In our previous installment, we learned that supply chain improvement or Lean Supplier Alignment is not just for large manufacturers or OEM’s. Small and midsized manufacturers can do it successfully, too. We laid out some basic areas of your supply chain to examine and how to get started. Now we will review a more specific tool to help you evaluate individual suppliers called the Supplier Scorecard.

The Supplier Scorecard assesses suppliers based on major performance benchmarks in several key areas such as Manufacturing Critical path Time (MCT), On-Time Delivery, Quality Parts per Million, Cost of Poor Quality, Inventory Turns and Productivity Gains. Improvement or industry leaders would be on the high end of this performance scale. Companies with very little or no improvement efforts will likely fall on the low end of the scale.

This scorecard is by no means a rigid yardstick. You may make adjustments for your specific industry. For example, your industry average of MCT for a particular part or product may take longer than the 6-9 days average measure here. Make changes where appropriate. Also, there may be other performance criteria that are specific to your industry that you wish to add to this scorecard.

Here is an explanation of each criterion:

1. Manufacturing Critical-path Time (MCT): The typical amount of calendar time from when a customer order is received and a manufacturing order is created through the critical-path until the first, single piece of that order is delivered to the customer. MCT is a general measurement to indicate the “leanness” of your supplier. A higher MCT usually indicates that there are more non value-added activities (i.e. waste) in the process of making the part or product. This in turn points to the need for Lean improvements. A lower MCT indicates that there are more value-added activities in process and hints to the likelihood that this supplier has already made good strides in Lean efforts.
    
2. On Time Delivery (OTD): Parts delivered on time / Total parts ordered. It is important that you and your supplier are on the same page with this measure. Very often, suppliers and customers are defining delivery differently – to whatever definition is to their best advantage. Clearly define the acceptances window, days early and days late to your suppliers. It should be fully explained to avoid any confusion on this issue.
     
3. Quality PPM: Defects per Million Opportunities. This is a rough measure of the quality of the operation. For more details, see explanation on Six Sigma.
     
4. Cost of Poor Quality (COPQ): There are different costs associated with poor quality (see page 5). Add up the dif-ferent costs for each supplier and calculate the total as a percentage of total revenues. 25% or more is a very high cost of quality and a serious issue. Whereas 15-25% is considered average. Less than 1% is superb.
       • Prevention Costs-Incurred to prevent or avoid quality problems (example: training workers).
       • Appraisal Costs-Associated with measuring and monitoring activities related to quality (example: inspecting outputs).
       • Internal Failure Costs-Incurred to remedy defects discovered before product delivered to customer (example: rework).
       • External Failure Costs-Incurred to remedy defects discovered by customer (example: warranty repairs).
    
5. Six Sigma Levels: The amount of variation in the manufacturing operation based on Defects per Million Opportunities. Companies that have only 3.4 DPMO or less have a 6 sigma rating or higher (highest level of performance) while those who have 66,807 DPMO or more have a 3 sigma or less (lowest level of performance). Those with a 6 sigma rating are completely dedicated to process improvement and have built in exceptional and consistent quality to their operation. A 3 sigma or less company is likely not dedicated to process improvement and have very inconsistent or poor quality.
     
6. Inventory Turns: Cost of Goods Sold / Average Inventory in Dollars On Hand. In general, higher inventory turns indicate a faster pull through the operation toward the downstream end. This healthy or good flow of product through the operation usually shows that they are making some good Lean progress. Lower inventory turns may show a need for additional or more effective Lean efforts.
        
7. Productivity Gains (PG): % Productivity Gain - % Inflation.

Create a table based on the scorecard on page 2 with the suppliers listed down the far left column and the particular criteria and overall score along the top row. Rate each of your major suppliers based on these criteria in the scorecard. The rating is on a scale of 1 to 5 with 1 being Below Average and 5 being Outstanding. Then take an average of all of the criteria ratings to get an overall rating or score for your supplier.

If the supplier rating is below 2, this supplier is in trouble and very substantial improvement is required. This supplier must be seriously committed to work with you to improve their performance; otherwise you should consider another company. A rating of 2-3 means that supplier is average. The company certainly has room for improvement but is in a better position to improve to higher levels than a supplier rated below 2. The rating of 3-4 is very good. This supplier is on its way to aligning with your operations. The closer to the high end of the scale, the less time and resources it will take for the supplier to reach top performance.

A rating of 4-5 means that supplier is very exceptional and will be an extremely valuable partner in your continued improvement efforts. With this high rating, the supplier is top in its class and should be rewarded with your business. The highly rated companies are more likely to recognize the key strategic nature of their relationship with your business and act accordingly while adhering to a true continuous improvement philosophy.

The Supplier Scorecard helps you know the score by distinguishing your superstars from the minor league suppliers. That way you can surround yourself with the top performers to make a winning supply chain team.