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Supplier Quality: Finding the Hidden Risks

Supplier Quality: Finding the Hidden Risks

By Jessica Kranish, February 28, 2014. Executiveboard.com

Firms that ask their procurement and quality teams to work closely together can significantly improve the quality of their suppliers’ output.

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Tales of poor supplier quality management made headlines throughout the past year, with companies in various industries suffering hits to their reputation, from Lululemon Athletica Inc. recalling yoga pants that were too sheer, to the supplier issues that made for a shaky start to the life of Boeing’s Dreamliner, to the ongoing investigations of the horsemeat scandal in Europe.

And in a more recent incident, Aston Martin announced a recall of some of its cars after learning that one supplier used counterfeit material for the vehicle’s throttle pedal arm.

While the details of what caused these problems differ, it’s clear from our work with procurement and quality functions that most companies should rethink the way they manage supplier quality.

A product with quality issues can seriously harm a firm’s reputation, even if the blame lies mainly with the supplier. And the losses aren’t limited to the defective products: having to replace a problematic, or failing, supplier on the fly can be costly.

Quality and Procurement Make a Perfect Match

Many companies stick with tried and tested methods to assess supplier quality—product inspections and supplier audits—but these activities often fail to provide meaningful information. It’s not difficult for suppliers with sub-par quality standards to pass these checks with some understanding of what the process entails; as for the teams carrying out the checks, too many regard them as a box-ticking exercise instead of an investigative process.

By working with Quality to delve deeper into suppliers’ performance on quality, Procurement gets a better view of its vendors’ practices, and the risks they could be exposing the company to, and does so early enough to take action and prevent damage.

What the Best Procurement Teams Do

Some of the most advanced procurement teams in our network start by using supplier segmentation to develop a short list of your most important suppliers (for CEB Procurement members). This provides them with a manageable group to concentrate on. They then determine which suppliers to turn to first by using a risk-based prioritization model.

Procurement and Quality often have a different approach to risk: Procurement tends to concentrate on suppliers’ financial viability and potential disruptions, while most quality organizations are (not surprisingly) concerned with risks that affect product quality. But these different points of view can complement each other and help identify potential issues.

Procurement doesn’t need to agree with Quality on every point discussed. Instead, accept that there’s no one definition of risk, and come to an agreement on a risk prioritization framework for both functions to use.

In one example framework (see chart 1), both Procurement and Quality assess a supplier based on their own definitions of risk; they then compare ratings to determine whether to leave the relationship as it is or take action—from developing improvement plans to terminating the relationship.

Shared Supplier Risk Prioritization Framework (Original)_edited-1

Chart 1: Shared Prioritization Risk Supplier Framework  Source: CEB analysis

At healthcare technology firm Beckman Coulter, for example, Procurement and Quality work together to evaluate current suppliers and assess potential new ones. Using a series of filters, Procurement and Quality assign one of three risk levels to each supplier to determine what steps to take next. For suppliers deemed to be Level 3 (high risk), the company conducts an immediate audit. For Level 2 (medium risk) and Level 1 (low risk) suppliers, the company defers its audits by one year and two years respectively.

Improve Quality Audits

Most companies’ supplier audits don’t go beyond a set standard that suppliers can easily pass; even those intent on concealing problems.

While these traditional tools can help determine whether suppliers aren’t conforming to standards or regulations, they’re ineffective at identifying the true cause of suppliers’ issues.

Procurement and quality teams should go beyond standard audits and consider other factors that pose risks, such as the supplier’s talent management or basic operating controls, to gain a better understanding of supplier performance. Quality can ask vendors for information on these risks directly; it can also use public information—such as news stories—to learn more.

For instance, 73% of employees attribute work errors to a lapse in their focus. Work-level distracting events, such as a change in team composition or workload, are most often responsible for this lack of focus. Auditors observing a supplier may notice that employees seem stressed, or that the supplier currently has a high turnover rate, but the auditor typically doesn’t record these concerns due to the limitations of the standard audit criteria. If a supplier passes the audit, Quality tends to move on. To go deeper, Quality can incorporate new criteria into its audits and ask questions like:

  • How long do employees’ shifts last?
  • Is the plant environment pleasant?
  • What does the plant’s safety record reveal?

Standardize the Performance Management Process

Firms should set-up a clearly defined and standardized process. At Rolls-Royce, Procurement created a “metrics dictionary” to prevent data inconsistencies among its suppliers. The function also developed a roadmap for managing performance, setting out steps like evaluating performance and creating an improvement plan, to make sure both the procurement team and the suppliers fully understand one another.

Procurement at BP uses a comprehensive set of tools, from segmentation to relationship mapping to a global performance dashboard, for a complete picture of supplier performance.

Procurement teams should also ensure they’re tracking the right metrics. Gold standard quality metrics include evaluating whether the supplier takes ownership of quality problems and whether the supplier’s quality team are trained to a good standard. Progressive firms also track the number of incoming quality issues, continuous improvement efforts the supplier undertakes, and reliability.

When Trouble Comes Calling

Procurement can use quality issues as an indicator of supplier financial distress. Rather than develop a generic list of distress signals or a highly customized list for each supplier, create signature lists for groups of suppliers that share certain characteristics, for example, suppliers in the same category or industry.

Brainstorm a list of distress signals—such as a decline in quality, fewer product choices, or deep discounting; then filter the list down to signals that are detectable and that will provide enough advance warning of possible problems. Procurement can also look back at suppliers that failed to identify the indicators that might have signaled the supplier’s impending failure.

If a firm is considering switching suppliers, ask two questions:

  • How likely the supplier is to remain in business or continue to provide products or services to your company?
  • How easy it would be to switch to alternate suppliers?

This will allow Procurement to determine the best response: for instance, qualifying alternate suppliers, working with the supplier to improve, or urgently terminating the relationship.

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