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How HP measures supplier performance and compliance(Purchasing Via Thomson Dialog NewsEdge) When Hewlett-Packard began outsourcing its manufacturing facilities, it knew it had to clearly define what was expected of its suppliers. The only way to make sure product quality met requirements was by clearly defining what the metrics for measurement were. By forming a concrete set of standards regarding product technology, quality, responsiveness, delivery, cost, and environmental impact, HP has been able to weed out non-compliant suppliers, and drive performance higher in others. Greg Shoemaker, vice president of central and direct procurement at HP, says that we work with our suppliers on quality enhancements to reduce warranty cost to HP, and therefore to offer the most reliable products possible. Several quality metrics are measured weekly for cost of quality impact, including annualized failure rate (AFR), annualized return rate (ARR), defects parts per million (PPM), and component failure rate. Reporting is reviewed weekly by the central groups and independently by the business units off mutual databases, says Shoemaker. Procurement engineers review the data as well in monthly supplier reviews with commodity management and business units participating. He adds that there is no flexibility in the rating even if market conditions deteriorate, and on-time deliveries require full compliance to shipping schedules. Back when most of HP's manufacturing facilities were based in Western Europe and the U.S., it was easier to easier to focus solely on the quality of supplier performance. As HP increasingly outsourced its manufacturing facilities to what Bonnie Nixon-Gardiner, global program manager of supply chain social and environmental responsibility, terms the higher risk geographies in Asia, Eastern Europe, and Central America, that changed. The need for all aspects of supplier performance, including environmental and labor concerns, to be clearly measured and defined became a new priority. Currently the company allocates $10 billion in spend on suppliers in the Americas and $40 billion in the Asia Pacific region. In countries like China, where Nixon-Gardiner says more than 80% of HP's products are manufactured, there are government laws regulating environmental, ethical, and worker safety requirements. But the laws on paper are not always regulated by governmental agencies to the degree or frequency that they should be, and that's a big concern for a company like HP, she says. So that's where we've had to really step in and make sure that these things are being paid attention to and integrated into the supplier's overall management system. Nixon-Gardiner began benchmarking the labor and environmental compliance practices of companies in other sectors, such as oil, gas, and food, just to learn what went well, what didn't go well in these other sectors, she says. Quite frankly, one of the real areas of concern was the metrics and clear measurements; communications about how suppliers can be successful and how they're measured. They hadn't really been developed, and I didn't feel that there were successful systems put in place nor solid decision-making methods in these areas. Environment joins the scorecardAfter approximately 17 years of running her own environmental planning company, Nixon-Gardiner came on board at HP in 1998. By that point, the company was already measuring suppliers on: Technology, quality, responsiveness, delivery, cost, and environmentTQRDCE. In the mid 1990s, she says, the environmental component was added in response to concerns that stemmed from outsourcing. The company uses a scorecard system to measure its supplierswith responsiveness and delivery lumped in one category. Each TQRDCE area receives 20% weight in the system. To eliminate confusion over environmental expectations, HP and more than 20 other electronics companies formed the Electronic Industry Code of Conduct (EICC) in October 2004. This approach, says Nixon-Gardiner, allows suppliers that serve more than one customer to fill out a self-assessment questionnaire that's on the EICC website, and they'll be able to provide the results of that to all of their customers. This process [reduces] the inefficiencies and confusion for high-volume suppliers in countries like China and Mexico. Of course, signing statements isn't enough to be deemed compliant. In addition to quarterly business reviews, suppliers are told to expect regular on-site audits, which vary in frequency depending on what they make and how they are performing. If a supplier is deemed high-risk by HP, Nixon-Gardiner says they can expect up to four audits in a year. Tangible resultsAs the scoring system is equal for all suppliers, says Shoemaker, suppliers are given the opportunity to upgrade their performance in each quarter. That's not to say that the categories are not interrelated, though. Nixon-Gardiner says that any one of these areas can usurp the other entirely. In the cases where a supplier's labor or environmental practices are cause for concern, HP performs additional audits on the supplier's management system to see if there is potential for change. If we don't receive action within a couple of weeks, she says, we will begin to change the business relationship. Often upon notifying HP management about the supplier in question, Nixon-Gardiner's concerns would echo other problems that had begun to manifest in other aspects of the supplier's performance. In those cases, the procurement executives said thank you for giving us one more reason (to terminate). So it's been validating in that they were having problems for delivery or quality, and they come back and say it doesn't surprise us, so let's terminate the relationship with the supplier. What Nixon-Gardiner says HP doesn't want to be, however, is a policing force for the supply base or the industry as a whole. That's one of the things I saw with the other industry sectorsthey're stuck in this compliance monitoring do-loop that they can't seem to get out of, she says. They've done thousands of audits, and after a decade of doing audits, real stable change has not taken place, and real supplier improvements have not occurred. Her belief is that many suppliers are not pushing a management-down change in behavior becauseeven worsethey don't see the real business benefit in environmental standards compliance. If they present a risk for us and lose, then we all lose, Nixon-Gardiner says. We're working hard to help them understand that as partners of ours, they need to increase their competencies in this space, they need to commit and they need to recognize this is the right thing to do, it's good for business, she says. We will give preference to them as better partnerswe will source to them. What it means to buyersMaria Varmazis Well-defined supplier metrics are key to communicating expectations Under-performing areas can overshadow all other aspects of performance, e.g. poor labor and environmental practices will affect quality Copyright 2006 Reed Business Information. All Rights Reserved. |