Setting supplier performance goals

How likely is it that someone in your market will begin to deliver 100% on-time and zero defects in one million parts (Zero PPM) quality? Would that affect your customers’ expectations for your performance?

Change is inevitable. Implementing change may seem impossible, but leadership requires accepting the impossible and setting a goal to achieve it.

Let’s consider the inevitable.

In the past, we have only been able to think about 100% on-time delivery through adding inventory – more raw materials if our suppliers had long lead times, and more finished goods if our customers needed near 100% performance. But many of us have almost lost our business that way.

Carrying costs are the silent killer: add $2 million in inventory raw or finished goods and you’ll add 20% per year in carrying costs – $400,000 per year. And how do customers offset that cost? They thank you. We are rarely in a position to charge for this service. We realize that we’re only doing it because the customer asked us to deliver on-time and we can’t do that without inventory.

We begin to notice our margin – or what’s left of it – dwindling away because carrying cost doesn’t show up in your P&L; it just hides everywhere on your financial statement. The customer has good reason to ask and expect us to adapt. They are implementing moving production lines and can’t tolerate late parts and assemblies. They’re looking for suppliers who can help them.

How did Zero PPM become a reality? As production lines for customers become fast and lean, a single part could stop workflow. Each delay could cost the customer millions of dollars. Automotive suppliers have operated at 100% on-time and Zero PPM for many years. Most aerospace suppliers are accustomed to operating at 2,000 PPM or more. Drawing a line between where we are and what it will cost our customers for suppliers to remain where they are, you cannot connect the dots.

Suppliers must achieve Six Sigma levels of quality and charge-backs will continue to re-enforce the status quo. Your customers are saying, “Somebody has to pay for this and it’s not going to be us.” The cost, or even part of the cost, of a flight test gone wrong will force many suppliers out of business.

Because these changes represent a danger to suppliers, I recommend that we adopt 100% on-time and zero PPM as either a short- or long-range goal. You might have to make this a long-range goal, but it’s important to have a culture and capability to continuously improve metrics toward that goal. If you don’t allocate the resources to make the goal a reality, how will you convince your customer that you’ll have what they will need in the future?

Supplier Excellence Alliance
www.seaonline.org

About the author: Michael G. Beason is chief executive officer of the Supplier Excellence Alliance (SEA) and can be reached at 949.476.1146 or Michael@seaonline.org.