reputation. So there are a number of challenges when it comes to supplier management. So that’s the reason supplier management is important even for quality professionals.

So as a CQE, you need to be aware of the challenges which you could have because of supplier input in your product or service. In recent times, there has been a lot of emphasis on outsourcing companies are getting things from those countries where these can be manufactured cheaper because of the labor cost or because of many other reasons. Many of the mid to large sized corporations, they go for outsourcing, and they go for outsourcing up to the range of, let’s say, 50% of their revenue. So that is the amount they outsource. What you could learn from this is there is a huge amount of outsourcing in the industry. Why they want to do that? Because organizations want to focus on what is their core competency. Let’s say most of the American companies, they have their core competency in intellectual knowledge of that product or service, whatever they are providing.

So their core competency is in product development, the knowledge or the information, what they have, a lot of hard work or the labor work, they want to outsource that so that they can focus on what their core competency is. So that’s one reason many of these medium to large companies do a lot of outsourcing. But then if you do a lot of outsourcing, then managing these suppliers becomes very critical. And that’s a key factor for the success of the organization. So even if you look at product like Apple, apple’s strength is in the intellectual information. What they have intellectual property, which they have, most of the manufacturing, they get it done in China because that’s where labor is cheaper or things get done faster. So with this background knowledge, we understand supplier management is important in the industry.

53. 1H-1Techniques – Supplier Lifecycle Management

Previously we talked about challenges which we have in supplier management. Now let’s look at supplier lifecycle management. And what does lifecycle management means? Lifecycle management means from one end to another end. How do you manage your suppliers? When you have supplier, the first thing which you do is you select a supplier. So from selecting the supplier to monitoring and then classifying them into different categories and then creating a longterm relationship. So that’s the whole chain of lifecycle management of suppliers. So you start interacting with supplier at the selection stage and you end up with a longterm partnership. That’s what we will be talking here. And how does this help? This helps in mitigating risk because if you have some long term relationship with the supplier, your risk will be mitigated because now your reputation and your supplier reputation both are tied together.

Your success is your supplier’s success. So if you have a long term relationship, that’s good to mitigate the risks which you could have, it will reduce cost because now you have a good relationship with the supplier. You have a lot of things being purchased from this supplier. So you can reduce cost because of bulk purchasing and this will ensure the compliance because now you are working together to meet the legal requirement or the customer requirements. And this is a sustainable model for long term relationship. So that’s the reason you want to go for long term lifecycle management with the supplier. In this, there are four stages. When we talk about life cycle management of supplier, we go through four stages. And what are these four stages? Let’s look at that on the next video.

54. 1H-1 Supplier Lifecycle Management – Four Stages

So as we talked in the previous video that supplier lifecycle management consists of four stages the first stage was supplier selection then we go for performance monitoring, then supplier classification and then we go for partnership or long term alliances. Let’s briefly look at these four stages here. In supplier selection, you do qualification. You select a supplier based on whatever information you have, whatever suppliers they are using. So, based on all that information, you do supplier selection. Considering that this particular supplier will be able to meet your requirement related to your product or service. So this is first stage.

Once you have qualified a supplier, then you start performance monitoring. You monitor the performance to check whether this supplier meets the requirement which you have established or not. And during this process of performance monitoring, you will have improvement plan. So, just in case your supplier is not able to meet your requirement, how you would make sure that supplier meets that? So how do you make sure that supplier improves from the current performance? And then you even have your exit strategy as well. So, just in case this supplier is not able to meet your requirement, then how do you depart? How do you exit from this relationship?

So this is something which comes in performance monitoring stage. Once you go through that, supplier gives whatever you want. Supplier is improving. Then what you could do is you can put this supplier into different categories in your list. Of suppliers. So that’s what is supplier classification. So based on the performance of initial few orders, you could non approve this supplier or reject this supplier. You could approve this supplier, you could put this supplier in the preferred supplier list or other classifications for this supplier could be certified, partnership disqualified.

So you could put this in number of categories. You can put this supplier into number of categories, whatever your system is. So in the end, what? You would be looking for is to have a long term partnership or alliance with this supplier. So you have a strategy for that. So if this supplier is able to do this this then you would consider to have a longterm partnership or alliance with this supplier. So this is the chain of supplier lifecycle management. In this course we will be putting emphasis on first two parts here, supplier selection. So in next few videos we will go through various stages of supplier selection. And then later we will be talking about performance monitoring. So these two, the first two blocks we will be talking in detail in next few videos. Let’s start with the process of supplier selection in the next video.

55. 1H1 Supplier Selection – Overview

As we discussed in the previous lecture, that in supplier lifecycle management, the first stage is supplier selection. So when it comes to supplier selection, we go through a number of stages here. In supplier selection, the first thing which you would do is you will identify potential supplier based on information. Whatever you have, you will list down who all could be your potential suppliers. Then you shortlist them based on what product or service which you want, see which of these could potentially meet your requirement. So from that short list, you start the process of pre-qualification. Once you have done the pre-qualification, then you create a bidder list.

Then once you have the bidder list, then you send the request for quotation to all these suppliers and request bid from them. So this is the product you want. You send that requirement to these pre qualified suppliers and ask them to submit the bid. And then you evaluate that bid whether these supplier will be able to meet your requirement or not. Based on that submission, you select or avoid the PO or the purchase order to these suppliers. So this is something which you generally follow when it comes to supplier selection. We will go through each of these stages one by one in a little bit more detail. So let’s start with identifying potential suppliers. How do you identify potential suppliers?

56. 1H1 Supplier Selection Process

So in the supplier selection process, the first stage is identify potential suppliers. So where do you find out these? You can find out these from Google, you can find these out from industry journal, that who all are a supplier for that particular product or service. And even before that you could look into your own existing suppliers, whether your existing suppliers can provide this product, product or service or not. If you have existing supplier, you always have some advantage because you know this particular supplier and we know that supplier selection process is a long process, so might take time and resources for selecting that. And many times there is a legal need or there is a need to have local suppliers. So you prefer your local suppliers because you live in a society and you want to promote people who are around you. So you might even want to look at local suppliers. So this is something which you need to consider when you are identifying potential suppliers.

Once you have identified all these potential suppliers, then the next step would be to shortlist them. So based on the feedback, whatever you have, you might want to shortlist or screen some of these suppliers. This could be based on their market reputation. So based on that, based on public information, you might want to shortlist these suppliers. So now you have a smaller list of suppliers to deal with. Once you have that, then you go for pre qualification. In pre qualification, you generally send them a questionnaire and ask them to submit information related to what is their financial status, what is the capacity which they have, whether they will be able to take your job or not. Because if they are already 100% booked, so they might not be able to handle your job timely.

So you look for their capacity, what capacity they have, what’s available, then you look for quality certifications. And one of those could be I used to 9001 certification to check whether they have an established quality management system or not. You might even ask a reference from their existing customers. And in some cases you might even need client approval because you have a client, you might need to have approval from your client to go for this particular supplier.

So that’s another thing which you need to consider. So once you have a pre qualified list of suppliers, so once you had a bigger list, then you shortlisted and now you have a list of pre-qualified suppliers. You have checked some of the information related to financial, related to capacity, related to quality. The next thing is now you establish a bidder list.

So this is your bidder list to whom you would go for the bid. Once you have bidder list, then you request for the bid. So you tell your supplier that this is what you want in request for bid. There are two commonly used terms and these are request for proposal and request for quote RFP and RFQ. Let’s quickly look at the difference between these two terms. Commonly used terms RFP which is a request for proposal is the term when buyer indicates the preferences and ask bidder to provide the details how these requirements will be fulfilled. So this is RFP where you leave a lot of things on supplier to decide. You just tell them what you want.

RFQ on the other hand, which is request for quotation is when you want buyer to supply the exact specification for the product you need. I need a Dell computer, this is the configuration, this is what I need in that computer laptop. This is RFQ. In RFP you just tell them that we need an information management system or we need to set up a network, details are finalized by the supplier. So this is RFP. In my industry, RFP is generally used for contracts.

So when you place a contract to a contractor to do certain job, this is RFP and when you ask a specific pump or valve to be ordered, you use the term RFQ. But generally these are the two terms which are used when it comes to request for bidding. So once you have requested for bid, now its suppliers turn to submit the bid and then you need to evaluate that. So bid is evaluated based on predetermined criteria. So first you look at that whether the technical specification, whatever you wanted are being met by this supplier or not. Then you look at the quality, what quality this supplier is giving the schedule, because many times schedule is important. And then commercial terms, what is the policy for refund, what’s the policy for canceling the contract? A lot of commercial terms are there. All these things are evaluated during the bid evaluation stage. Other criteria include financial strength, which probably these things we would have already seen in pre qualification.

But you still want to see the financial, the production capacity, the communication responsiveness, how is health, safety and environment in the company, in the suppliers organization and how socially responsible this particular supplier is. You might be thinking that how is it very important to look at the safety aspect of this supplier because that’s their organization, how they deal with their workers, that’s their problem. But let’s understand that, that this is for us also as a buyer to make sure that they run a safe organization.

Because if nothing else, if you really don’t bother about what’s happening in their organization, at least be aware that if there is some incidence in that organization that’s going to affect your order as well. There is a fire in that company, you will be the one who will be suffering if there’s an accident in the company, there’s a shutdown in the company, there could be a number of things because of health, safety, because of financial bankruptcy. So all these things, you look at that before you finally place the order so this is evaluating the bid. Once you have evaluated the bid, then you select one of these suppliers based on the criterias which you have already defined, and then you place order on that. So this was the whole cycle of select think.

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