Increasing globalization over the last few decades has resulted in businesses sourcing materials from suppliers located all over the world. While this was done primarily to lower the manufacturing cost, it has also increased risks. Often, businesses find managing suppliers difficult because they have similar arrangements with all of them though their level of engagement with each may vary.
Mature businesses analyze the nature of engagement with their suppliers, identify the risks, and classify them accordingly. This helps in identifying key suppliers who are critical to their manufacturing process and develop a systematic approach that promotes growth and value creation for both.
According to research conducted by PwC with 30+ Chief Procurement Officers, a robust supplier relationship management program helps with the following:
- Helps leverage supplier capabilities better
- Delivers on cost reduction targets
- Secures your supply
- Helps select the customer of choice
- Increases responsiveness across the supply chain
- Anticipates volatility in prices
- Manages supplier risk better
- Makes it easier to meet sustainability and ESG requirements
Creating a fully integrated operating model with your key suppliers can help reduce risk exposure, improve financial benefits, enable continuous improvement, and help drive competitive advantage. Therefore, the mode of identifying, selecting, and working with your key suppliers will need a dedicated effort with a partnership mindset.
Key supplier management amidst a pandemic
In 2020, the complexity in supplier management was compounded by the COVID-19 pandemic that disrupted supply chains globally. This has increased awareness about the need for a good supplier management system. Also, procurement leaders and CPOs realized that automation and digital transformation were critical to the success of supplier qualification and on-boarding, supplier quality management, supplier performance, and program management.
The path of supplier management is strewn with challenges. These include:
- Assessing potential quality and operational risks associated with a particular supplier
- Increased lead times, unavailable materials, reduced operations at suppliers’ end
- Finding alternative suppliers, qualifying and on-boarding them
- Risk monitoring across the supply chain
- Insufficiency of data for evaluation and decision making
SCM and procurement leaders need to design and implement a specific workflow to manage key suppliers who are critical to their business. Supplier performance management, backed by data and a mindset for continuous improvement (CI), is crucial.
Back to basics
The supplier qualification process is a cyclical one that needs to be repeated periodically. It is critical to developing and periodically revise supplier management programs to identify compliance issues. Implementation and maintenance must focus on enabling continuous improvement of business practices at the organization as well as for the supplier. This must also include fine-tuning the quality systems for mitigating risks and achieving business objectives.
Some of the best practices businesses must incorporate into their key supplier management program include:
- Selecting, evaluating, sorting, and maintaining supplier profiles according to the type of product or service
- Rationalizing the list of ‘key or critical’ suppliers if your business has too many of them
- Ensuring supplier questionnaires or audits are consistent with the supplier’s material or services
- Reviewing and analyzing data and ensuring visibility to appropriate stakeholders
- Ensuring that adequate resources are available to manage the supplier quality program
- Ensuring employees know and understand their responsibilities and authority
Emphasis should be placed on the control and oversight of suppliers according to the risk associated with the material and/or service provided.
Applicable Standards and Regulations
Such a focused approach to supplier qualification and management is not only a business need but also mandated by different regulatory bodies. For instance, 21 Code of Federal Regulations, Part 820.50 Purchasing Controls requires each manufacturer to establish and maintain procedures and specify requirements that must be met by suppliers, contractors, and consultants. The selection of potential suppliers, contractors, and consultants should be based on their ability to meet the specified requirements, including quality, and the evaluation should be documented.
ISO 13485:2016 that governs the Quality Management Systems for the Medical Devices industry also requires manufacturers to document procedures to ensure that the purchased product conforms to specifications. Businesses are required to establish an evaluation and selection process for suppliers based on their ability to supply as per specifications, on the performance capabilities of the supplier, the impact of the material purchased on the quality of the medical device, and the associated risk.
While establishing the selection criteria for key suppliers, it is also important to identify risk factors such as:
- Poor audit results with a high number of deficiencies
- A poorly defined QMS
- Whether the supplier has received regulatory action such as observations, warning letters, enforcement action, etc.
- It is the sole source (the only source) or a single source (with alternatives available)
- How critical is the service/product being sourced?
- What is the intended use of the component or raw material or service?
- Whether the supplier has a previous history of nonconforming material/negative advance trending
The assessment can be done using different methods. One of them is through questionnaires aimed at understanding the supplier capabilities by seeking information on:
- Their product and service capabilities
- Frequency of regulatory inspections
- Certifications they hold
- Training provided to their employees
- Document control procedures
- Non-performance controls
- CAPA procedures
- Complaint handling processes
- Supplier management capabilities
For key suppliers, analyze audit findings and carefully examine audit reports. You can also initiate an audit through your affiliate or subsidiary. Ensure that the audit covers their quality management, personnel/buildings/facilities, documentation, records, materials management, change control, risk management, and so on. For the audit to be useful, the scope should include information on your partnership and expectations from the supplier.
Once you have identified your key supplier, it is crucial to sign a quality agreement with them. A purchase order that identifies their responsibilities may be used in lieu of a formal written contract for service. It should have the supplier explicitly agreeing to produce requested documents and allow access to the facility for regulatory inspections.
Ensure that there is a delegation of responsibilities for manufacturing controls, ID and traceability, labeling, complaint handling, incident reporting, maintenance of records and their compliance activities. The terms of the agreement should specify the duration of validity of the agreement, communication of changes and amendments, and addressing nonconformance issues in a timely manner.
Also evaluate the financial stability and geographical location of suppliers. Especially due to the disruption caused by Covid-19, understanding how that region has been affected and how it has impacted the supplier’s business and delivery capabilities will be crucial.
Monitor suppliers periodically. Based on risk and their performance over a period of time, requalify or deactivate them. Risk factors include nature and the extent of deficiencies, failures, and quality events as they may impact the final product acceptance.
Since monitoring all the suppliers is not possible at all times, a simple way of successfully managing it is:
Low risk = less frequent, less intense monitoring
High risk = more frequent, more extensive monitoring
In case of failures, you may initiate CAPA and SCAR depending on the risk level. Based on the findings and the decision taken, update the status of the supplier – whether they have been disqualified or given conditional approval. Implement risk mitigation measures to ensure business continuity such as qualifying a second supplier. If required, initiate a for-cause audit, announced or unannounced.
Measure Supplier Performance
It is important to establish metrics and methods to measure and analyze supplier performance periodically. These would include nonconformance issues caused by the supplier, risks associated with the suppliers and so on. Adverse or negative trends must be identified and acted upon such as initiating a CAPA. Assess how the removal of a key supplier will affect your business continuity and if you have a fallback option to replace this supplier with a new or existing supplier.
Innovative Key Supplier Management Practices Needed
More than ever before, Covid-19 has added stress and struggles to supplier management in recent times. There has been an increased supplier and customer cost to ensure manufacturing in a safe environment at both the manufacturer’s and the supplier’s shop floor. Some of the developments as a result include:
- New requirements for altering workspaces
- Increased need for PPE for all personnel
- Reduced operations and personnel
- Additional shifts to improve productivity
Businesses need to be proactive in these times and assess the quality and operational risks associated with suppliers and implement mitigation activities.
In short, secure current supply base: manage and mitigate supply uncertainty with key suppliers:
- Engage with suppliers to understand their risk and collaborate
- Place focus on critical/key higher risk suppliers – not all suppliers require the same level of qualification
- Re-board/requalify/remove inactive suppliers
- Identify and secure additional suppliers
- Identify metrics that can quickly identify supplier performance. Don’t overburden the company with ineffective metrics.
The ComplianceQuest Supplier Management Software built on Salesforce.com is a scalable, robust, risk-based system to help you qualify your suppliers quickly, analyze their performance, and categorize them to mitigate risks and improve performance. To find out more, contact us at http://www.compliancequest.com/contact-us/
This blog is based on the webinar Not All Suppliers are Key Suppliers: Managing Risk Within Your Supplier Management Program by Linda L.S. Lovett, CEO, Lovett Consulting.