Supplier Quality Management: A Risk Based Approach

In our modern economy, business decisions are made based on the forces of the global supply and demand network. In many cases, outsourcing just for cost savings is no longer an optimal strategy; rather market leading companies are trying to balance a diverse set of needs across a global network, which includes responsiveness, quality, and innovation as well as cost. In such an environment, many companies are attempting to engage in off-shoring, near-shoring, and on-shoring strategies all at the same time. So what steps do executives need to take to excel and lead in such an environment?

LNS Research believes that engaging in Supplier Quality Management can effectively optimize the global supply chain while reducing external risk exposure. And, as is the case with managing any risk, to be successful we must assess, quantify, prioritize, and mitigate risks in a systematic Operational Risk Management framework that extends across the enterprise.

Before working toward the reduction of supply-chain risk, however, we must first understand Supplier Quality Management.

Supplier Quality Management largely depends on the efficient production of materials while minimizing adverse events. A supplier that performs well, quickly communicates non-conformances or deviations, responds to audit or report requests, relays process/equipment changes and, among many other areas, meets delivery requirements. Inappropriately dealing with adverse events and non-conformance related to performance directly translates to supplier risk.

Supplier Quality Management: Risk Assessment

To get a full picture of your company’s supplier risk portfolio, individualized risk assessments should be made on the performance of each supplier. This can be done in various ways. Traditionally, quality managers have sent representatives for on-site audits to view actual production lines. This, of course, has become costly with globalization, unless multiple suppliers have been strategically chosen within close proximity. Another method is to build into the quality agreement the delivery of data reports and audits upon request or at specified times throughout the life of the contract.

As Supplier Quality Management is an integral component to the total cost of quality, Enterprise Quality Management Software (EQMS) companies have begun incorporating it into available software. A quality manager should integrate his or her EQMS with that of the suppliers and, if possible, with the supplier’s suppliers (often through a shared web-portal). This is an ideal method of obtaining a real-time performance assessment and greater visibility. However, the integration may seem overbearing for smaller companies that would rather remain independent from larger entities.

Supplier Quality Management: Risk Quantification

A supplier’s risk can be quantified as a function of two variables (likelihood and impact of adverse events occurring) and ultimately assigned a level of risk for comparison and, later, prioritization. The first variable relates to the aforementioned performance of the supplier. By analyzing performance indicators in a way that creates standardized metrics—average response time for corrective actions, MRB inventory levels, delivery times, customer complaints, etc.—suppliers can be rated based on their overall performance relative to others. Supplier Quality Management greatly facilitates this, as information is recorded and available within the software, allowing companies to make an assessment on the likelihood a supplier will have a particular failure in a standardized way.

The second risk variable, impact, greatly depends on the supplier’s criticality to production and the final product. For example, if a there is no substitute for a material used, then that supplier should automatically be considered riskier despite its levels of performance. If production cannot continue without this supplier, it should hold considerable weight in a risk portfolio. Conversely, the less critical a supplier is to continuity, the less risk it should be assigned.

Supplier Quality Management: Risk Prioritization

Since organizations heavily rely on supply chains for production, supplier quality management should be of great consideration in defining strategic vision. By quantifying supplier risk, accounting for both performance and criticality, we can effectively prioritize issues that require the most attention. It is advisable to treat these external risks similar to internal inefficiencies or gaps. Employing closed-loop CAPA or deviation management techniques, as you would in-house, will mitigate supplier risk while also avoiding the same issues from arising in the future.

Concluding Thoughts

In today’s world of globalized supply and demand networks, companies need to efficiently optimize the supply base given a broad set of requirements that go well beyond cost. To effectively do this, companies should begin to use a risk based approach that looks at both the criticality of a supplier and the likelihood of failure of a supplier. By applying standardized risk tools through an enterprise system, the long term successes of initiatives around supplier quality are much more likely to succeed.

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