How to Establish Effective Supplier Development Process?
If you buy a lot of products from supplier companies from China, you can have an impact on those companies. If you can get them to use the supplier development process to improve their performance, for example, by improving their quality or cutting their costs, you will benefit greatly.
The process of getting suppliers to improve is often referred to as supplier development process. Most large companies have established their own supplier development processes, at least in terms of key relationships.
The question is, what makes sense for your company?
As we will see, the supplier development process needs to be adapted to the situation on both sides. There is no “one size fits all” approach here.
Table of Contents
Supplier Development Process Flow:
Here’s a comprehensive overview of the Supplier Development Process Flow:
1. Identify Needs and Requirements:
- Assess internal needs and define specific requirements for suppliers, considering quality, cost, delivery, innovation, sustainability, and other relevant criteria.
- Determine the types of suppliers needed (e.g., raw material suppliers, component manufacturers, service providers).
2. Supplier Identification and Screening:
- Conduct research to locate potential suppliers through various channels (e.g., industry directories, trade shows, online databases, referrals).
- Screen potential suppliers based on preliminary criteria to narrow down the list.
3. Supplier Evaluation and Selection:
- Issue a Request for Proposal (RFP) or Request for Quotation (RFQ) to gather detailed information from shortlisted suppliers.
- Evaluate supplier proposals based on defined criteria, including:
- Financial stability
- Technical capabilities
- Quality management systems
- Past performance
- Cost competitiveness
- Delivery reliability
- Geographic location
- Ethical and sustainability practices
- Select the most suitable suppliers based on evaluation results.
4. Supplier Negotiation and Contract:
- Negotiate contract terms and conditions with selected suppliers, covering:
- Payment terms
- Delivery schedules
- Quality standards
- Service level agreements
- Intellectual property rights
- Confidentiality agreements
- Termination clauses
- Sign a formal contract to establish the business relationship.
5. Supplier Development and Performance Management:
- Onboard new suppliers, providing orientation and training on company processes and expectations.
- Regularly monitor and evaluate supplier performance using metrics such as:
- Risk management
- Collaborate with suppliers to identify and address performance gaps.
- Provide feedback and coaching to help suppliers improve.
- Conduct joint improvement projects and knowledge sharing initiatives.
6. Supplier Relationship Management:
- Build strong, collaborative relationships with key suppliers.
- Foster open communication and regular interactions.
- Engage in joint problem-solving and continuous improvement efforts.
- Recognize and reward supplier achievements.
- Resolve disputes fairly and efficiently.
7. Supplier Certification and Audits:
- Implement a supplier certification program to assess and verify supplier capabilities and compliance with standards (e.g., ISO, industry-specific certifications).
- Conduct regular audits to ensure continuous compliance with quality, social, and environmental standards.
8. Supplier Risk Management:
- Identify and assess potential risks associated with suppliers (e.g., financial instability, quality issues, supply chain disruptions).
- Develop mitigation strategies to minimize risks (e.g., alternative sourcing options, contingency plans).
- Monitor risk factors and implement corrective actions as needed.
9. Supplier Refinement and Reassessment:
- Continuously review and refine the supplier base to ensure alignment with business needs and strategies.
- Regularly reassess supplier performance and make adjustments as necessary (e.g., termination of underperforming suppliers, expansion of relationships with high-performing suppliers).
New Supplier Development Process Tips:
1. What is the Current Situation? What Do You Need to Prioritize?
If you have collected a KPI dashboard on each key vendor, you may be able to point to 1 or 2 areas of performance they need to improve. Even if you don’t have any data, you can choose one of these familiar candidates to prioritize for improvement:
- Quality, including closing the loop on past issues to prevent a recurrence
- On-time delivery
- Unit Cost
- Ability and speed to develop custom products
- Universal service
2. Do You Have the Strength?
If you are General Motors and dealing with a relatively interchangeable source of parts, you are at an advantage.
If manufacturer A rejects your request and doesn’t want to sign your contract, you go to manufacturer b. Once they accept a project, they can’t abandon it midway through a model’s life cycle without a penalty that will likely put them out of business.
However, not every buyer is in this position.
We see some companies working with a main supplier. They desperately need the manufacturer to improve in some way. But they are totally dependent on them, so they can’t disrupt the situation. Both sides are aware of this fact.
This becomes even more problematic when the buyer needs more capacity. They can never risk losing a source of product, so they can’t be too strong on any key supplier.
The more you rely on the manufacturer, the more you need to establish a positive partnership. You can’t force them to do anything.
And, the smaller you are in the eyes of the factory, the less you can push them to do anything. If you buy 60% of their products, they will certainly listen to you. If that percentage is 2%, they probably won’t do it.
3. How Far and How Fast Do You Need the Supplier to Go?
You need to understand what you need to change. Let’s take three examples.
- If they have a bottleneck process where they need to buy 3 additional cheap machines and hire 3 mechanics, this could be a 3 month project.
- Suppose they lack a planning system that regularly causes them to miss important deadlines. In that case, that could be a 9 month project (hire a production and material control person).
- If you want them to be “zero defect“, you need them to change their entire mindset. It will become “the way they do business”. There is no end in sight. It may take a big push from their key customers. or, you can hire us to help you do full inspection job and let them look over the inspection report to fix the quality issues in the future.
4. Decide on a Method to Motivate Suppliers
In other words, what carrot will you use and what stick will you use? Here are some common approaches:
- Offer expert assistance
Offering expert assistance would be welcome. Or, in a facility that doesn’t want anyone to see their work up close, it may be seen as an offence. Proceed with caution. Remember, getting suppliers to cooperate in deciding on a good choice is more likely to succeed than ordering what they must do.
- Hold regular formal meetings.
A formal meeting once a quarter (for example) to explain the areas of underperformance and how to address them can be very helpful. Maybe all they need is some pressure, and then they’ll find out what they need to do.
- Compare with other suppliers.
Comparing yourself to other anonymous suppliers to mimic their competitive spirit and/or get them to take your threats seriously can also help a lot.
- Escalate issues using painful and expensive situations
Escalating specific issues into expensive and painful situations (e.g. 100% source checking, frequent audits… at the supplier’s expense) may be all they need. Make their mistakes painful, and then they will work to avoid them. Of course, this will add friction to your relationship, so if you want a long-term partner, don’t overdo it.
- Punish them financially
A similar idea is to financially punish employees for poor performance. Make their mistakes painful. Charge on the rank.
5. Implement the Method You Choose and Iterate as Needed
First, you need to announce it to the relevant suppliers. The axis of improvement may be related to a key topic that you are driving throughout your business and that they may have already heard about. Or it may be very specific to their operation. In any case, you will need to explain why it has become critical and inevitable.
If you have made such a request and it has not been honored, then you should take a “wait and see” attitude. You will need to send someone to the plant to push your agenda.
6. How to Expect Cost Reductions without Getting into Very Conflicted Relationships
Many companies have buyers who are evaluated on the basis of the savings they make through price reductions, so they will pressure suppliers to offer lower prices.
This comes at the expense of building cooperation and positive relationships. Everyone in the factory needs to be careful not to convey any information that buyers could use to drive down prices.
Now, the right approach is to be transparent and clearly communicate expectations when developing new products. Based on a specific timeline, you will need a lower price over time. The people in the factory can plan for this and continue to look for ways to save money.
7. Provide Constant Feedback
Your understanding of good/bad performance may differ from that of your suppliers. It’s important to give them regular feedback to make sure they understand what you won’t tolerate and how much their problems are costing you.
Developing a vendor is a marathon, not a sprint. It usually requires a combination of constant pressure, consistency in messaging and providing regular feedback directly to the operations team.
Some buyers will get frustrated by small steps and move on to another source. But other sources can have their own issues, which are unclear at this point. The “middle ground” is usually to dual source a part/product, compare the two sources, and then give the best manufacturer more business. It can be part of your supplier development approach.
In some cases, you can really build a close partnership, and the benefits of single sourcing are usually justified.
It’s a really great and productive relationship. Unfortunately, this doesn’t happen very often.