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The way OEMs and electronics manufacturing services (EMS) providers measure supplier performance has evolved over the years. In the old days, a component supplier’s performance may have just been measured based on the price of the components and whether the manufacturer delivered parts within a certain delivery window.
Today, most OEMs and EMS providers rate supplier performance based on a matrix of value that factors in not only price and delivery, but also quality, technology, and responsiveness. Increasingly, suppliers are also being evaluated on how well they adhere to a customer's corporate social responsibility code of conduct. If a supplier forces employees to work excess overtime or perhaps uses child labor, the supplier would get a poor performance rating and risk losing business.
Most electronics companies rate their suppliers based on total cost of ownership (TCO). Quality, delivery, technology and supplier responsiveness to supply chain issues all impact TCO.
“Quality is always a priority. We continually raise the bar for continuous improvement,” said David Yeo, commodity management director at Celestica.One company that uses total cost of ownership is EMS provider Celestica, based in Toronto.
"We measure cost in two ways," said David Yeo, commodity management director at Celestica. “One is the price of commodities that a supplier provides Celestica compared to the market price, and the other is the total cost of part.”
Total cost takes into consideration the other elements such as delivery and supply chain flexibility, which would include leadtime reduction of a component and quality of the product the supplier manufactures.
“Quality is always a priority,” noted Yeo. “We set defect per million targets which vary by commodity. And we continually raise the bar for continuous improvement.” Not meeting those targets impacts the rating on the supplier’s scorecard.
While product quality has improved over the years, new targets have to be set because of new technology.
“The technology required for many products has increased,” said Yeo. “The challenge for suppliers today is that they have to maintain and improve that level because the products that they are working on become smaller and higher performance.”
With current demand for components weak, delivery is not too much of a concern. However, Celestica is looking to reduce component and replenishment leadtimes.
“With replenishment leadtimes, we have supply chain programs such as vendor-managed inventory (VMI). So we give them a forecast as far out as possible so that they can plan and replenish the product when we require,” Yeo noted.
“If a supplier has an environmental problem or an ethics problem such as excess overtime,” the supplier risks losing TI business, said David Reid, Texas Instruments’ ethics director.He added that suppliers are rated on whether they have effective VMI programs because such programs reduce total cost for Celestica.
While Celestica is an EMS provider, technology is also an important rating criterion. “Ten years ago, an EMS supplier like Celestica would not have been too concerned about a supplier’s ability to deliver technology,” said Yeo. However, Celestica and other EMS providers are moving away from the traditional role of the EMS provider.
Yeo noted that more of Celestica's business is as a joint design manufacturer (JDM).
“We're not only just mounting components on printed circuit boards. We are involved in the early stages of product design with suppliers and customers, so technology is critical," said Yeo. “We have to be aware of suppliers and their technologies.”
If a supplier’s scorecard rating is poor, it does not mean the supplier will automatically lose Celestica's business or not be considered for future business.
“We work with them to improve,” Yeo said. “We want to bring them to a greater level of innovation so we can create a competitive advantage for us. Those that are not living up to performance requirements are usually not our partners.”
The need to innovate
Innovation is being reflected in more supplier scorecards. For instance, communications equipment company Alcatel Lucent looks for innovation in communication from suppliers. The company has revamped its supplier scorecard over the past 18 months, according to DeAnn Hargis, managing director, global sustainability & quality – procurement at Alcatel-Lucent. The company re-evaluated its supplier scorecard questions so that they focused more on innovation in communication with suppliers.
“Corporate responsibility is an active part of our supplier scorecard," said DeAnn Hargis of Alcatel Lucent.“We put much more focus on innovation,” said Hargis. “It is not just innovation from great R&D aspects, but also includes how well the supplier works with our R&D team for actually realizing their innovation in our designs,” she said.
Hargis added that this is important because suppliers are viewed as an extension of Alcatel-Lucent, and they depend on suppliers to bring in new ideas for products.
Alcatel-Lucent also evaluates supplier’s supply-chain innovation, according to Hargis. She said Alcatel-Lucent wants suppliers to propose ideas on how to improve the supply chain and reduce risk.
That is why Alcatel-Lucent factors in corporate social responsibility and environmental sustainability into their scorecard.
“Corporate responsibility is an active part of our supplier scorecard," said Hargis. “The corporate responsibility assessment score of the supplier begins with the very first conversation. If the supplier is unwilling to agree and align to the Electronic Industry Citizenship Coalition (EICC) code of conduct, then we can’t progress much further.”
Suppliers are evaluated and given a scorecard based on corporate social responsibility. “It tells them their strengths and their weaknesses. It is as a standalone scorecard dedicated to corporate responsibility,” said Hargis. The score is part of the suppliers overall performance rating.
Other electronics companies also factor in corporate social responsibility into their supplier scorecards. One such company is Texas Instruments. David Reid, TI’s ethics director said that adherence to TI’s code of conduct requirements by suppliers is an important part of the “matrix of value” that TI expects from suppliers.
“If a supplier has an environmental problem or an ethics problem such as excess overtime,” the supplier risks losing TI business, according to Reid. Just like the other factors of cost and quality, if they are not meeting our expectations (concerning CSR), the supplier could certainly reduce future business with them.
Social responsibility is becoming embedded into IBM's supplier performance ratings “along with cost, quality, delivery, technology, relationship, etc.” said John Gabriel, manager, supply chain social responsibility at IBM.
“It has become another facet of the total sourcing equation,” Gabriel said.