Taking Control of Supplier Quality: 5 Best Practices for Implementing a Successful Supplier Governance Program

Taking Control of Supplier Quality: 5 Best Practices for Implementing a Successful Supplier Governance Program
Introduction
Supplier governance represents a challenge for organizations - even on a small, local scale. This challenge is compounded greatly as more organizations are dealing with hundreds and even thousands of suppliers around the globe. These evolving supply chains have simply outpaced traditional supplier controls. There are many different supplier control frameworks and methodologies available, covering everything in the supply chain from raw materials to contract manufacturing. Today, to achieve effective supplier control requires a fresh look at the people, processes and technology involved. The new global standard for supplier governance is an agile, multi-faceted model that comprises a disciplined process, optimized key resources, versatile tools and complete stakeholder visibility. The five best practices described below will help business leaders evaluate their supplier quality operations and create a foundation for greater supply chain integrity and improvement.

Supply Chain Pressures

Two major sources of pressure on supplier quality are supplier volatility and quality resource restriction. Looking at the supply chain, one of the first things to note is that it is a moving target. Like any organization, suppliers change names, locations, ownership and infrastructure. This creates perfect conditions for internal systems to develop redundant and duplicate data. Secondly, with global supply chains being the norm, physical distance is a factor that must be considered. Aside from lead times, cultural and local knowledge factors shouldnt be underestimated. Local and global economic conditions also impact supplier stability. From an internal perspective, most organizations in quality-critical industries have an excellent internal network of quality experts. Unfortunately, these resources are finite, and too often bogged down in nonvalue-adding activity. A good example is increased travel a global supply base demands this, which impacts capacity. Also, a more complex supply chain requires more up-front detective work to create an adequate supplier profile, and more back-end follow-up work to close out issues all of which impacts supplier quality resources. Another challenge of the supplier quality function of larger organizations is staying internally connected. Many organizations maintain a largely decentralized supplier quality function in order to remain responsive to individual divisions, operations or even plants. Unfortunately, this leads to a lack of information sharing and standard practice that could offer economies of scale across the organization. The tools and techniques of the supplier quality function need to be in sync with the advanced supply chain that it is tasked with controlling. Companies still operate processes that are facilitated by email and isolated data repositories. With a more diverse supply chain comes greater risk, and reducing that risk in the supply chain means increasing the number, frequency, and duration of supplier evaluations (typically quality system audits). Even without increasing the scope of the audit function, the natural growth and diversification of the supplier base will outpace the structure and resources of a static supplier audit program.

Elements of Best Practice

There are several ways to help the supplier quality function adapt, in order to address these challenges inside organizations and inside supply chains. Many organizations already have elements of these best practices in place: an abundance of data ( leading organizations harness this), a basic supplier quality infrastructure ( leading organizations modernize and optimize this),

Taking Control of Supplier Quality Rev C

SQA SERVICES, INC. www.sqaservices.com

Page 1 of 6

Taking Control of Supplier Quality: 5 Best Practices for Implementing a Successful Supplier Governance Program interaction with key suppliers ( leading organizations have a long-term relationship), some form of corrective action management ( leading organizations see this through), and supplier evaluation that is tailored ( leading organizations maximize the opportunity to learn, improve and minimize risk).

Automation plays a major role in each of these best practices. Because each element impacts the other, integrating them offers potential for the greatest benefit.

Harnessing Data
The integration of supplier data is already a mature concept. The end result has a variety of names, like Supplier Scorecard, Supplier Dashboard or Supplier Profile. The integrated supplier view equips a Supplier Quality Manager to make informed decisions usually about how much money to invest about the supply chain, based on risk. Broadly speaking, this integrated view includes: Compliance rating the supplier infrastructure in place to support the scope of supply (e.g. systems, processes, resources). Performance monitoring elements such as on-time delivery, price and quality. Criticality which measures the impact of the suppliers performance on the supply chain based on questions like What is the intended use of their product? These considerations play a major role in the amount of attention to give each supplier, and the standard to which they will be held. External factors which represent a view of the supply chain at a higher, industry-wide level. Scenarios include resource shortages, regional stability, or even an increase in criminal activity (e.g. counterfeits or raw material adulteration).

In order to integrate the supplier view, it is necessary to integrate the sources of data three of which should already come from within the organization through mainstream enterprise systems. The mining
Taking Control of Supplier Quality Rev C SQA SERVICES, INC. www.sqaservices.com Page 2 of 6

Taking Control of Supplier Quality: 5 Best Practices for Implementing a Successful Supplier Governance Program and integration of this data to provide meaningful, actionable information comes under the broad heading of data analytics. Leading companies are extremely good at prioritizing and directing their limited resources, based on effective use of data analytics. Without this data, companies are at risk of over-allocating resources to good performing suppliers and under-allocating resources to poor performers. Understandably, many companies focus efforts on strategic supply partners, however many industry leaders set aside a significant portion of their resources to handle their worst performing suppliers i.e. those with the greatest potential for improvement. This prioritization is also consistent with a risk-based approach to supplier quality management. Suppliers with the higher risk attract greater attention and resources. Risk can include things like product quality, whether or not they are a single source, their financial stability, their spend volume, and so on.

With an integrated supplier quality view, it is possible to develop supply chain intelligence. By mining and integrating data that is already present, it is possible to identify the gaps and improvement areas within your supply base. Most companies will be collecting the data in one way or another. The data may exist in spreadsheets, Access databases, Google docs, local quality systems, and so on. Few companies are tying it together. One example of supply chain intelligence is an analysis of the state of control in certain key areas (e.g. materials management or change control) for a group of suppliers of the same commodity. This enables a supplier quality manager to identify and address common areas of weakness. The data is based on results from supplier audits all of which evaluate the same key areas.

Revisiting Supplier Quality Infrastructure

The second best practice employed by leading companies is the use of a modernized, optimized supplier evaluation process. And of course, this is driven by and feeds into data analytics. The big difference with the leading organizations is that they approach their supplier evaluation the same way they approach their manufacturing environment with an eye on quality and improvement. For supplier quality tools and practices, it is important to foster consistency, subject to local requirements. This requires an emphasis on common elements, rather than what is different (which is a typical objection from individual supplier quality groups). Leading companies look at how many tools exist to perform essentially the same thing, and how many of the same tools are used differently. In addition to sharing tools, this also leads to the sharing of resources and results (and avoids doubling-up on supplier audits). Supplier audits are the result of many events involving multiple stakeholders inside and outside an organization. An auditor on-site at a supplier is but the tip of the iceberg. The steps involved in

Taking Control of Supplier Quality Rev C

SQA SERVICES, INC. www.sqaservices.com

Page 3 of 6

Taking Control of Supplier Quality: 5 Best Practices for Implementing a Successful Supplier Governance Program preparation can include audit justification/prioritization, supplier liaison, legal approval, supplier history review, auditor coordination, and pre-audit briefings. Following the audit there is immediate action (if required), report preparation, content review and corrective action management through to closure. By mapping this process, steps and roles may be optimized (e.g. reassigning administrative tasks from auditors), and supplier audit as a risk management tool can be made more effective (e.g. defining broader internal action based on poor supplier audit results). In acknowledging that supplier audits are part of a larger process, it is possible to map the process for control and improvement. Because the audit process is time-sensitive, back-tracking after an audit has been performed is time-consuming and not always effective. The addition of checkpoints in the audit process will allow the identification of all of the pre-requisites of a successful audit. Basic questions such as Has another division of our company already performed an audit we can use? and Are there any areas [such as special processes] that require added attention? will help with auditor coordination, and produce audits with more teeth. Automation also plays a major role in enhancing the supplier evaluation function. For supplier quality systems (or the equivalent enterprise system modules) to be effective, it is important that they are configured for both visibility (a repository) and control (supporting and managing the process) of supplier quality. It is possible to automate many parts of the process that have traditionally been manual, e.g. monitoring responses and escalation. It is also possible to control supplier exchanges, like selfassessment, or CAR approval in order to maintain an audit trail.

Broaden Supplier Evaluation

Given all of the time and effort that goes into conducting an on-site audit of a supplier, companies are increasingly looking to leverage that investment by increasing the scope of the exercise. Quality audits, by definition, evaluate a supplier against a standard. They are essential, mandatory in many cases, and productive if done properly. The main issue with quality systems audits is that they often look at only one of the many management systems that impact business reliability and performance. Implications of factors such as safety, human resources, risk management, capability and strategic planning are generally not built in. In keeping with a risk-based approach, such broader supplier assessments are generally reserved for key, strategic suppliers. Generally, suppliers undergoing assessments are not only being evaluated for use, but also for improvement and enhanced partnership. Companies that focus on enhancing the overall quality picture of their key suppliers achieve the benefits of a lower cost of quality through reduced detection costs (e.g. receiving inspections) and cost avoidance (e.g. recalls). A broader supplier evaluation approach also provides the flexibility to address critical topics of the company or industries. For example, in the healthcare industry, additional critical topics may include: Prevention of cross-contamination Documented process robustness Appropriate use of standards for materials/products based on specifications Change management and management of customer complaints

Corrective Action Needs Management

Just as with supplier audit programs, successful supplier corrective action requires a detailed, managed process. The corrective action process should be viewed as an essential second half of the supplier control process the first half being the evaluation. For cause corrective action should obviously be treated the same way. There needs to be a robust and ideally highly automated process for managing the activity, most of which should be happening at the supplier. A good corrective action management process will mimic the steps used in the chosen corrective action methodology (e.g. the 8-D approach), with roles, actions, deadlines and approvals embedded. The roles are the most variable in the process, and often the most

Taking Control of Supplier Quality Rev C

SQA SERVICES, INC. www.sqaservices.com

Page 4 of 6

Taking Control of Supplier Quality: 5 Best Practices for Implementing a Successful Supplier Governance Program overlooked. This easily obtainable data (usually during an audit or assessment) helps prevent supplier corrective action from falling into limbo. Like risk-based auditing, the extent of corrective action management will be a reflection of the risk and impact of the finding or cause. For high-risk findings or suppliers, it is not unusual to see companies enforcing a person-in-plant to assist with remediation planning/execution, or subject matter expertise. Good CAR management extends beyond the boundaries of internal systems. Best practice companies package their supplier corrective actions with tools that help the supplier successfully close out the corrective actions. This starts with an explanation of what is required, including examples. Follow-up is pre-determined, automated, measured and, if necessary, escalated. In reality, some suppliers just wont know what to do even if shown how to respond to a corrective action. Leading companies provide additional options for suppliers, based on criticality including assisted remediation.

Partnering for Improvement

It should not come as a surprise to any suppliers that they will be required to participate in a supplier evaluation program. This is a foundation for partnership, and should be written into purchasing agreements, along with an agreed quality plan and performance level(s). A mutual commitment to quality involves a greater exchange of quality-related data. Companies and suppliers should have a view of capturing it once, and maintaining a single authoritative source that may be accessed (or integrated) as required. Visibility is a by-product of this shared approach suppliers see whats required of them and how theyre doing, while internal stakeholders see the same information. Manual exchanges with suppliers are a burden on all stakeholders. The most efficient way to collect critical data is by capturing it once, at the source. That source is largely the suppliers, and ideally they provide performance information into a collaborative environment that all stakeholders access and use as a basis for strategic decisions. While some companies have introduced a supplier portal to facilitate purchasing transactions, few have taken it to the level of sharing quality data in both directions. This includes multi-aspect supplier scorecards, self-audits, and exchanges of everything from pre-audit background information to corrective actions. There are many commercial options for systems that provide the appropriate controls, checks and balances must be in place for security and verification. Data sharing represents a significant commitment for suppliers, and like evaluation and corrective action, the level and extent of data sharing is consistent with the strategic importance of the supplier. Suppliers that embrace this concept of taking responsibility for data collection at its source will find it to be a win-win scenario. They improve, they see more business, and users see better quality, and an overall reduced cost of quality. While sharing data is one example of supplier partnering, so too is sharing expertise. As mentioned earlier with CAR management, a supplier isnt always going to know the right way to approach a remediation or improvement effort. Leading companies in this area will match their suppliers commitment with an equal commitment of technical resources (usually a Quality Engineer) and program resources. This ensures that the supplier has a clear roadmap and source of direction and feedback. Part of the scoping of an improvement effort is an agreement of what will be achieved. Also, having a guideline for target dates prevents suppliers from over- or under-committing for example, it wont be possible to build a new cleanroom in a week. Likewise, it shouldnt take six months to implement a new SOP. Having a library of improvement tools, like skeleton documents, will help suppliers fast-track their improvements. Lastly, with direct involvement in the improvement process, leading companies are better equipped to adapt, or possibly influence, changes in their or their suppliers environment.

Recap
Supplier governance will always be a challenge, given the pace of changes inside and outside the organization, and the limited resources available to control them. By improving the following five areas within the supplier quality function, companies can effectively manage these challenges: harnessing data, enhancing the supplier quality infrastructure,

Taking Control of Supplier Quality Rev C

SQA SERVICES, INC. www.sqaservices.com

Page 5 of 6

Taking Control of Supplier Quality: 5 Best Practices for Implementing a Successful Supplier Governance Program broadening the scope of supplier evaluation, and managing supplier corrective action as a process

These five areas of best practice can be linked in order to create a more integrated and effective system of governance. This state of control requires the integration and optimization of functions that are most likely already present. And by partnering with key suppliers, leading companies are hitting their goals of lower risk, improved supplier quality, and lower costs.

About the author

Gerard Pearce is executive vice president of SQA Services Inc., a Los Angeles-based company specializing in global supplier quality management. Gerard has more than 20 years experience in combining the fields of quality, supply management and technology. He published The Purchasing Revolution in 1999 and served on the committee of the World Congress of the International Federation of Purchasing and Supply Management. He is heavily involved in shaping and implementing the global outsourcing quality strategy for SQAs Fortune 500 clients in a variety of quality-critical industries, including medical device, pharmaceutical, oil and gas, aerospace and high-tech. He can be reached at gpearce@sqaservices.com or through www.sqaservices.com.

Taking Control of Supplier Quality Rev C

SQA SERVICES, INC. www.sqaservices.com

Page 6 of 6