The supplier quality management process must be treated as part of a broader quality management system for sustaining compliance and achieving process excellence. The business model built on ROI calculations doesn’t just take into account costs and quantitative measures, but also qualitative improvements.Download an Insight
Establishing a robust supplier quality management program is not only desirable, but also critical in today’s complex and fast-paced business environment. It is vital for organizations to cultivate cordial relationships with global suppliers, and build a sustainable supplier governance foundation with well-defined metrics and parameters around quality and compliance. However, this is often easier said than done. Most organizations are dealing with increasing regulatory oversight, cut-throat competition, time-bound customer demands, and market fluctuations. In the midst of all these challenges, supplier quality is probably the last thing on their minds.
Adding to the complexity, supplier quality is often managed manually, making it time-consuming and complicated to consolidate and track open and recurring non-conformances and related corrective actions. With paper-based tools, organizations often find it difficult to analyze data, uncover supplier insights, and gain a clear understanding of supplier capabilities. This manual approach also leads to data inconsistencies while monitoring and measuring supplier performance and quality.
Many of these challenges can be overcome with the help of technology. Leading organizations use technology to consolidate and centralize supplier information, contracts, SLAs, and product data, while also automating quality audit planning, audit execution, and non-conformance and CAPA management. The technology-enabled approach provides numerous benefits, ranging from the ease in supplier segmentation to the minimization of non-conformances, cost savings on corrective actions, and reduction in defective inventory.
Key benefits of a technology-enabled supplier quality management solution
- Improve Supplier Segmentation and Audit Planning
- Enable Supplier Rationalization
- Reduce On-going Costs of Auditing New Suppliers
- Reduce Non-conformances and CAPAs
- Minimize Product Quality and Compliance Issues
- Lower Cost of Order Replacements
- Improve Tracking of Supplier Chargebacks
- Improve Inventory Availability
- Reduce Number of Quality Checks at Warehouses
- Ensure Fewer Customer Complaints
To quantify the cost-savings and efficiency improvements related to each of the above benefits, we use the example of Organization X, a company with multiple brands, lines of business, and suppliers. Based on certain assumptions about their business, as well as our own experience with customers, we analyze the organization’s potential Return on Investment (ROI) with a supplier quality management solution. Multiple measurable variables have been considered while deriving these values, each of which has been listed below along with the associated benefit.
Business Benefit #1
Improve Supplier Segmentation and Audit Planning
Let’s assume that Organization X has 2,000 suppliers. They conduct 4 audits per supplier per annum where the total cost of each audit is USD 500. That amounts to USD 4,000,000 in total supplier audit costs.
With a supplier quality management solution, Organization X can clearly segment their suppliers based on each supplier’s risk profile (see table 1). This allows them to plan and prioritize their supplier audits more efficiently, and actually reduce the number of audits that need to be performed. In other words, instead of conducting 4 audits for every single supplier, the organization needs to conduct only one audit for Tier A suppliers, and two audits for Tier B suppliers because these suppliers have lower levels of risk and higher maturity. As a result, overhead audit costs can reduce by as much as USD 2,000,000.
The risk profile of each supplier can be calculated in the supplier quality management solution based on the ratings from supplier self-assessments, auditor validation, historical audit ratings, number of non-conformances, and other such factors. The audit frequency will vary based on the changing risk profile of the supplier.
Business Benefit #2
Enable Supplier Rationalization
With a new supplier quality management solution, Organization X can gain better visibility into supplier capabilities, maturity, and risk levels. This will help them understand where suppliers need to improve their internal processes, and scale up their operations.
More importantly, it will enable Organization X to rationalize their suppliers, eliminating those with higher risk levels, and focusing instead on optimally utilizing the existing suppliers.
Therefore, from among 2,000 suppliers, Organization X can actually eliminate the 400 suppliers who fall in Tier C because these suppliers are high risk and low maturity. This will enable the organization to save USD 800,000 on supplier audits (see table 2).
Business Benefit #3
Reduce On-Going Costs of Auditing New Suppliers
Let’s assume that Organization X on-boards 100 suppliers per year. If these suppliers are not segmented based on their risk profile, 80 high risk suppliers may be on-boarded without the company’s knowledge. Moreover, the potential costs of auditing all the new suppliers with the same frequency would be high - USD 200,000 (400 audits x 500 USD, assuming that 4 audits are conducted per supplier per year where the cost of each audit is USD 500).
With a supplier quality management solution, the organization can segment the suppliers based on their risks, and actively choose more suppliers that have lower risk and higher maturity. Assuming, now out of 100 new on-boarded suppliers, 40 are in Tier A, 40 are in Tier B and 20 in Tier C (taking into consideration that Tier C cannot be completely eliminated). As a result, not only will they have greater confidence in quality across their supply base, but they will also reduce the number of audits that need to be conducted on each supplier. Hence, they will now conduct 1 audit for Tier A, 2 audits for Tier B and 4 audits for Tier C suppliers,
Since Tier A suppliers will require fewer audits than those in Tier C, Organization X can save USD 100,000 on onboarding and auditing new suppliers every year (see table 3). They can also reduce the number of re-audits by 30% with this solution.
Business Benefit #4
Reduce Non-Conformances and CAPAs
Let’s assume that Organization X faces 2,000 supplier non-conformances every year. Most of these non-conformances are likely to arise because the suppliers are of high risk and low maturity, or because they are not being audited thoroughly.
The supplier quality management solution will enable Organization X to onboard a higher number of mature suppliers, while also increasing visibility into each supplier’s risk profile, and streamlining supplier audit and inspection processes. As a result, Organization X will be well-positioned to actually reduce the number of non-conformances by almost 80% . This, in turn, will lead to fewer Corrective Actions and Preventive Actions (CAPAs), and overall savings of USD 800,000 (see table 4).
Business Benefit #5
Minimize Product Quality and Compliance issues
The lack of an effective supplier quality management solution can result in multiple non-compliance or product quality issues. For instance, a supplier product may not adhere to specifications. Or the stock may be damaged and unfit for sale. Ultimately, the loss incurred by the buyer will be both qualitative and quantitative.
Organization X can avoid these issues with a supplier quality management solution which enables timely supplier audits and inspections. Assuming that the organization has USD 10 million worth of stock in the warehouse with non-compliance or quality issues, a supplier quality management solution can help them reduce these faulty products by 30% , leading to savings of USD 3,000,000 (see table 5). Fewer quality issues mean stronger compliance with product quality regulations, lower costs of non-compliance, and better products for the end user.
Business Benefit #6
Lower Cost of Order Replacements
Let’s assume that Organization X ships 30,000 products from its warehouses to the retail stores. On average, 10% of the shipment is returned to the warehouse due to faulty or non-compliant products. Replacing the consignment can be expensive both in terms of product and logistics costs.
A supplier quality management solution can help Organization X minimize returns by facilitating systematic quality monitoring processes and inspections. This, in turn, will result in fewer quality issues and non-conformances. Better quality products ensure lower re-order and transportation costs.
Our experience with customers has shown us that Organization X can reduce product returns to the warehouse by 30%, thereby saving USD 900,000 (see table 6).
Business Benefit #7
Improve Tracking of Supplier Chargebacks
A supplier quality management solution can help Organization X manage and monitor supplier chargebacks in a streamlined, automated, and closed-loop manner. It can also improve visibility into the overall chargeback process, helping the organization recover costs faster. In fact, Organization X can increase supplier chargebacks by 10% , adding USD 100,000 to their current chargebacks (see table 7).
Business Benefit #8
Improve Inventory Availability
Let’s assume that Organization X issues 200,000 Purchase Orders (POs) a month where the average value of each PO is USD 1,000. If a supplier fails to meet the requirements of the PO due to production issues, lack of raw materials, or any other reason, Organization X’s stock availability will be affected. Assume that 1% of the total number of POs is delayed. This amounts to 2,000 delayed POs a month and 24,000 delayed POs a year (see table 8).
With a supplier quality management solution, Organization X can track the status of each PO easily and effectively, and take proactive action where a delay might be expected. More importantly, they can iimprove visibility into supplier capacity and probable risks which, in turn, will help them place their orders wisely.
Based on our experience with customers, Organization X can reduce the delay in POs by 30%, thereby saving USD 720,000.
Business Benefit #9
Reduce Number of Quality Checks at Warehouses
Let’s assume that Organization X conducts 175 quality checks per hour, in an 8 hour shift for 300 days a year. At USD 10 per hour, the total cost of quality checks is USD 4,200,000.
A supplier quality management solution can help Organization X reduce the burden on quality checkers at the warehouse or in the factory by strengthening overall supplier quality management right from the onboarding stage. It can also improve efficiency - thereby amounting to either more checks per hour (e.g. 350/ hour), or fewer checks overall. In our experience with customers, quality checks can improve by 50%, enabling Organization X to save USD 2,100,000 (see table 9).
Business Benefit #10
Ensure Fewer Customer Complaints
With consistently high quality products come satisfied customers, and that is the end advantage of a supplier quality management solution. It can provide better visibility into supplier risks, improve control over quality and compliance, and lead to fewer non-conformances – all of which can help Organization X reduce the cost of customer complaints by 30% (based on our experience with customers), resulting in total savings of USD 240,000 (see table 10).
Benefits and ROI
In a Nutshell
The supplier quality management process must be treated as part of a broader quality management system for sustaining compliance and achieving process excellence. The above business model built on ROI calculations doesn’t just take into account costs and quantitative measures, but also qualitative improvements. Building an ROI-based business model offers quality managers the impetus needed to justify budgets for implementing a supplier quality management solution. It also provides a transparent view of the profitability involved in such a project, giving quality managers the insights they need to negotiate and make the right investment decisions.