MODULE 5:

SUPPLIER QUALITY MANAGEMENT

OBJECTIVES:

At the end of the lesson, you should be able to:

1. Identify the right and effective supplier by

evaluating their performance regarding delivery
efficiency, product and service provisions,
credibility and reliability.

Evaluating and Selecting

Supplier

What is Supplier Selection?

Supplier selection is the process of choosing which prospective vendor or supplier should an
organization get into business with. One of the primary goals of supplier selection is to establish
a mutually-beneficial business-to-business relationship with a reliable supplier that provides the
most value for money.

What is the Importance of Supplier Selection?

Supplier selection is an important process that sets a foundation for a long-term business-to-
business partnership with suppliers that can greatly contribute to the success or failure of a
business. Guaranteeing supplier quality also makes for an agile supply chain for your business
where disruption is at least minimized, if not totally eliminated.

Done right, supplier selection can help bring about the most value for money for a business or a
commissioning plan that aims to maximize its resources and efficiently operate in order to
optimize profitably.

No matter if you’re a small business or an already established one, identifying the right supplier
when sourcing out and effectively managing them provides substantial assurance for you and
your business.

What are the Stages of Supplier Selection?

Supplier selection is a process that needs to follow a strategy for a business to end up with its
ideal supplier. Here are 5 stages of an effective supplier selection process:

Stage 1: Identify Business Needs

Identify what your business needs in order to produce its products or provide the services that
it offers. Determine also if there are industry standards that you need to meet or regulations
that your business must comply with. If you are in the business of manufacturing goods or
providing services, be aware that your business partners and your customers may also expect
your own suppliers to comply with the same standards that they require of you in order to
maintain an acceptable level of quality across a product’s lifecycle.

Stage 2: List Potential Suppliers

Come up with a list of your potential suppliers after you have identified your business needs.
One of the easiest ways to find potential suppliers is by going through your personal and
business networks. You can also check advertisements, industry publications, as well as attend
trade shows and business forums to find potential suppliers.
Harness the power of the internet and search for online forums that cater to your type of
industry and check business-to-business marketplace where you may find suppliers available in
your area. The internet, just like your networks, is also a wonderful avenue where you can look
for information regarding supplier reputation.

Stage 3: Determine your Supplier Selection Criteria

Create a list that spells out what you want and what the business expects from a supplier in
order to help narrow down your supplier choices. This can also aid in determining the
differences between suppliers and can help make the selection process easier and more
objective.

What are the supplier selection criteria?

A supplier selection criteria is a list of things that you prioritize and will help you decide which
supplier or vendor you are going to select. Aside from detailed specifications, here are some
supplier selection criteria that you may want to think about when looking for suppliers:

 Quality and safety of products – this is the very basic and non-negotiable for your business
when looking for a supplier and something that your supplier should be consistent with.
 Flexibility – the supplier’s ability to adapt to your (possible) changing business needs may
come in handy should you require some changes to your orders in the future.
 Delivery – a supplier, at the very least, is expected to deliver on time all the time and be
reliable enough to inform you if there are going to be any foreseen delays.
 Reliability – a reliable supplier is a business partner that can greatly contribute to your
business’ success while, on the flip side, an unreliable and unpredictable supplier can spell
trouble for your business.
 Cost – make sure that the supplier’s cost is within budget. Ensure also that savings made on
lower costs will not compromise the quality and safety of the supplier’s products. Another
thing to consider is if there is a type of payment arrangement that’s going to be ideal or
agreeable to both parties in case your business needs to do this in the future.
 Quality of service – the kind of service your supplier provides can make them stand out
among their competitors and can make doing business with them a good experience for
you.
Knowing what you want from a supplier at this point can help you make a shortlist of suppliers
that you can meet during your selection process.

Stage 4: Meet the Suppliers

Once you have made a shortlist, arrange a meeting with the potential suppliers and ask if they
can do a presentation of their products and demo how they supply their customers. Meeting
the suppliers is an opportunity to gauge how they operate and if they might be ideal for your
business.

Meeting the suppliers can also come in the form of a supplier site visit. Ask if you can conduct a
supplier audit, using a supplier audit checklist with weighted criteria, which will help better
determine if their operations and their supplies are in line with regulations and compliant with
industry standards expected of your business.

Conduct supplier audits and meet as many suppliers as you can on the shortlist before you
finally select your supplier and proceed with negotiating a contract.

Stage 5: Draft, Negotiate, and Sign the Contract

This is the conclusion of your supplier selection process that began with identifying your
business needs from suppliers, getting to know suppliers, and selecting from a shortlist of
potential suppliers. At this stage, you can draft a contract that clearly details your expectations
and review them with the supplier. Be prepared and expect a negotiation that will cover
important information such as the amount of compensation for the corresponding supplier
deliverables as well as the frequency of payment, due dates, expected delivery dates, and point
persons, among others.

The contract should also include other important information such as the agreed date for end
of contract, possible renewal of contract, and, this should be very clear for both parties,
grounds for early termination of contract.
The ideal scenario should be both parties are happy with the mutually-beneficial terms of the
contract.

How to Maintain a Good Relationship

with Suppliers?
Once suppliers have been selected and
orders have been made, how do suppliers
and businesses keep a mutually-beneficial,
long-term, business-to-business
relationship? Below are some
recommendations derived from the tips
provided by the Queensland government.

1. Establish a Standard
This is crucial even before the onset of the partnership. A standard on the quality and quantity
of supplies, how they are to be delivered, and how often the deliveries are to be made should
already be agreed upon at the very beginning and adhered to for the duration of the contract.

2. Keep Communications Open

Be transparent and maintain an open communication with suppliers. Is there a delay in
receiving the delivery? Tell the supplier right away so they can check what might be causing the
delay and see if they can do something about it. Do you need to change something about your
order? Inform the supplier as early as possible and be ready to discuss any possible impact on
the quality and usual turnaround time as any deviation from previous agreements may affect
not only you but also the supplier and their other commitments.

Keeping lines open and being open for discussions with suppliers can help establish a good
reputation for your business and can help make transactions easier between you and your
suppliers in the future.

3. Pay on Time
A supplier is in the business of providing supplies and expects to be compensated on time all
the time. In the scenario that the business is unable to make a payment on the predetermined
due date, it is best to inform the supplier at the earliest in order to set expectations and agree
on a possible payment arrangement.

4. Maintain Good Recordkeeping

The organization should have a record of every supplier transaction, deliveries received, and all
reports regarding supplies. By having a record of everything related to suppliers and other
vendors, the business will have reliable information that can be used for future negotiations.
Data collected over time can also help justify contract renewals or terminations.

https://safetyculture.com/topics/supplier-selection/#:~:text=Supplier%20selection%20is%20the%20process,the%20most
%20value%20for%20money.
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What is a supplier evaluation?

A supplier evaluation is the process of assessing and approving potential suppliers through
quantitative and qualitative assessments. The purpose is to compile a list of the best suppliers
available. A supplier evaluation also examines current suppliers to measure and monitor their
performance in order to reduce costs, mitigate risks and drive improvement.

Supplier evaluation is the process organizations use when choosing vendors and suppliers for
their products or materials. During this process, a company might evaluate certain criteria to
determine which vendor can best help it achieve its business goals. Here are several criteria you
might use to evaluate a supplier, including:

 Price: Suppliers offer various price ranges for the same products. Monitoring prices
frequently helps you identify changes in market demands or availability.

 Quality: Product quality provides a qualitative measurement of how durable or effective a

supplier's product is. You might request samples to evaluate quantity before purchasing.

 Service: Consider evaluating the service a supplier provides before working with them.
Service criteria might involve friendliness, responsiveness and an overall understanding of
the company's needs.

 Social responsibility: Companies may value suppliers whose values and mission align with
their own. Social responsibility can include a supplier's community involvement and
contributions to charities.
 Convenience: For companies in need of frequent supplies, convenience matters. You might
evaluate how easy it is to order products, how quickly you receive supplies and how willing
a supplier accommodates your employer's needs.

 Flexibility: Flexibility shows a supplier's ability to scale deliveries up and down based on
business needs. This can be an important criterion if productivity fluctuates throughout the
year or if several locations require deliveries.

 Risk: As many businesses rely on their suppliers to provide their own customers' products,
understanding the risk can help you determine if they're the right supplier. You might
analyze the risk of price increases or supply availability.

Types of supplier evaluations

Using several methods for assessing a vendor can provide valuable insight for making business
decisions. Here are several methods you might use to perform a supplier evaluation:
 Scorecards: You might create scorecards with a numerical rating system for each
evaluation criterion. This provides measurable data about each vendor so you can compare
suppliers.

 Questionnaires: Questionnaires can provide more qualitative data, like quality and
communication effectiveness. You might also provide questions to suppliers to explain
some of their processes.

 Discussions: Informal discussions allow leadership and teams familiar with products to
discuss their options. As each team member might have different priorities, like cost or
convenience, discussions can help everyone decide on the most important factors when
selecting a supplier.

 Vendor visits: Some businesses meet with a supplier at their location to learn more about
the company and its production methods. This lets you get acquainted with key staff
members and make notes about the supplier environment.

How to evaluate a supplier

There are several steps you can take to evaluate a supplier:

1. Define your metrics

Before evaluating suppliers, define your metrics based on the most important criteria for the
business. Some metrics you might track include the number of on-time deliveries, average price
or number of product defects received. Each of these performance indicators can help you
compare different suppliers. To understand how receptive they might be to changing business
needs, you can also consider other metrics, like if vendors have available feedback channels and
existing customer reviews.
2. Identify potential vendors
Once you collect metrics, you can list the different types of vendors your employer might need.
These include delivery, manufacturers, office supply providers or raw material suppliers.
Categorizing each based on priority can help you identify which vendor might be most
important to the business's success. These classifications can show you how strictly you might
evaluate each.
3. Create an evaluation process
Defining a clear evaluation process can help you select a supplier and monitor their
performance. Consider which team members can offer input to rate each criterion. These may
include sales associates, members of supply chain teams or quality assurance team members
that can rate the quality and consistency of each supplier.
Once you develop an evaluation team, determine the most effective method to assess vendors.
Consider establishing regular meetings with internal teams to evaluate the supplier and discuss
their findings with leadership before communicating results to the vendor.
4. Communicate with vendors
Similar to regular team meetings, you might also establish monthly or quarterly meetings with
vendors to evaluate their performance. Working with vendors as partners can encourage them
to provide better service and products to ensure you meet business needs. In these vendor
discussions, you might share what criteria they've met and what they might improve to
continue earning your employer's business.

Approaches and Methods

There are several different methods used for carrying out a supplier assessment that considers
sustainability practices:
 Questionnaires designed to evaluate the knowledge and intentions of employees and
management;
 Scorecards that quantify the effectiveness of a business’ sustainability principles;
 Site visits by certified inspectors to the business in question;
 Third-party standard certifications.

Benefits of Conducting a Supplier Evaluation

1. Increase performance visibility. When companies do not have data on how their suppliers
are performing, supplier management tends to be based on assumptions. The simple act of
measuring performance can be even more dramatic when companies award additional business
on the basis of suppliers meeting performance goals.

2. Uncover and remove hidden waste and cost drivers in sustainable

procurement. Sustainable procurement is full of potential risks that can originate from
suppliers with regard to CSR. Some of these risks can be avoided through better communication
between customers and suppliers. By understanding supplier performance and their business
practices and processes, customers can help suppliers reduce waste and inefficiency. This not
only improves supplier performance but also lowers costs for customers.

3. Leverage the supply base. By measuring supplier performance, an enterprise can set a
threshold for its suppliers that can yield higher-quality results. Companies can develop new
products and services based on a better understanding of their suppliers’ capabilities and
performance levels.

4. Align customer and supplier business practices. Ideally, suppliers should run their business
in alignment with their customers by sharing the same business ethics, pursuing similar
standards of excellence and committing to sustainability and continuous improvement.
5. Mitigate risk. Insight into supplier performance and business practices helps reduce business
risk, particularly given companies’ increasing dependency on key suppliers. Risks can be
financial or operational, and increase with geographic distance.

6. Improve supplier performance. The goal of supplier assessment should be to evaluate

supplier performance and improvement. While simply measuring performance has a positive
effect, supplier assessment can be most effective when it leads to continuous improvement
activities that demonstrably enhance supplier performance. Follow-up activities, such as
supplier training and development, and corrective actions to address supplier assessment
findings are the best ways to obtain measurable and positive results.
https://ecovadis.com/glossary/supplier-evaluation/#:~:text=A%20supplier%20evaluation%20is%20the,of%20the%20best
%20suppliers%20available.

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MANAGING SUPPLY CHAIN QUALITY

What is supply chain quality?
This type of quality management refers to the processes companies use to assess, monitor, and
proactively manage the quality of products and processes in the supply chain.
Similarly, supplier quality is the ability of supply chain partners to reliably deliver the products
and services that satisfy the end buyer’s needs. ASQ goes a bit further, adding the cost of
transactions, ease of communication and problem resolution, and alignment of the supplier’s
internal policies (inventory levels, for example) with the manufacturer’s goals to the definition
of supplier quality.
Measuring the cost of supply chain quality
Although ASQ data shows that only one in three organizations actively tracks the cost of quality,
it’s an essential metric for companies that pursue operational excellence. Shaving just a few
percentage points off your cost of quality management each year can translate into millions of
dollars.
When discussing figures associated with quality costs, we need to look further than our internal
quality control programs. The cost of poor quality (COPQ) in the supply chain typically falls into
one of three categories:
1. Appraisal costs
2. Internal failures
3. External failures
4. Prevention costs

Internal failures that impact the cost of supply chain quality

Internal failure costs are those incurred to remedy supplier quality issues before the product
reaches the customer. These include the cost of scrapping or reworking defective materials and
the waste associated with unnecessary work or poor communication.
Take a moment to consider the true cost to your company for:
1. Downtime
2. Production delays
3. Backorders
4. Quality-related price downgrades
External failures that impact supply chain quality costs
External failure costs occur when a defective product is delivered to the customer. These are
the most expensive and potentially damaging of all supplier quality costs. Remedying quality
issues at this stage is generally five times greater than internal failure costs.
Direct external costs include:
1. Product returns
2. Repair and servicing
3. Penalties
4. Warranty claims
5. Complaint investigations
6. Customer service
 INVENTORY MANAGEMENT
INVENTORY MANAGEMENT
What is an Inventory Management?
 A systematic approach to sourcing, storing, and selling inventory—both raw materials
(components) and finished goods (products).
 Means the right stock, at the right levels, in the right place, at the right time, and at the
right cost as well as price.

Inventory Management Techniques

1. Economic order quantity (EOQ)
 is a formula for the ideal order quantity a company needs to purchase for
its inventory with a set of variables like total costs of production, demand
rate, and other factors?
 The overall goal of EOQ is to minimize related costs. The formula is used
to identify the greatest number of product units to order to minimize
buying. The formula also takes the number of units in the delivery of and
storing of inventory unit costs. This helps free up tied cash in inventory
for most companies.
 EOQ is a mathematical technique that considers customer ordering
patterns, the costs associated with placing orders and carrying
inventories, and supplier delivery times
 EOQ determines ideal quantities of raw materials and other elements of
work in process to satisfy customer demands without carrying too much
inventory.

How EOQ Works?

Two-step process:
a. determining the optimal ordering quantity and optimal average inventory
level by using EOQ analysis - This technique allows a company to determine
how much inventory it should order and maintain in an idealized situation (a
situation in which delivery times and demand levels remain constant).
- EOQ analysis defines the quantity and inventory level necessary to minimize
inventory carrying costs while providing sufficient inventory to meet
customer demands.
 b. determining the safety stock - The safety stock adds a little margin above
what would be required for the ideal situation in which delivery times and
demand remain constant.
- The safety stock recognizes that delivery time and demand are typically not
constant, and in fact, the safety stock is derived based on the history of prior
delivery times and demand levels.

2. Minimum order quantity.

On the supplier side, minimum order quantity (MOQ) is the smallest amount of
set stock a supplier is willing to sell. If retailers are unable to purchase the MOQ of a
product, the supplier won’t sell it to you.
For example, inventory items that cost more to produce typically have a smaller
MOQ as opposed to cheaper items that are easier and more cost effective to make.
3. ABC analysis.
This inventory categorization technique splits subjects into three categories to
identify items that have a heavy impact on overall inventory cost.
 Category A serves as your most valuable products that contribute the most to
overall profit.
 Category B is the products that fall somewhere in between the most and least
valuable.
 Category C is for the small transactions that are vital for overall profit but don’t
matter much individually to the company altogether.
4. Just-in-time inventory management.
Just-in-time (JIT) inventory management is a technique that arranges raw
material orders from suppliers in direct connection with production schedules.
The system is often referred to as a "pull" system, as it starts with an order for
finished products and each work station pulls what it needs to produce the finished
products from the preceding work station.
JIT is a great way to reduce inventory costs. Companies receive inventory on an
as-needed basis instead of ordering too much and risking dead stock. Dead stock is
inventory that was never sold or used by customers before being removed from sale
status.
5. Safety stock inventory.
Safety stock inventory management is extra inventory being ordered beyond
expected demand. This technique is used to prevent stock outs typically caused by
incorrect forecasting or unforeseen changes in customer demand.
6. FIFO and LIFO.
LIFO and FIFO are methods to determine the cost of inventory. FIFO, or First in,
First out, assumes the older inventory is sold first. FIFO is a great way to keep inventory
fresh.
LIFO, or Last-in, First-out, assumes the newer inventory is typically sold first. LIFO
helps prevent inventory from going bad.
 7. Reorder point formula.
The reorder point formula is an inventory management technique that’s based
on a business’s own purchase and sales cycles that varies on a per-product basis. A
reorder point is usually higher than a safety stock number to factor in lead time.
8. Batch tracking.
Batch tracking is a quality control inventory management technique wherein
users can group and monitor a set of stock with similar traits. This method helps to track
the expiration of inventory or trace defective items back to their original batch.

Importance of Inventory Management

In a broader context, inventory management also provides insights into your financial
standing, customer behaviors and preferences, product and business opportunities, future
trends, and more. Reduce costs, optimize fulfillment, provide better customer service, and
prevent loss from theft, spoilage, and returns

Good inventory management helps with:

 Customer experience. Not having enough stock to fulfil orders you’ve already taken
payment for can be a real negative.
 Improving cash flow. Putting cash into too much inventory at once means it’s not
available for other things – like payroll or marketing.
 Avoiding shrinkage. Purchasing too much of the wrong inventory and/or not storing it
correctly can lead to it becoming ‘dead’, spoiled, or stolen.
 Optimizing fulfilment. Inventory that’s put away and stored correctly can be picked,
packed and shipped off to customers more quickly and easily.

ONTIME-DELIVERY PERFORMANCE IMPROVEMENT

ON-TIME DELIVERY PERFORMANCE IMPROVEMENT

Introduction:
Attaining acceptable delivery performance is the most significant manufacturing challenge
faced by many organizations. Manufacturing Resource Planning (MRP) systems, when
implemented without considering other delivery performance factors, often do not provide
hoped-for delivery performance improvements.

What is On-Time Delivery?

 Refers to a key performance indicator measuring the rate of finished product
and deliveries made in time.
 Keeps customers happy by meeting promised commitments, ship dates, and delivery
dates. This often called OTD for shorthand.

Delivery performance shortfalls are most frequently driven by problems that fall into six areas:

 Production Capacity.
 Production Control.
 Productivity.
 Procurement.
 Process Robustness.
 Product Delivery Responsibilities.

We've found that companies suffering from poor delivery performance usually have problems in all six
of the above areas. To understand how to find and fix the problems in each area, we need to first
consider how MRP works.

Manufacturing Resource Planning

MRP is a computer simulation of the factory and its manufacturing processes. The MRP system is a
comprehensive and interactive data base that includes information on each product's bill of material,
the manufacturing process, inventory levels, purchased parts' lead times, setup and run times for each
operation, and other information relevant to the manufacturing process.

MRP issues daily dispatch reports to the manufacturing, purchasing, and stockroom areas.

MRP assesses, on a daily basis, the status of all material receipts and issuances from stock, the status of
all manufacturing operations, the status of all purchasing activities, and the status of components that
have been rejected.
Tips for Improving On-Time Performance of Delivery
1. Invest In Local Warehouses
Investing in local warehouses in multiple locations will lessen the delivery time.
2. Maintain Realistic Deadlines
Set a timeline that is realistic and follow it aggressively. Analyze your supply
chain efficiency level and set a delivery timeline accordingly.
3. Ensure Good Relationships with Your Carrier Partners
Find a reliable carrier service provider who can meet your demands and
expectations. Once the carrier has accepted your requirements, ensure that you
maintain good relationships with them by making timely payments. Also, help them in
their endeavor to deliver on time by providing timely information, such as customer
details, stock clearance, and so on.
4. Manage Your Stocks
Ensure that your systems always reflect on the most recent and current status of
your stocks.
5. Predict Production Demand
Some goods are more popular than others. Also, some locations have a big
demand for particular items. Analyzing your data history will give you a fairly good idea
of what products are required and which locations would need more of a particular
product category.
6. Real-Time Order Tracking
Customers are satisfied when they can track their purchases online. By letting
your customers know where in the delivery journey their purchases are, they know you
are working on their deliveries and not sitting on their order. A reliable order
 management software will also help retailers and shippers track the status of an order
and enhance on-time performance.

Why On Time Delivery is Important?

 Drives better collaboration with your customers
 Ensures reliability of delivery
 Customer loyalty