When electronics companies evaluate supplier performance, they also take a close look at total cost of ownership of purchasing from a supplier, how well a supplier responds to requests, and if the supplier provides flexibility in payment terms and order quantities, by James Carbone.
When it comes to evaluating suppliers, it is not just about quality, delivery and cost anymore.
While those three criteria are central to most supplier evaluation programs in the electronics industry, more companies are also factoring in other criteria such as responsiveness, total cost of doing business with a supplier rather than just unit price, corporate social and environmental responsibility and technology development.
For instance, suppliers of computer manufacturer Lenovo aren’t just rated on cost quality and delivery. They are also scored on technology, service and sustainability, including how they manage water and waste. David Martin, manager, strategy & operations global operations, said suppliers are evaluated annually and the company meets with its top-tier suppliers semi-annually.
“We also implemented the Electronics Industry Citizenship Coalition (EICC) Code of Conduct with our suppliers to ensure timely self-assessment” and independent third party EICC audits of suppliers concerning treatment of workers and ethics issues, he said. The Code of Conduct is a set of standards to ensure that working conditions at an electronics company are safe and that workers are treated with respect and dignity, and that business operations are environmentally responsible and conducted ethically.
Martin said Lenovo generally awards business based on overall acquisition cost, which includes the cost of parts, as well as manufacturing, delivery, logistics, warranty, and manufacturing costs and on-time delivery.
Of course, product quality is also measured. Martin said Lenovo measures several quality parameters including first past yield (out of box testing in key supplier outsourced manufacturing), incoming quality for parts, field reliability and repair actions at PPM levels. He said across those parameters, Lenovo measures to ensure issues are resolved quickly because prevention of a quality defect in manufacturing costs less than fixing it in the field.
“Delivery is a key measurable in our supplier evaluation,” said Martin. “Generally, most of our supplier volume is on pull replenishment, so we track towards hub levels and day-of-supply metrics,” he said.
For many electronics OEMs and electronics manufacturing services (EMS) providers, supplier evaluation and scorecards have evolved over the years.
Stewart Partridge, vice president supply chain and process improvement for TT Electronics, based in Woking, England, said in the past his company would measure a supplier’s performance based on parts per million defect levels of the components the supplier manufactured and purchase price variance (PPV). If a supplier provided a lower price for a part than other suppliers, the supplier with the lower price would be ranked higher.
TT manufactures components and provides integrated manufacturing services to defense and aerospace, industrial and rail OEMs.
“In the past, we never really looked at the total cost of ownership performance,” said Partridge. Now we have scorecards where we weigh quality, cost and delivery, but also weigh other factors like a supplier’s ability to deliver smaller order quantities” and provide flexible payment terms.
Partridge said TT annually evaluates more than 400 suppliers that represent 80 per cent of the company’s production spend. “We have 24 manufacturing locations around the world and they all measure quality, cost and delivery in exactly the same way,” said Partridge.
Supplier performance data is stored on a web-based spend analytics tool where TT buyers can view supplier performance, quality, cost and delivery. “Then we can compare vendors and make decisions based on scorecards,” he said.
Emphasis on TCO
He said while TT evaluates suppliers on traditional criteria of quality and delivery cost, it is also looking at total cost of ownership in doing business with suppliers and how well suppliers respond to issues and TT requests. With quality, suppliers are measured on how well they meet the PPM targets that TT set for them. With delivery, suppliers are evaluated on how well they meet TT’s zero days late, three days early delivery window. Cost refers to the price that suppliers charge TT for components.
With total cost “we look at the landed cost of the part. We try to make sure that freight, tax, duty, transaction fees, and payment terms are all in a spreadsheet,” said Partridge. He said from the data TT can determine which supplier has the lowest total cost versus the lowest unit price.
Total cost of ownership can be impacted by supplier responsiveness, or the lack of it. So can TT’s ability to get a product to market in a timely fashion, which is important for TT to compete in the marketplace.
“You don’t just compete on quality and price. You compete on responsiveness as well,” he said.
Responsiveness is related to total cost. For instance, many suppliers have minimum order quantities (MOQ), which can have an impact on total cost. If an OEM needs to purchase 100 parts from a supplier, but the supplier has an MOQ of 1,000, it means the OEM customer has to hold inventory, resulting in a higher cost of ownership in doing business with a supplier.
“So now we want smaller MOQs, smaller batches, smaller purchases, smaller deliveries,” said Partridge. “We don’t want to hold loads of inventory” and be burdened by the cost of it, he said. So TT may request small MOQs and factor in responses of the supplier when calculating supplier performance.
Suppliers may also be asked for flexible payment terms rather than being paid 30 days or for a discount if TT pays in less than 30 days.
“I think responsiveness, order quantities, inventory holding, cash holding and payment terms are all in the forefront of supplier selection and working with suppliers and all this goes to total cost of ownership,” said Partridge.
TT also evaluates the financial viability of a supplier and the risk of placing too much business with a vendor. That puts the supplier into a risk category because then the supplier is dependent on us.
“We don’t want to get to 25 per cent of a supplier’s revenue,” he said. That puts the supplier into a risk category because they are dependent on us. If there’s a downturn, they may go out of business” and would not be available to supply components to TT in the future, said Partridge. “We don’t need that risk.”
Examining supplier service
Other companies are also looking more closely at total cost and supplier responsiveness to requests, problems and issues. At EMS provider Kimball Electronics, based in Jasper, Ind., “service” is a key criterion that is measured, said Paul Grooms, quality manager. Service includes how well a supplier responds to an issue brought to its attention and if they address the issue with root cause analysis, corrective actions and formulate a preventative action plan, said Grooms.
TCO is an important component of supplier evaluation at Kimball. “The cost of transacting business is factored into the overall business rating of all suppliers,” said Jamey Mann, director of global purchasing and supply for Kimball. “Suppliers that provide additional attributes that lower the cost of doing business are provided more consideration in our sourcing decisions,” he said.
Such attributes include “coverage of liability, terms, freight, and inventory programs, all add value and are expected. We value the innovative contributions from our supply base,” said Mann.
Kimball measures quality of the products that suppliers manufacture. “Quality is an objective measure of the PPM (defect levels) over a rolling three-month period,” said Grooms. He added in discussions with suppliers, quality is “much more involved” than the PPM defect level.
“For example, a supplier that has a defective shipment, but demonstrates/provides services to address the immediate needs, such as sorting, replacement parts, failure analysis to address design marginalities is an invaluable partner and it is recognized by Kimball as a differentiator for doing business,” said Grooms.
With delivery, suppliers are measured on delivery to their committed date, said Mann. The percentage of deliveries that are on time are measured. “Each supplier’s ability to provide shipments within a fixed time frame (plus & minus) of the due date is very important to Kimball Electronics,” said Mann.
Shipments made too early impact inventory levels. Late deliveries can result in production lines going down, he noted.
While social responsibility is not part of the scorecard, a supplier is assessed on this when becoming a Kimball approved supplier. “Kimball makes it a priority to ensure our suppliers address both social and global regulatory responsibilities when doing business with us,” said Grooms.
Mann said that Kimball uses scorecards as the center point of periodic business/quality reviews with critical suppliers to improve relationships with suppliers to meet both parties’ needs.
Mann said scorecards are important to Kimball because having suppliers that “deliver a high-quality product on time and at the best cost is invaluable to us and our customers.”
Poor quality = less business
He said poor quality and service will impact the awarding of future business to a supplier. However, Kimball will work with problem suppliers to improve their performance.
“Many of our customers are highly regulated and changing a supplier after a product introduction can be a very expensive proposition,” said Mann. “Therefore, Kimball remains focused on working with suppliers on issue resolution.”
However, in cases where quality and service do not meet our requirements, “we will work with our customers on alternative solutions,” he said.
“We expect, as do our customers, that our supply base deliver high-quality materials at all times,” said Mann. He said Kimball Electronics has had some suppliers that have improved their performance and sustain superior performance after having had issues.
Other suppliers have ups and downs concerning performance based on new product introductions and specification changes. Those suppliers need to make timely, effective corrective actions, he said.
Mann noted that Kimball is a global company with multiple locations. To communicate supplier performance data for all its locations, Kimball has developed supplier quality database so suppliers providing materials to multiple Kimball Electronics locations “can be scored/assessed globally with the click of a mouse, not just at the local level. In this way Kimball Electronics can understand the full impact of a supplier on our business and not make decisions that don’t reflect or take into account the overall performance.”
Continuous improvement of supplier performance is imperative to OEMs and EMS providers.
“We’re always working to improve supplier performance because each commodity segment has a concentrated number of suppliers and the industry is working on thin margins so performance is essential,” said Martin of Lenovo.
However, he noted that supplier performance waxes and wanes in part because suppliers face increasing challenges as the marketplace dynamics change.
“For example, one year cost is tantamount. Next year it’s supply,” said Martin. “In another year, it’s quality. They must continually be flexible and adapt to constant change,” he said.
“They need to adapt to those changes to maintain or improve their performance score. Those with unacceptable levels don’t make it, while those with acceptable levels keep getting business,” said Martin.