Editor’s Note: Enjoy this part 1 of a 3-part series on how to evaluate your suppliers and Supplier Quality Management processes by Chuck Intrieri with The Lean Supply Chain. We cover supplier evaluation often on this blog and this post is in keeping with that good tradition. Our two next posts will detail, by industry, SQM and metrics issues. Also included is the application of a SQM case study.

Supplier Quality Management (SQM), Defined

SQM shows a supplier’s talent in the delivery of goods or services to satisfy a buyer’s needs. It seeks to ensure units ‘fit’ to buyer’s demands with no or little use of minimal inspection and adjustment. Quality expert Joseph Moses Juran shows how to split the process into 9 steps of supplier quality assurance.

1. product quality requirements defined.
2. alternative supplier evaluations.
3. best supplier selections.
4. dual quality planning conduction.
5. relationship period cooperation.
6. conformance to requirements validated.
7. qualified supplier certifications.
8. implementing quality improvement plans.
9. use of created supplier ratings.

5 Key Metrics Used for Scoring SQM (from LNS Research)

1. Cost of quality. This metric measures the cost to manufacture a quality product. Two main cost categories are: good quality and poor quality. The cost of quality definition and enterprise quality management software—part 2, cost of quality details these metrics and offers insights on measuring them.
2. Overall equipment effectiveness (OEE). Create a metric with better visibility for key operations areas by calculating the OEE formula: OEE = Availability × Efficiency × Quality. OEE first measures how often an asset is available when it should be producing product for a customer and if an asset is close to producing a buyer product to its theoretical maximum. OEE also measures percentages of met quality specifications for products produced.
3. Products in compliance percentage. This metric is crucial in regulated fields such as medical devices, biotechnology, pharmaceutical, and the food and beverage industries. Also, the automotive as well as the aerospace and defense fields need this vital data metric. It measures compliance with government regulations and internal guidelines by percentage of products. With many changes in the compliance landscape, it’s a challenge for most firms to stay current.
4. Complete, on-time shipments. Product quality should not delay final delivery. While on-time and complete shipments as a metric sounds easy – ways companies measure this metric can be very different. LNS Research defines it as the percentage of products delivered  wholly complete and on-time without repromise dates or errors.
5. New products introduction (NPI). NPI metric is defined as new products’ percentage that meet volume, quality, and time goals. New products introduced for a competitive advantage are vital to industries like consumer electronics and automotive. Profit growth depends on how well a firm handles new product introduction while effectively meeting NPI goals.

Executives are provided critical insight through the five key metrics into their supplier’s financial and operational performance.

SQM Evaluation Process

#1: Evaluation of Risk Criteria

SQM: Assessment of Risk

A full overview for compiling your supplier risk portfolio can be supplied to your firm through individualized risk assessments, which certainly should be calculated in multiple ways for every supplier’s performance results. Globalization has affected traditional on-site audits, unless multiple suppliers are chosen strategically within close proximity of each other this can be too costly a proposition. Another method of collection that can be employed instead is a supplier quality agreement that includes data reports and audits delivered upon request and/or at specific times during the contract period.

SQM is a key part to total cost of quality, Enterprise Quality Management Software (EQMS) and firms have started adding it into software solutions. Integrating EQMS with that of suppliers and, when possible, with supplier’s suppliers by management (commonly using shared web-portal) is wise. This method is ideal to obtain improved visibility in real-time and constant performance assessments. That level of integration, however, might appear overreaching to smaller businesses that prefer to be independent from larger firms.

SQM: Risk Quantification

A supplier’s risk can be quantified as a function of two variables (likelihood and impact of adverse events occurring) and ultimately is 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 (the 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. SQM facilitates this greatly. Data is recorded and made available in the SQM software, which allows a firm to assess whether a supplier will experience a particular failure in a standardized way.

The second risk variable, impact, depends greatly on a supplier’s criticality to production and their final product. If they have no substitute material to use in production, then a supplier should be marked as riskier regardless of its levels of performance, automatically. If you must use the supplier, make sure it holds considerable weight in your risk portfolio. If it is less critical to continuity, assign it less risk.

SQM: Risk Prioritization

SQM should be of great consideration in defining strategic vision. By quantifying supplier risk, we can effectively prioritize what issues require the most attention. 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 cutting future incidences.

#2: Audit Strategy

• Prioritize based upon risk (including time since last audit)
• Pick the top five highest risk suppliers and schedule audits throughout the year
• Hire another SQE for every fifteen suppliers that require onsite auditing.

#3: Review of Supplier Audit Frequency

The manufacturer audit is just for control and requires no set repetition unless new, persistent problems occur without supplier correction.  Major supplier yearly auditing (top five) is recommended, either by you or your choice of a subcontracted auditing firm. Occasional, unplanned audits will best evaluate a “normal production day” at the Supplier site.

#4: Audit Priorities Review

A key area is insuring a top management focus that is knowledgeable and understanding of the quality/auditing process across industry type. Review their quality budget and quality table of organization. Determine their goals and who manages quality for ongoing training and education including for a continually updated Supplier Quality Manual. The audit priority is a balanced scorecard of measurements focused on cost, quality and timeliness.

SQM Programs’ Evaluation of Suppliers Summary

Efficient optimization of the supply base should be attained by firms using a wide set of requirements. These requirements should go beyond cost and ensure the use of a risk-based approach to evaluate each supplier’s criticality including whether or not they are likely to fail. An initiative’s long-term success for supplier quality metrics will work best when audit tools and standardized risk application are made through an enterprise system.