Risk, Quality, and the Road to Preferred Supplier Status

Posted by Dan Jacob on Thu, Apr 12, 2018 @ 12:20 PM

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Just how critical are risk and quality to today’s supply chain? Recent LNS research reveals risk and quality improvements are among a supplier’s most important investments. For many, this will not be a surprise, because quality is often leveraged to determine preferred supplier status, and preferred supplier status impacts contract awards. Quality and risk are indeed strategic investments given that suppliers are even more focused on growing revenue than the rest of the market.

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Why is this particularly important to suppliers in 2018, and how can suppliers react to this information to improve their market standing?Top financial objectives by value chain

Market Imperative: Differentiate on Quality and Risk

There are several market dynamics that are working in concert to increase quality and risk momentum in the supply chain. Let’s focus on the increased visibility of product performance. Business-to-business (B2B) and business-to-consumer (B2C) suppliers have unprecedented visibility into product performance and quality, modifying purchasing behaviors and connecting quality to revenue. Consider this:

    • Suppliers, such as those in the automotive supply chain are monitored by automated and instrumented supplier management systems. These systems separate suppliers based on risk formula, which include multiple factors including quality and on-time delivery. Preferred suppliers get more business, while higher risk suppliers require more oversight and are awarded fewer competitive contracts
    • Consumers are leveraging social media and online marketplaces to communicate their product and service experiences with unprecedented reach and influence. Falling below four stars can be devastating to online product sales
    • FDA has recently launched a public dashboard presenting Adverse Events, making it easy for regulators, the life science value chain, consumers, and litigators to easily query adverse events

This level of scrutiny and instant global visibility is a new phenomenon and means that manufacturers can no longer afford to improve products post-release; product performance and quality must be excellent from the initial release. Suppliers must adapt to this change in market conditions.

How should suppliers react?

Suppliers looking to improve recurring revenue and bottom line performance should take the proper approach to quality – shift its perspective from conformance to performance, from cost-prevention to designed-in quality. One particularly important area is the approach to risk. Suppliers across manufacturing have risk-based compliance obligations, from ISO 9001:2015 for general industry, IATF 16949:2016 in automotive, HARPC in Food & Beverage, and ISO 14971 and Q9 in Medical Devices and at Pharmaceuticals, etc.

While compliance is a fundamental requirement, attaining compliance is not a differentiated strategy. Conversely, the proper risk strategy is a competitive differentiator for suppliers. This strategy must be proactive, aligned with strategic corporate and peer objectives, and guided by attaining operational and financial performance. In fact, those that adopted at least 5 of the 7 risk best practices tracked by LNS realized improvements in median warranty accrual, overall equipment effectiveness (OEE), on-time delivery, first pass yield, percentage of successful new product introductions (NPI), supplier defect rate, and higher percentage of products in compliance.

A differentiated risk strategy improves the performance of NPI, quality, and operations. And, of course, delivers compliance.

Today’s risk strategy should also consider the impact of the Industrial Internet of Things (IIoT), also known as Industry 4.0. In recent years, IIoT adoption has accelerated substantially, and many initiatives such as Zero Defect target quality improvement. LNS defined this as Quality 4.0, and has explored the application of new wireless sensors, connectivity, analytics, apps, and scalable technology to quality processes and people. While Quality 4.0 isn’t the first step on a risk-based performance journey, it is an important destination that will determine future competitiveness.

Webcast: Industry Standards as Building Blocks to Quality Maturity and Operational Excellence

Tags: Risk Management, Supplier Quality Management (SQM), Quality 4.0