Friday, August 12, 2011

Common Questions in Supplier Surveys

Understanding the supplier, what they do and how they do it is important not just for making sure that the supplier is qualified, its also important for negotiations. So I though it would be good to share some of the common questions I would ask and explain why,

1. Date – You write the date on any survey as status is time dependent. Ensure information is current.
2. Prepared by: A supplier may have been qualified under a unique set of circumstances or for a specific size or type of work which you won’t know unless you can ask.
3. Street address - There may be multiple suppliers with the same name, or multiple locations for one supplier.
4. Sales/business contact information. This is who they want you to talk to.
5. Engineering contact information. Use these to probe for information about the product, process, which you can use later in the negotiation.
6. Service contact information. Use this to probe for information about warranty, service, returns, which you can use later in the negotiation.
7. Parent company (if any). If you are already doing business with the parent use that to leverage to total business in the negotiation and use what has been agreed as “precedence” in discussions.
8. Subsidiaries (if any). Same as above.
9. Manufacturing locations. If you understand where they manufacture the product you may be able to push fulfillment from the location with the most advantage to you (reduced delivery costs, lead-times, duties, etc.)
10. Service and repair locations. This impacts the response time they can commit to for service and the lead-time for repair/replacement.
11. Years in business. General question, but may lead into discussion of previous names for the company giving a better history.
12. Services and products offered: Understand the total portfolio, for use when trying to consolidate or leverage purchases or to “hold out the carrot” of the promise for future business to negotiate a better deal now.
13. Percentage work done internal versus outsourced. You seek this to understand capabilities and where they may have potential margins built in which you can negotiate. If a large percentage is subcontracted out they may have less margins to work with.
14. Major customers and contacts. Use this information to check references.

Financial Questions
1. Ownership. You look at ownership from a standpoint of leverage you may get from prior relationships and connections.
2. Company Type. Corporation – public – private, limited corporation, partnership, individual. If private, as them to identify the principal owners.
3. Sales: (last five fiscal years. One of the key aspects of sales is understanding how important your business will be to them so you may use that. Sales Breakdown – by geography, percent public versus commercial. Getting a breakdown of sales is key in understanding how important your business will be to them in that segment so you may use that. E.G. If they were primarily government/ military and clearly wanted to expand into commercial your business may be of greater value to them.
4. Services Revenues. In buying you must consider the total cost of ownership and on-going service and maintenance cost may be a large portion of that cost. Negotiate these costs before you buy when you still have the leverage of the purchase or any concessions you negotiate you will probably pay back several times later.
5. Source of sales by percent (Competitive vs Negotiated) : Source of sales indicates what they are familiar with and have most likely priced to. E.G. If they are used to negotiations and you ask them to competitively bid, they may still expect a negotiation to occur after the bid process and price it accordingly. In many places a competitive bid situation is only the preliminary to the negotiations.
6. Bankers. Total available lines of credit, current amount of credit line used. Their cash position will help identify their value of money which is important when discussing payment terms, investments, inventory etc.
7. Financial Reports (last 3 financial years): You review their financial reports from the perspective of insuring that they have sufficient financial strength but also to get an understanding of the types of operating margins they have achieved, their overhead costs, their cost of goods, cost of sales etc., all of which you would use in the negotiation. Get reports with Auditors notes.
8. Growth Plan. An aggressive growth plan, or major capital investment all require a backlog of business to support it. Use that knowledge to your advantage.
9. Substantial litigation in which you are currently involved. You want to understand this from risk factor but also from the leverage you may gain from it. Many companies shy away from doing business with companies who have problems leaving opportunity for those who are prepared to take manageable risks.
10. Assets – property, capital assets, owned versus leased? Assets play a major role in understanding capacity and you would use disclosures to do a sanity check against their stated capacity. Also use them in any discussion on “one time costs” which they would seek to charge.

Employees.
Percent permanent vs contract, turn-over rates, breakdowns by skills, union vs non-union, dates contracts expire. Employee status is something you would want to understand to determine leverage you may have from any under-utilized capacity they may have. E.g. If they lose the work will they still have to pay their people? Would they take the business at a lower margin to cover their fixed and semi-variable costs?

Manufacturing:
Facilities / capacity / flexibility, production equipment, manufacturing processes, process controls, tooling, documentation, ECO controls. Looking at these areas help identify capacity, constraints and how well the manufacturing activity is managed. Shifts can be key information in negotiating upward flexibility Capital equipment constraints help identify how capacity much you can have before there is a discussion of additional capital required / who pays the costs / or what commitment is required. Process constraints are looked at from the standpoint of at what volumes will additional process equipment investments be required. Percent of automation will help identify the degree to which the supplier may expect learning curve or process improvements that will reduce their costs.

Materials:
Percent of material that is consigned, purchased, manufactured by you, made by an affiliated company. If a large percentage is consigned it will usually mean that they will have less leverage to get best pricing in negotiations for you if you want them to do the buying. The more vertically integrated they are or the more materials or services come from affiliated companies, the more you should seek to leverage their pricing as a whole. No one will win unless they all contribute. What percent are single sourced? A single source may mean little leverage unless their is real competition to the suppliers product. Then it can be the message that no one will win unless they all contribute.

Current performance:
Delivery plus zero or minus 1 day at suppliers dock, 100% quality / zero inspection, lead-time less than or equal to actual process time, flexibility to respond to demand, percent cost reduction per year. Make sure that what they represent they can and will do and they are held to it in the agreement.

Supplier Management:
Who are your major suppliers: The quality of the suppliers indicates their commitment to quality, their focus on materials or service costs. What type and percentage of the work is subcontracted? Quality improvement programs, Delivery / lead-time/ flexibility improvement , Cost reduction/value engineering programs, programs for early involvement in design. The extent to what they have any of these as effective programs will indicate the degree of opportunity for cost improvement available. Few programs, not highly effective should mean substantial opportunity to negotiate additional cost improvements whereas if they already have all in place and they are effective, the degree of opportunity is reduced. Programs to prevent interruption of supply? Use this for negotiations to excuse yourself from firm commitments in the event of problems, force majeure situations. Use it to get commitment of multiple locations that you can use for supply chain advantages.

Channels of purchase:
The channel they buy from affects what they pay and your cost It also affects what they can contractually provide. The fewer direct contracts they have with OEM Suppliers the more you need to look at whether they can stand behind the contract commitments on their own.

Sales channels.
What channels do they sell thru? You want to understand if they will deal direct or will want you to purchase through third parties as that can affect both your cost and the value of any contract terms. Understanding that a supplier sells through distribution can provide additional flexibility or sources for materials in the event of shortages.

Organization / Key Personnel, Program Management.
The more the purchase will be dependent upon their personnel the more you want to know: how they are organized; how they manage their people; and programs and tools they use and who will be managing the work for you.

Engineering:
Design resources, design rules, understanding international requirements, design capabilities, design tools - CAD etc, VA/VE activity, special expertise. This looks at the suppliers capabilities should you look to the supplier to develop new products or change existing products.

Quality:
Quality processes, quality controls – Incoming, in process, tests, reliability programs. These will give you an indication about how well the supplier manages their quality, which can impact you costs of management of quality performance problems.

Service and repair
Services and tasks performed, frequency and duration, Response times for service calls. Cost of service not included in the price. This identifies what you can expect and what some of the life cycle cost will be.

Repair capability, repair quality, repair channels, long term support, training, parts availability, repair cost/turn times and repair locations and programs. This identifies what you can expect and what some of the life cycle cost will be.

Maintenance.
What they provide, when they provide it, at what cost, frequency, response times etc. This identifies what you can expect and what some of the life cycle cost will be.

Representative Work (Used in conjunction with reference checks):
When did they do the work? How large was the project? What was their role in the project? Who managed the project for them? What office or group manage it? What Contract Approach was used? What was the frequency of change, change requests or waivers from specification? What was their adherence to the schedule? Were there problems that occurred during the project? How did they respond to them? Where there any claims, or disputes? If they were going to do it over again, what would they do differently? The key in these types of questions is understanding what they did versus what you want them to do. A second key is identifying if they still have the skilled people to repeat the successful performance.

For Software:
1.Operating systems and revision levels supported. Does it work on what you have?
2.Scope of license: Exclusive/non-exclusive & geographic scope? Right to sublicense? Object code & source code OR just object code? Site/CPU/or unrestricted license? Limits on use: internal/3rd party/potential competing uses? Term: time certain OR perpetual? The scope of the license should impact what you are willing to pay. The more restrictive or limited, the less you want to pay.
3.Delivery and Installation: Time frame? Media or delivery method, FOB location; Acceptance, Test: start date and duration criteria: preferably, specifications. Assistance included? Export classification? Buyer or Supplier Installation? You ask these questions to understand what is included in the price.
4.Warranties: Start date & duration, Material errors or failures: criteria? Repair or replace requirements, Time response requirements, Disclaimers. You consider these from a perspective of the value of the purchase and life cycle cost.
5.Documentation. Documents and quantities provided in price? License of documentation: Rights, if any, to prepare derivative works? Rights to copy for internal training? You consider these both from a pricing perspective and life cycle cost. If you constantly need to purchase documentation from them or have them prepare derivative copies the cost adds up.
6.Training. What’s recommended? What’s included in the price? Location, number of students, cost and details of additional training? This is another life cycle cost issue.
7.Consulting services. What is included in the price? Cost of additional? While you may not need them its best to understand what they will do and what it would cost in case you do need them.
8.Maintenance. Maintenance: scope, cost, error correction & response times? Hotlines, escalation processes? Another life cycle cost element relating to either the cost of the service or your cost of downtime.
9.Enhancements: definition of enhancements, scope, cost. The key to this is understanding what you will get under warranty or maintenance contracts versus what they want to charge more for.
10.Future releases: Planned releases, cost of release, how long will they support multiple releases? I always ask this as I might want to delay the purchase and buy the next release or negotiate a free upgrade to that future release as a condition of the purchase.
11.Source Code: Is it provided or escrowed? If escrowed, the escrow agent’s name and location. What are the provisions for release. This is to understand the protection you will have if the supplier fails and is unable to support the product.

For software that is included as part of a piece of capital equipment you want to make sure that you have the right to sublicense it to any purchaser of the equipment. Otherwise it can make you equipment useless or significantly reduce its resale value making the life cycle cost high. You use The impact to life cycle cost to either pay less of get the right to sublicense.

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