In this chapter the focus is on how the supplier evaluation process is handled in practice between JOT Automation Group Plc. and its suppliers. Evaluation process is explained step by step and in each stage procedures and processes are analysed. In this case two suppliers were audited and measured. Supplier evaluation process is concluded and improved to use further on as a routine procedure in JOT Automation Group Plc.
5.1 Supplier selection
Pneumatic components are one of the essential materials used in JOT Automation Group Plc. products. At the moment two suppliers are used and relationship with both of them dates back years. Festo Oy is a minor supplier compared to its competitor covering ca. 40% of the supply share at JOT Automation Group Plc.’s purchases. However Festo Oy is willing to gain a larger share of the pneumatic components by increasing R&D co-operation and offering custom-made components to JOT Automation Group Plc. This lays an interesting foundation for supplier evaluation process.
The other supplier is a mechanical component’s merchant SKS-Tekniikka Oy. JOT Automation Group Plc. is buying a variety of products from this company related to different movement functions like linear bearings. SKS-Tekniikka Oy has also been a long-time supplier. Supply share and relationship of SKS-Tekniikka Oy has recently been stabile and remarkable improvements have not been insight.
Both suppliers are interesting cases to test supplier evaluation process in practise.
Festo Oy is putting a lot of effort on to serve JOT Automation Group Plc. better and so on willing to develop co-operation. Mutual R&D operation offers opportunities as
well as great risks. Supplier evaluation should give as a result a precise investigation of supplier’s business policies, which will reduce co-operation risks.
SKS-Tekniikka Oy’s evaluation process will focus more on the relationship development of the current situation. Why relationship is not developing and why the same problems occur all the time. Evaluation process should find deviations of the areas where misunderstandings can be found.
5.2 Supplier evaluation planning
At the current situation at JOT Automation Group Plc.’s performance indicators are delivery promptness and number of the claims, which both are measured continually.
Performance history is gone trough with the supplier monthly basis. There were two clear requirements set for the suppliers, which they should aim to. Delivery promptness ought to be over 98% and component’s warranty at least 24 months.
During the last year Festo Oy’s performance has been moderate. Some problems occurred in the delivery promptness during the summer but performance has risen during the last quarters, see figure 12.
Delivery Promptness
Figure 12. Festo Oy delivery promptness.
Number of the claims was five during the year 2000. The number was minor compared to the amount of purchased components, which can reach over hundred thousands. The main factors of the audit with Festo Oy were the focus on the delivery accuracy and its improvements along with organisational investigation.
SKS-Tekniikka Oy has had some deviations with delivery promptness during the year 2000. Problems have been discussed several times in the monthly meetings.
Improvement has been remarkable. It should be clear that the importance of the delivery promptness is emphasised in the future. At the result of the audit process both companies should be aware of the delivery promptness measurement procedure.
Investigating the working procedures secures opportunities for future developments.
Delivery Promptness
Figure 13. SKS-Tekniikka Oy’s delivery promptness.
5.3 Supplier audit preparation
An audit preparation was made based on the ten preparation steps described previously. Targets of the audits were already set in the previous step: delivery promptness and relationship development. With both of the suppliers evaluation process was generally described in the monthly meetings. At the same time agreement of the audit date was set.
The audit questionnaire was formed based on the checklist. Delivery accuracy audit checklist was selected to be the foundation of the conversation and the audit should be weighted on that list. Questionnaire was sent a week before to the suppliers to prepare themselves. Suppliers were asked to send an operation manual or a process description, but both Festo Oy and SKS-Teknikka Oy were not willing to hand it out.
Both of the companies appealed to the information confidentially.
Different departments like design, purchasing, feedback were interviewed to find out any ideas or possible problems concerning operations with suppliers. No remarkable shortages were found. It seemed that everything was in order and business operation within the company was going smoothly. Measurement systems and quality documents were checked to find some interfering problems or interesting cases to go trough. Reclamation register showed a few good examples in both of the cases to check and go trough during the audit process.
Audit team consisted of two persons: Miika Sunikka and Raimo Lehto who is responsible of material sourcing functions at JOT Automation Group Plc. Briefing was held before the audits, details were discussed and material was checked. Both members knew their tasks and objectives of the audit. Raimo Lehto operated as a leading auditor.
5.4 Supplier audit process
Before starting the audit attendances were introduced and areas of response were explained. As a review Raimo Lehto explained the supplier evaluation process, the purpose of the audits and also its importance to JOT Automation Group Plc.
At Festo Oy preparation was done excellently. The audit started with informative presentation of Festo Oy’s development program. A lot of answers were given and interesting aspects came out. One of these aspects was the company’s broad measurement system and how simple it is to use. After presentation the audit questionnaire was gone trough question by question. Major part of the audit was spent on product and customer service elements. Rest of the elements were checked roughly. After each question acceptance was checked and a short description was written for further reporting. Some of the questions were skipped if they were seen irrelevant or too confidential. There were five attendances from Festo Oy each responsible for different function and each offering answers to specific questions.
SKS-Tekniikka Oy’s audit preparation was done adequately. There were six attendances from Tekniikka Oy each responsible for different functions. SKS-Tekniikka Oy did not have a company or process presentation prepared. On the other hand presentation was not asked or needed, but it would have been a convenient way to start and link things together. The audit continued according to the questionnaire.
Answers to questions were clear and mostly acceptable, but some exceptions occurred. Also here like in the previous case questions were skipped based on the JOT Automation Group Plc.’s requirements.
Both audits were held on a same day and estimated to last 3 hours. This agreement was made during the pre-negotiation between the audit process parties. Time limit seemed short, but efficient preparation was thought to cover short action time. In both of the cases audit went according to the plans.
5.5 Supplier audit reporting
After the audit process questionnaires and remarks were collected and put together for a final report. Information were analysed and essential conclusions were written down. Report was formed based on the audit process description document. This document described how to do internal or supplier audit documentation at JOT Automation Group Plc. Supplier audit report consists of the audit questionnaire with remarks and the audit summary.
5.6 Supplier acceptance or rejection
Generally both suppliers were found to be in a good operational condition and acceptance for continuation was easy to admit. In both of the audited companies operational procedures and business culture was surprisingly well managed.
Especially in Festo Oy’s case expectations were exceeded. Both companies use process management, which is needed in ISO 9000-2000 series updates.
Target of Festo Oy’s audit was to reduce risk of possible mutual co-operation. This risk was noted to be very marginal, because of the up-to-date and still continuously developing of the organisation. Both JOT Automation Group Plc. and the supplier saw delivery promptness to be very important and mutual operation of its improvement was decided. Festo Oy agreed to deliver reports a cross, that possible deviations could be noticed as soon as possible. Transportation was seen as one of the major critical risk factors.
Aim of the SKS-Tekniikka Oy audit was to find the problem, which causes deviations of the delivery promptness measurement between the two parties. During the audit it was noticed that JOT Automation Group Plc. delivery measurement allows only one-day difference in confirmed delivery date. SKS-Tekniikka Oy’s delivery measurement allows six days difference. This gap is remarkable and essential reason for different results. SKS-Tekniikka Oy will change system unite with the JOT Automation Group Plc.’s system.
5.7 Supplier action plan preparation
A few actions were done based on the results of the audits. In Festo Oy’s case reporting as well as reclamation handling stage needed some improvements. Festo Oy will deliver reports of purchase amounts and delivery promptness to JOT Automation Group Plc. Purchase amounts and delivery promptness are measured from Festo Oy to the JOT Automation Group Plc.’s local network companies. To speed up reclamation handling procedure at Festo Oy JOT Automation Group Plc.’s reclamation number should be mentioned while filling out Festo Oy’s reclamation form.
In SKS-Tekniikka Oy’s case the most important action was to change measurement system to match with JOT Automation Group Plc.’s. SKS-Tekniikka Oy will also develop reporting by delivering reports of purchase amounts and delivery promptness to JOT Automation Group Plc. Purchase amounts and delivery
promptness are measured from SKS-Tekniikka Oy’s to the JOT Automation Group Plc.’s local network companies. These actions will have a follow-up in monthly meetings held between JOT Automation Group Plc. and both Festo Oy and SKS-Tekniikka Oy.
5.8 Performance measurement and reporting system implementation
Supplier performance measurement is based on the measurement forms introduced previously in chapter 4. Implementation started by creating the workbooks for both suppliers with Microsoft Excel. There are own worksheets to each quarter where data input is done. The worksheet calculates supplier performance index after the final accepted input. The workbook collects SPI information and presents it as a graph, in which the historical trend can also be seen. The purchaser in charge fills out the worksheet after each quarter and is responsible for validity of the data.
Responsible purchaser was advised to operate with the performance measurement system. There were no changes to performance measurement indicators. Reliable data was considered to be available and it can be used to define SPI. Indicators, purchase price reduction and proximity to JOT plants, were defined to cover a specific product portfolio. This was done to ease the amount of work in the data-gathering phase. Supplier specific standards so to say targets were set to Festo Oy and also to SKS-Tekniikka Oy based on the information received from the yearly contracts and present supplier requirements at JOT Automation Group Plc.
Purchases and forecast indicator’s increase or decrease is scaled from 1 to 2.
Standard is set to 2, because JOT Automation Group Plc. is seen to benefit when supplier sales continually increases. Purchase price reduction / Discount % standard is set to each supplier individually compared with last years discount %. For Festo Oy standard is 35 and in SKS-Tekniikka Oys case it is 10. Number of claims is calculated manually from JOT Automation Group Plc.’s reclamation database.
Standard number is 1 because of mathematical equations. Response to claims as well
as stock programming, response to special orders, evaluation of relationship, ease of ordering, information system and reporting standards are based on general requirement for supplier and are same for all suppliers. Column remarks give detailed information for buyer to place the right performance to each indicator.
Delivery promptness standard is set 100 in this phase. Like can been seen in SKS-Tekniikka Oy case pour performance in this indicator will decrease SPI to very low level. Possibility is that 100 will be replaced with moderate target. Proximity to JOT plants standard is taken from the supplier’s yearly contract.
Relative importance weights in this stage are set to support JOT Automation Group Plc. strategies. This means that quality and delivery issues are weighted to be the most essential. Relative importance weights can be changed when more experiences of the supplier measurement form is gotten.
5.9 Continuous performance measurement and reporting
After finishing the supplier performance measurement worksheet data from the year 2000, fourth quarter was gathered for both Festo Oy and SKS-Tekniikka Oy. Ready made forms are shown below.
Festo Q4 2000 Supplier Performance Measurement Form
Made by:Miika Sunikka Time:08.03.2001 Performance Criteria
1 2 2 Total amount of purchases
yearly contract Purchase Price Reduction/ Discount %
Discount % 45 35 3 If discount %, RIW should be marked positive
Quality
excel -file Number of Claims Number of Claims
(claims +1)
1 1 -5 Number of claims indicated during last quarter
buyer Response to Claims 1-3 3 3 4 1= No response, 2= Response, but not
adequately, 3= Response, OK
Service Performance
wise Delivery Promptness
(positions)
% on Time 94,2 100 6
buyer Stock Programs 1-3 3 3 2 1= No stocking, 2= Stocking, but not
adequately, 3= Stocking, OK
buyer Response to Special
Orders
1-3 3 3 3 1= No response, 2= Response, but not
adequately, 3= Response, OK
buyer Proximity to JOT plants Lead-Time 7 9 -2 Selected components, average delivery days
Relations
buyer Evaluation of
Relationship
1-3 3 3 3 1= No relationship, 2= Relationship, but could
be better, 3= Good relationship
buyer Ease of Ordering 1-3 2 3 2 1= Fax/ phone, 2= Email, 3= Internet
buyer Information System 1-3 1 3 2 1= Systems not compatible, 2= Systems
compatible, 3= Systems compatible and developments ongoing
buyer Reporting 1-3 3 3 2 1= No reports, 2= Some reporting, 3= Full
reporting
Supplier Performance Index 0,91
Table 3. Supplier performance measurement form and supplier performance index from fourth quarter, year 2000, Festo Oy.
Supplier performance index 0,91 is good and can be seen as acceptable. Festo Oy’s performance is unexceptionable, but still improvements can and should be done.
Focus will stay on delivery promptness.
SKS Q4 2000 Supplier Performance Measurement Form
Made by:Miika Sunikka Time:03.08.2001 Performance Criteria
1 2 2 Total amount of purchases
yearly contract Purchase Price
Reduction/ Discount % Discount % 15 10 3 If discount %, RIW should be marked
positive
Quality
excel -file Number of Claims Number of Claims
(claims +1)
3 1 -5 Number of claims indicated during last
quarter
buyer Response to Claims 1-3 3 3 4 1= No response, 2= Response, but not
adequately, 3= Response, OK
Service Performance
wise Delivery Promptness
(positions)
% on Time 70,7 100 6
buyer Stock Programs 1-3 3 3 2 1= No stocking, 2= Stocking, but not
adequately, 3= Stocking, OK
buyer Response to Special
Orders
1-3 2 3 3 1= No response, 2= Response, but not
adequately, 3= Response, OK
buyer Proximity to JOT plants Lead-Time 9 7 -2 Selected components, average delivery
days
Relations
buyer Evaluation of
Relationship
1-3 3 3 3 1= No relationship, 2= Relationship, but
could be better, 3= Good relationship
buyer Ease of Ordering 1-3 2 3 2 1= Fax/ phone, 2= Email, 3= Internet
buyer Information System 1-3 2 3 2 1= Systems not compatible, 2= Systems
compatible, 3= Systems compatible and developments ongoing
buyer Reporting 1-3 3 3 2 1= No reports, 2= Some reporting, 3= Full
reporting
Supplier Performance Index 0,73
Table 4. Supplier performance measurement form and supplier performance index from fourth quarter, year 2000, SKS-Tekniikka Oy.
SKS-Teknikka Oy’s performance is not as good as Festo Oy’s performance. There is a great difference in delivery promptness. This was noticed already during the audit, so the action plan is made to achieve improvements. Supplier performance index 0,73 is low. SPI should be over 0,90. Poor performance is explained with low delivery promptness figure. Reason for poor performance has been on both sides.
JOT Automation Group Plc. forecasts to SKS-Tekniikka Oy have prevailed badly as well as SKS-Tekniikka Oy has not been able to find a way to operate with JOT Automation Group Plc.
5.10 Continuous feedback and development
During this process no major development ideas was discovered. I was realised that the process works better than expected. Audit seems to serve its purposes well and can be performed very quickly. Some modifications were done to the questionnaire, but they were more likely connected to the layout.
Supplier performance measurement indicators seemed to be selected correctly and information needed was available. Future developments to IT-systems will decrease the amount of work, because of the reporting can be received directly for the system.
6 CONCLUSIONS AND RECOMMENDATIONS
Purpose of this thesis was to develop a process for the supplier assessment and the relationship improvement. Model was build up based on the literature as well as the experience in practice. After the supplier evaluation model was constructed two case studies were done as a trial evaluation process. It was essential to have a practicable example how the supplier evaluation process works and what kind of benefits it is able to offer.
The essential idea of this thesis is that companies need to develop their supplier relationship assessment. One of the major reasons is that business environment is changing to the direction that the collaboration in a supply chain is significant in keeping the market positions achieved due to the strengthened competition within the industry. The base of the partnership is to understand the mutual benefit in the relationship between the supplier and the buyer. Either buyer or the supplier cannot decide by himself the level of co-operation, both parties must be involved in the decision-making. A strong relationship gives a lot of advantages. Major developments in most of the cases usually are cost-efficiency, improved quality and more accurate delivery.
When supplier relationship is established to the partner level, it is important to start to evaluate and measure the relationship. All business functions include risks and these possible risks cause threats. In the changing business environment supplier relationships are shifting to the direction, where the risks and threats are shared as well as the possible benefits between the buyer and the seller. Buyer passes over more and more responsibilities to suppliers that company can concentrate on their own core competence. Basic functions are outsourced which leads to the contract manufacturing. In the standard material and component markets suppliers should offer more modular packages instead of single products. Suppliers should also take more responsibility of R&D work. New product development and innovations could
be made according to customers needs. Supplier should find new more suitable and cost efficient solution to customer’s problems.
The foundation of the supplier evaluation system should be based on the mutual interest in finding the shared benefits. Suppliers have responsibilities, which includes risks. Risks can be avoided by securing bottlenecks. The core of the supplier evaluation process is to investigate possible threats and to reduce these risks.
The supplier evaluation process is a simple and compact tool made for operative sourcing and purchasing management. Received results should support the decision-making process as well as the supplier base coordination. The results also support supplier development and the relationship improvement.
Competition in the electronic manufacturing equipment industry is getting harder.
Competition in the electronic manufacturing equipment industry is getting harder.