Monday, August 8, 2011

Is supplier qualification or vendor validation important for procurement and negotiations?

Whether a qualification is important will vary based upon industry, commodity and the potential risks and costs you would have if the supplier failed to perform. The bigger the risk and potential cost, the more important it becomes and the more detailed and frequent it’s needed. The longer the expected relationship, the more important it becomes. Companies may have standard checklists, most of the time checklists are modified to deal with the specific commodity being purchased as each commodity may have different needs or concerns. The most common items that would be included in a checklist are financial questions to identify the suppliers, quality, service & support, engineering, and procurement/logistics/supply chain issues. It all depends upon the scope of what you are looking for the supplier to provide. The extent of any qualification will also vary based on the potential risk and cost of problems if the Supplier fails to perform. The biggest problem that most procurement organizations have is that they view supplier qualification from a single dimension – whether the supplier is qualified to perform the work. I view supplier qualification from two additional dimensions that are important from a negotiation perspective.

The first additional dimension is what is the potential cost impact from what I see of the supplier’s operations and how will that impact their costs in the future. This is extremely important when it comes to selecting and negotiating with a supplier for long-term relationships.If a supplier is running at maximum capacity and the only way to improve is to either expand operations or invest in new tools and equipment you probably have less of a chance to drive cost down than if the supplier is running at less that full capacity and has all the right tools and equipment needed. The second additional dimension is what are the actual or potential problems that I see from their operation. The simplest examples of this would be in a manufacturing operation you see a large amount of re-work or scrap at the end of the process, or a large amount of warranty returns. When you see problems in an operation there are two uses. One is to consider if you may need to manage or protect those potential problems in your contract. The second is to think about how you can use the problems you saw as leverage to get specific concessions in the agreement. For example if you saw a large amount of warranty returns you might want to use that to have the supplier assume all the cost of warranty returns or you might want to negotiate for different warranty terms or an extended warranty period. For example if you needed to have the supplier and there were a large number of warranty returns rather than take the traditional approach where you return it and wait for them to repair it, you could negotiate an advance swap program where you notify them of the failure they ship a repaired or replacement item immediately and you ship them the defective product for them to repair or replace and put back into their inventory.

How frequently do you need to re-qualify a supplier? Frequency should once again depend upon the risks involved. If you have a large supplier with strong financials that is consistently performing, you can do it infrequently. If you have a supplier that has either weak financials or a history or performance problems you need to closely track them with greater frequency if you need to continue to use them. The more volatile the business or market the more frequently you need to check. I once had a situation where we were going to have a building designed and constructed in Germany. A team had qualified a number of architects and then the project was put on hold for about a year. I picked up the procurement/contract/negotiation responsibility for the program and insisted that we qualify them again. The project manager didn’t like the idea and thought it would be a waste of time. At the first firm we arrived at we were escorted to the conference room and I could sense that it was simply too quiet. We saw their portfolio of all the work they had done which was good. Then I asked for a tour of their office and in walking around there was little sign of activity, most of the desks and drafting tables were empty. When we left the project manager noted that when he was there the last time the office was full of people busy at work. I then asked him if he want to hire a company where most of the work was going to be performed by people that they would need to hire for the project and who had nothing to do with their portfolio of work. Then he realized why I had insisted on re-qualifying the suppliers. Things can and do change.

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