Old adages made new: Supplier performance management is job one in creating a lean supply chain

LSI Corp., a provider of silicon, systems, and software technologies used by other companies to power storage and networking solutions, has no factories of its own. Instead it chooses to run its supply chain as a virtual company. That kind of operation obviously places a premium on supplier performance.
By Jim Fulcher, contributing editor October 1, 2008

LSI Corp. , a provider of silicon, systems, and software technologies used by other companies to power storage and networking solutions, has no factories of its own. Instead it chooses to run its supply chain as a virtual company.

That kind of operation obviously places a premium on supplier performance.

To establish a successful virtual business model, LSI must document and maintain tight integration with supplier operations, says Don Alvine, VP of operations and chief procurement officer at the Milpitas, Calif.-based company. After all, LSI’s performance can only be as good as that of its suppliers.

“We tell suppliers they shouldn’t be able to tell where their business ends and ours begins. It has to look like one company rather than a collection of companies,” Alvine says.

LSI, while certainly ahead of the curve, isn’t alone in relying heavily on optimal supplier performance. As manufacturers lean more on their partners for core activities while experiencing demand variability and a simultaneous rise in customer expectations—as well as higher commodity and transportation prices—the ability to manage suppliers’ performance is even more vital.

First steps

Improving supplier performance—and documenting it, at that—probably isn’t as widespread as it should be, but manufacturers are racing to put it in place, says Mike Jovanis, VP of product development with Sparta Systems , an enterprise quality management solutions supplier.

Essentially, adoption is driven by business growth that requires companies to cut costs and reduce risk, Jovanis says. “Companies in many industries are facing corporate directives to reduce costs in the midst of heightened scrutiny over quality and regulations,” Jovanis adds. “The problem in some industries is that brand recognition is a key differentiator. In high-profile markets like pharmaceuticals and automotive, brand reputation can be damaged overnight by a quality issue.”

For this type of company, the issue isn’t just the cost of low quality, but the overall cost of total quality, Jovanis says. To achieve their goals, many companies use supplier and vendor scorecards to measure performance. This process enables them to document delivery time, defect rates, and other measurements, which can lead to improvements.

For a virtual company like high-tech supplier LSI, it’s important to have a B2B platform to address the challenges of managing outsourced manufacturing. An E2open solution enables supplier order management and VMI with direct suppliers, WIP tracking for subcontractor assemblies, supplier performance management and scorecarding, and linking customer demand and supply for the former Agere Systems side of LSI’s business.

One of the problems found at the outset of documenting supplier performance is that employees often need to manually enter data from email systems and faxes into a spreadsheet, says Brent Ray, president and CEO of TrackSpeed , a supply chain technology and tracking solution supplier. Another substantial obstacle is that metrics may be measured one way at one facility, and a different way at another facility. That means across the enterprise, there’s no uniform way to document supplier performance.

Using an automated system to enforce standards will eliminate manual data entry, says Ray.

Time is money

“One of the biggest benefits from documenting supplier performance across the enterprise is that a company can reduce costs,” says Ray. “The next step is to compare locations and supplier performance across the enterprise. That way a company can identify its best practices and then roll them out across the enterprise as a standard.”

Manufacturers understand that supplier performance management is about time and money, says John Boyless, director, School of Technology Studies; and associate professor, Industrial Distribution, at Eastern Michigan University.

“Time is money, and that old adage holds true today more than ever before,” Boyless says. “Improving supplier delivery time allows manufacturers to cut turnaround time and inventory,” he says.

It’s important to note that there are significant benefits for the supplier as well. When the manufacturer and supplier work together, they identify ways for the supplier to make improvements, Boyless says. One example might be that the supplier can make multiple partial shipments rather than waiting to make one complete shipment that may be late, and thus incur express delivery rates.

Other benefits, while considerable, can be hard to quantify.

TD Industrial Coverings (TDIC), for example, is deploying the KPI Scorecard from TrackSpeed as a means to solidify customer relationships, says Mark D’Andreta, president. The Sterling Heights, Mich.-based company makes protective covers for robotic and other industrial applications, including welding, painting, finishing, and assembly applications.

“It’s a dog-eat-dog world now because with commodity pricing, the difference between prices for our products and our competitors can be slight. Any advantage you can demonstrate to the customers is critical,” D’Andreta says. “We hold ourselves accountable for the savings we promise customers. We use KPI Scorecard to show customers the savings we can offer now—and later, that we delivered on what we promised.”

In particular, TDIC shows customers savings that are possible when a specific part price has been reduced, or that a part has been redesigned using less-expensive materials. On the other hand, sometimes a part is redesigned using a more-expensive material so the part will last longer. KPI Scorecard enables TDIC to show the customer that even though the part now costs more, it lasts longer so the customer won’t need to reorder it as frequently.

“This is all about providing extra value for customers because they can see what they should expect, and how we hold ourselves accountable,” D’Andreta says. “We’re gaining favor with existing accounts. Customers appreciate it.”

Managing supplier performance with the goal to improve supplier quality and on-time delivery is just the tip of the iceberg, say industry experts. The real goal is to gain the necessary knowledge to improve supply chain collaboration.

Demand flow in high-tech

Collaborating with trading partners means sharing demand signals, jointly planning and managing inventory, extending product availability, and automating processes across demand and supply networks, says Mickey North Rizza, a director with Boston-based AMR Research . While these are important differentiators for leading companies, it is demand flow that drives supply chain synchronization, North Rizza says.

Research indicates that while high-tech and retail companies have raised the bar on collaboration with sound practices, the leaders integrate collaborative practices with collaborative relationships.

“High-tech companies are proving their maturity in understanding demand flow and the importance of multi-enterprise collaboration,” explains North Rizza. “They translate and manage demand volatility to create more predictable multitier supply plans, and enact global sourcing strategies. They also segment their suppliers and implement performance management processes to improve inventory availability and reduce obsolescence.”

Mark Woodward, CEO of E2open , a provider of multi-enterprise on-demand solutions for supply and demand chains, procurement, and B2B integration, sees that trend as well.

“I can’t think of any E2open customers who don’t see supplier performance management as a cornerstone of their supplier relationship management strategy,” Woodward says. “Visibility to supplier performance used to be a ‘nice-to-have’ capability, but now it’s a ‘must-have.’ You can’t compete without it now. Customers like Dell, LSI, Celestica, Vodafone, Boeing, and Cisco consider supplier performance management a core capability.”

Companies like these have moved past simply gaining visibility to supplier performance data. Now they self-report and share the results on an ongoing basis instead of waiting for a quarterly review, Woodward says. Supplier performance management is integral to Lean and Six Sigma initiatives, seeking to drive continuous improvement using more sophisticated data measures and key performance indicators based on the total picture of what a supplier is doing for a customer. So instead of simply measuring on-time delivery, they review supplier responsiveness to a change request, he says.

“Manufacturers and suppliers then work together to use these performance metrics to drive improvements in overall supply and demand network efficiencies. To do so means giving the right information to the right people at the right time so they can make decisions—and then measure the results,” says Woodward. “The management philosophy shifts from tactical fire fighting to self-service exception management measured against agreed-upon service levels. The best suppliers use the information to win a larger share of spend allocations. Suppliers not able to achieve performance targets receive a lot of ‘help,’ and if corrective actions don’t result in satisfactory improvements, those underperforming suppliers will lose their standing.”

A virtual company

LSI’s virtual company status involves considerable collaboration. In fact, Allentown, Pa.-based Agere Systems , an integrated circuit components company, implemented E2open’s multi-enterprise supply chain management platform some time ago to enhance customer service levels, cut costs, streamline operations by outsourcing manufacturing, adopt lean supply chain techniques, and centralize procurement, Alvine says. In early 2007, Agere and LSI Logic merged to form LSI Corp. Today, the former Agere side of the LSI business continues to use the E2open solution, which is being rolled out across LSI as a company standard.

“The management philosophy shifts from tactical firefighting to self-service exception management measured against agreed-upon service levels.”

—Mark Woodward, CEO, E2open

E2open’s solution delivers integrated order management, vendor-managed inventory, and visibility throughout the supply chain—including into subcontractors’ assembly locations, Alvine says. That gives LSI one stream of information—from customers to suppliers—used to more effectively manage inventory and capacity, and satisfy customer requirements.

Chief among the solution’s capabilities:

  • Visibility into relevant partner information and processes to ensure alignment of supply and demand, streamline inventory, and minimize risk;

  • Automation of process steps to reduce manual intervention, improve data quality and timeliness, and enable management by exception;

  • Aggregation and normalization of data across outsourced partners, which enables end-to-end supply and demand visibility and process improvement; and

  • Performance scorecards allowing supplier management to be measured against defined metrics to ensure compliance with policies and reduced costs associated with errors.

LSI uses the E2open solution to execute automated, exception-based workflows with its trading partners. Alvine says all the workflows are closed-loop with positive response. For instance, LSI uses the platform to communicate its forecast to suppliers, which then use the platform to send a supply commit back. If a supplier can’t commit to the forecasted quantities, the platform flags the problem and escalates it according to LSI-defined severity parameters.

“An initiative like this is a big undertaking, but there are significant benefits because what happens is the demand signal from the biggest customer passes through all suppliers. Since they can see demand, they can become leaner in turn—and help the entire supply chain become lean,” Alvine says. “The E2open solution helped us cut costs, streamline the organization, and respond to customers who exhibit a quicker pace. The result is we now have 99.94-percent delivery performance, inventory turns are 150 percent better than the industry average, and we’ve made substantial margin and cycle-time improvements.”