Executive Briefings

Healthy Paranoia Drives Investment In Supply Management

With the growth in offshore sourcing and manufacturing, supply lines have become longer, more complex and more vulnerable to disruptions. Concerned companies are meeting this challenge with a disciplined approach to supply management.

Supplier quality, reliability and performance are increasingly critical for companies under constant pressure to both innovate and reduce costs through methods like lean logistics and offshore sourcing. Consequently, managing the supply base and its associated risks has become an industry-leading best practice.

"It's no longer just about buying smarter to save money," says Christine Crandell, vice president of marketing at Ariba, Sunnyvale, Calif. "It's about the role of resource provision in your corporate strategy and how that fits into the whole story of risk management." Companies today are worried about supply disruptions and also supply flexibility, Crandell says.

Best-in-class companies are more than worried, "they are paranoid," according to Sudy Bharadwaj, vice president and research director at Aberdeen Group, Boston, who authored Aberdeen's recent Global Supply Visibility and Performance Benchmark Report. Their paranoia is well-founded, he adds. "Pressures to reduce inventories leave many companies in all industries with only enough inventory for a relatively short period of time," Bharadwaj says. This minimal safety stock-coupled with the long lead times and uncertainties of low-cost country sourcing-means an increased risk of missed delivery dates that can slow manufacturing lines or leave store shelves empty, he says.

Being motivated by fear pays off, however. Companies in the survey that said their policies are driven by fear of disruptions, rather than by actual experience, had far fewer disruptions than their more reactive counterparts, as well as higher overall supply chain performance. "Here we have proof of what many successful business thinkers and authors have long said: only the paranoid survive," says Bharadwaj. These proactive, best-of-class companies met customer-requested ship dates an average of 90 percent of the time, versus 40 percent for lower performers. And they achieved this service level while reducing inventory by 39 percent, compared with a 22-percent reduction for average and laggard companies.

As its title implies, the Aberdeen study cites visibility and performance measurement as two essential ingredients of effective supplier management. Other needed elements are an understanding of the total costs of doing business with a supplier and supplier collaboration. The report says two technologies are key to these capabilities: supplier enablement and supplier portals. With the exception of supplier performance measurement, which already is widespread, the report says that all of these solutions "are in strong growth mode (as) many enterprises are immediately upgrading all segments of a global supply visibility and performance program."

More evidence for the value of supplier management comes in another survey of 229 global procurement executives by Accenture, McLean, Va. "Companies that get supplier relationship management right can typically realize an additional 2 percent to 3 percent savings over and above the 8 percent to 10 percent they would get from typical strategic sourcing," says Accenture partner Randall Moore. Additional savings come from post-contract activities such as contract compliance, supplier measurement and joint process improvement.

Moore identifies four things that companies need to do well in order to have a high performing SRM program. First, he says, "they need to very thoughtfully segment their suppliers in order to understand which ones should be truly integrated into their supply chain." Second is a strong contract management capability; third is supplier performance measurement, and fourth is integration and collaboration.

While there is considerable overlap, these two surveys reflect the differing views and definitions of SRM that exist in the marketplace. "If you were to go out and ask five companies to name the most important thing about SRM, or even supplier performance management, you would get five different answers," says Meg Lloyd, vice president of applications development at Oracle, Redwood Shores, Calif. "That is partly why companies tend to list this as a very high priority but have never been crystal clear about how to focus on it," she says. "Some think the focus should be on risk, others on price, others on delivery performance, others on flexibility."

In addition, it often is difficult to know who owns the supplier management function. "We see a number of companies that are struggling with the organizational issues," says Lloyd. "Is the procurement department responsible or does the procurement department establish the relationship, with the manufacturing plant being responsible for the performance of a given supplier? Who really owns the responsibility?"

This murkiness is reflected in the approach to solutions by both users and vendors. Some include supplier management under strategic sourcing initiatives; others see it as part of product lifecycle management, or spend management, or supply chain management-or some combination of functions from all of these.

Dallas-based i2 Technologies firmly believes SRM is a core part of supply chain management, for example, but its solution set has some PLM-type capabilities as well. "We want to provide an end-to-end solution, which means you really need to start with the design process," says Manish Govil, program manager-SRM group. i2's solution gives engineers the ability to incorporate sourcing intelligence by searching for existing components that meet a new design need. "One of the big value propositions we bring our customers, especially those in high-tech, aerospace and automotive, is the ability to find and use parts that already exist," he says. "That means they are not having to design these parts or carry the inventory or do any of the other associated transactions, which are savings that go directly to the bottom line."

i2 also gives design engineers access to lists of preferred suppliers and their capabilities. "Designers are the people who decide what the company is going to buy, so if we can give them information that helps them make supply-friendly decisions, then we smooth out a lot of vibration and save both time and cost," Govil says.

Core Suppliers
Regardless of approach, one of the first steps in supplier management is identifying key suppliers that are core to a company's operations and that warrant establishment of joint processes and communications.

"The biggest pain point for companies is simply to identify who their most important suppliers are and how important they are," says Lloyd. "So the first step in formalizing a supplier management program is having visibility to your suppliers and how much of your enterprise they supply. Then you need an organizational commitment to standardize as much as possible across all internal buying organizations so that you deal with suppliers in a consistent way."

Bharadwaj reiterates this point. "In today's global economy, suppliers may be servicing an enterprise all over the world," he says. "Therefore, the optimal process is one which is aligned and standardized company-wide." Moreover, he says, a successful program must be repeatable and sustainable-"thus a very disciplined approach must occur."

Identifying core suppliers requires looking at more than price and delivery performance, says Moore. "You also need to consider such things as what joint development opportunities might be available with this supplier or whether this supplier can offset your own R&D costs by providing engineering talent and resources." Companies should not waste effort on suppliers that do not fundamentally impact either their cost structure or their ability to deliver core missions, he says, noting that this will likely be no more than 15 percent of the supply base.

Interestingly, the Aberdeen study found that there is no middle ground on this subject. Best-in-class companies either focus on the top 10 percent of their suppliers or they connect and share information with 100 percent. "A very common trait of industry average and laggard performers is that they share information with 50 percent of their suppliers," Bharadwaj says.

"We see a number of companies that are struggling with the organizational issues."
- Meg Lloyd of Oracle

In addition to identifying key suppliers in their current supply base, companies need to be able to evaluate new suppliers as well. This requires "an advanced decision support tool that allows you to evaluate multiple parameters and then optimize based on business objectives," says Tim Minahan, senior vice president of marketing at Procuri, Atlanta. In Procuri's case, that involves three things: the ability to evaluate thousands of line items on multiple price and non-price factors; the ability for suppliers to offer alternative bids or bundles to differentiate themselves and perhaps offer a better value; and constraint-based scenarios that take into account various business concerns. These might include the need to meet set-aside requirements for minority-owned businesses, for example, or a requirement that a critical part only be sourced from suppliers within 500 miles of the plant. "Companies constantly are trading off cost, performance and risk and our optimization engine allows them to come up with an allocation strategy that works for their business," Minahan says.

Emptoris, Burlington, Mass., has a supplier qualification solution that uses detailed questionnaires that suppliers can answer via the Web. "This helps companies narrow down their list of potential suppliers to determine which ones they actually want to engage with," says CEO Avner Schneur.

Supplier Networks
To connect to core suppliers and automate communications, many turn to third-party supplier networks, such as those managed by Ariba, E2open, Oracle and many other vendors.

"Automating core suppliers clearly has become an industry best practice," says Crandell. "Automation not only allows companies to streamline and enforce consistency in processes, it also enables functions like contract compliance." The Ariba supplier network currently has more than 140,000 participating suppliers with a volume twice that of eBay. "We process a purchase order every two seconds," Crandell says.
"Automation of basic processes provides value on both sides of transactions, in terms of reducing headcount and having accurate data," says Lorenzo Martinelli, executive vice president at E2open, Redwood City, Calif. "But the real value of automation is that it allows timely information so companies can practice exception management." Finding out there was a problem at a supplier review meeting a month after the fact helps no one, Martinelli says. "You need real-time visibility of problems so you can start working with the supplier on a resolution. Then you measure the supplier on how quickly it is able to respond to the problem." That there will be problems is a given, he says. "Otherwise you can be sure you are running fat somewhere. As companies move toward a lean model, the question is not whether you will have problems, but how quickly you can respond."

Kinaxis, Ottawa, focuses specifically on this issue with its RapidResponse solution, which is used by OEMs to manage their contract-manufacturing supply. "Users are able to have visibility to all their suppliers in one common environment," says Kerry Zuber, director of business consulting. Within this application environment, they also can run a variety of "what if" scenarios to determine, for example, whether supplier inventory and production can support new order demand. "They are able create a private plan within RapidResponse and, if it is feasible, immediately make order commitments against that inventory," Zuber says.

Another way to communicate and collaborate with suppliers is through a supplier portal. According to a benchmark study from Purchasing Magazine, the use of and demand for supplier portals is on the rise. Forty-nine percent of its respondents currently are using portals for communications and commerce with suppliers and another 35 percent say they plan on using portals in the future.

One advantage to portals is that suppliers can be made responsible for keeping their own information up to date. This self-service feature is employed by the TotalSupplier portal from Procuri, though Minahan says it is "empowerment without choice." The portal is a very structured environment, where a supplier comes in and provides information that a buying organization needs, he says. This eliminates situations "where you have buyers or supply chain folks running around and trying to identify all this information. Does a supplier have its insurance certification? Is it ISO 9000 certified? Does it have alternative parts we need to be in compliance with environmental regulations? The information is all there in a central repository."

Procuri's system also can monitor attributes of the supplier through the portal, Minahan says. "Using the insurance certificate as an example, if this is something that needs to be renewed every year, we can alert the supplier that it is coming due and needs to be updated. That alert can then be escalated to a commodity manager if action is not taken, or the system can even shut out the supplier from doing more business. Basically, it allows the buying organization to proactively monitor suppliers and mitigate risk."

Portals also provide a forum for collaboration, enabling buyers and suppliers to establish a corrective action plan when something goes wrong, says Lloyd. "Our iSupplier Portal gives buyers and suppliers a real-time view of what each other are doing." For example, she says, "a supplier can log onto iSupplier and see all of the orders that the buying organization has for them. They can acknowledge those orders or respond that they cannot meet the requested date and offer a promise date to which they are willing to commit. So there is collaboration even before the order is committed."

Oracle also uses its portal to give suppliers visibility to their performance scorecards. "This really puts supplier management into the hands of the supplier," Lloyd says. "A supplier can come in and see how it is doing and, if it is not doing well, see what it needs to fix."

Performance Management
Supplier performance monitoring is a major part of SRM and is an area where companies rapidly are moving from management by spreadsheet to more sophisticated software solutions. The Aberdeen study found that use of spreadsheets for supplier performance measurement will drop by 66 percent within two years and use of in-house applications will drop by 32 percent. Companies will instead use ERP or best-of-breed systems or will outsource this function. Within two years, only 8 percent of enterprises surveyed will not have a supplier performance measurement program in place.

Effective performance measurement of suppliers begins with negotiation of the contract, says Martinelli. "Companies need to see that performance measures are built into the contract during the negotiation process. There is no value in measuring something if there is no contractual commitment to support it."

It also is important to establish clear, standardized metrics and measurements so the supplier has no doubt about what a company's requirements are, says Lloyd. "Then you have to have software that will automatically collect and compute those metrics-the percentage of deliveries that are on time, the percentage of returns, the quality number, adherence to pricing and so on." Oracle uses its Daily Business Intelligence application for this function. "The idea is to have a single version of the truth regarding how the supplier is doing," she says.

That is not always as straightforward as it may seem because there are qualitative measures as well as quantitative ones, says Govil. Again, this is where supplier responsiveness comes in. "If I have a demand surge-say I was expecting production of 100,000 units but I now need 130,000-can the supplier ramp up production to meet that increase in the time frame I need? There needs to be a way to assign a value to these qualitative things as well as to quantitative measures so you can have apples-to-apples comparisons," he says.

Emptoris uses a supplier assessment to help with this task. "We create a decision tree with a significant number of questions related to the supplier's specific domain area," says Schneur. These questions are submitted to different people in the organization, in different ways, to make sure that the supplier is meeting all of the organization's various needs. One Emptoris customer, a large aerospace and defense company, uses the supplier assessment to classify suppliers based on their ability to come up with innovative ideas, he says. "This process really helps distinguish between suppliers based on all of their capabilities," he says.

Another reason for supplier monitoring is early detection of problems that could lead to failures or disruptions. That is the purpose behind Open Ratings, a Dun & Bradstreet company based in Waltham, Mass., that uses machine learning and pattern recognition technologies to spot suppliers that are heading for trouble. AMR Research, Boston, cites an aerospace company that implemented Open Ratings as an early warning system after two significant supplier failures that cost the company several million dollars. This user combines the risk scores generated by Open Ratings and financial scores from Dun & Bradstreet to come up with a composite score that rates suppliers either as safe, in need of close monitoring, or requiring action in the form of risk mitigation or prior approval of orders. After 11 months, AMR reports, 15 new suppliers at the A&D company had been blocked for being high risk and 300 orders across 100 suppliers were stopped and redirected to new suppliers.

Supplier performance measures are an important factor in achieving continuous improvement, which is a central, though hard to measure benefit of SRM. It is documented in the Aberdeen study by a widening of the gap between high and low performers the longer a supply visibility and performance program was in place. "Follow-up interviews with various enterprises confirmed that the more mature the program, the more value it delivers," says Bharadwaj. "Companies need to make sure technology investments in this area can support a continuous improvement cycle."

Supplier quality, reliability and performance are increasingly critical for companies under constant pressure to both innovate and reduce costs through methods like lean logistics and offshore sourcing. Consequently, managing the supply base and its associated risks has become an industry-leading best practice.

"It's no longer just about buying smarter to save money," says Christine Crandell, vice president of marketing at Ariba, Sunnyvale, Calif. "It's about the role of resource provision in your corporate strategy and how that fits into the whole story of risk management." Companies today are worried about supply disruptions and also supply flexibility, Crandell says.

Best-in-class companies are more than worried, "they are paranoid," according to Sudy Bharadwaj, vice president and research director at Aberdeen Group, Boston, who authored Aberdeen's recent Global Supply Visibility and Performance Benchmark Report. Their paranoia is well-founded, he adds. "Pressures to reduce inventories leave many companies in all industries with only enough inventory for a relatively short period of time," Bharadwaj says. This minimal safety stock-coupled with the long lead times and uncertainties of low-cost country sourcing-means an increased risk of missed delivery dates that can slow manufacturing lines or leave store shelves empty, he says.

Being motivated by fear pays off, however. Companies in the survey that said their policies are driven by fear of disruptions, rather than by actual experience, had far fewer disruptions than their more reactive counterparts, as well as higher overall supply chain performance. "Here we have proof of what many successful business thinkers and authors have long said: only the paranoid survive," says Bharadwaj. These proactive, best-of-class companies met customer-requested ship dates an average of 90 percent of the time, versus 40 percent for lower performers. And they achieved this service level while reducing inventory by 39 percent, compared with a 22-percent reduction for average and laggard companies.

As its title implies, the Aberdeen study cites visibility and performance measurement as two essential ingredients of effective supplier management. Other needed elements are an understanding of the total costs of doing business with a supplier and supplier collaboration. The report says two technologies are key to these capabilities: supplier enablement and supplier portals. With the exception of supplier performance measurement, which already is widespread, the report says that all of these solutions "are in strong growth mode (as) many enterprises are immediately upgrading all segments of a global supply visibility and performance program."

More evidence for the value of supplier management comes in another survey of 229 global procurement executives by Accenture, McLean, Va. "Companies that get supplier relationship management right can typically realize an additional 2 percent to 3 percent savings over and above the 8 percent to 10 percent they would get from typical strategic sourcing," says Accenture partner Randall Moore. Additional savings come from post-contract activities such as contract compliance, supplier measurement and joint process improvement.

Moore identifies four things that companies need to do well in order to have a high performing SRM program. First, he says, "they need to very thoughtfully segment their suppliers in order to understand which ones should be truly integrated into their supply chain." Second is a strong contract management capability; third is supplier performance measurement, and fourth is integration and collaboration.

While there is considerable overlap, these two surveys reflect the differing views and definitions of SRM that exist in the marketplace. "If you were to go out and ask five companies to name the most important thing about SRM, or even supplier performance management, you would get five different answers," says Meg Lloyd, vice president of applications development at Oracle, Redwood Shores, Calif. "That is partly why companies tend to list this as a very high priority but have never been crystal clear about how to focus on it," she says. "Some think the focus should be on risk, others on price, others on delivery performance, others on flexibility."

In addition, it often is difficult to know who owns the supplier management function. "We see a number of companies that are struggling with the organizational issues," says Lloyd. "Is the procurement department responsible or does the procurement department establish the relationship, with the manufacturing plant being responsible for the performance of a given supplier? Who really owns the responsibility?"

This murkiness is reflected in the approach to solutions by both users and vendors. Some include supplier management under strategic sourcing initiatives; others see it as part of product lifecycle management, or spend management, or supply chain management-or some combination of functions from all of these.

Dallas-based i2 Technologies firmly believes SRM is a core part of supply chain management, for example, but its solution set has some PLM-type capabilities as well. "We want to provide an end-to-end solution, which means you really need to start with the design process," says Manish Govil, program manager-SRM group. i2's solution gives engineers the ability to incorporate sourcing intelligence by searching for existing components that meet a new design need. "One of the big value propositions we bring our customers, especially those in high-tech, aerospace and automotive, is the ability to find and use parts that already exist," he says. "That means they are not having to design these parts or carry the inventory or do any of the other associated transactions, which are savings that go directly to the bottom line."

i2 also gives design engineers access to lists of preferred suppliers and their capabilities. "Designers are the people who decide what the company is going to buy, so if we can give them information that helps them make supply-friendly decisions, then we smooth out a lot of vibration and save both time and cost," Govil says.

Core Suppliers
Regardless of approach, one of the first steps in supplier management is identifying key suppliers that are core to a company's operations and that warrant establishment of joint processes and communications.

"The biggest pain point for companies is simply to identify who their most important suppliers are and how important they are," says Lloyd. "So the first step in formalizing a supplier management program is having visibility to your suppliers and how much of your enterprise they supply. Then you need an organizational commitment to standardize as much as possible across all internal buying organizations so that you deal with suppliers in a consistent way."

Bharadwaj reiterates this point. "In today's global economy, suppliers may be servicing an enterprise all over the world," he says. "Therefore, the optimal process is one which is aligned and standardized company-wide." Moreover, he says, a successful program must be repeatable and sustainable-"thus a very disciplined approach must occur."

Identifying core suppliers requires looking at more than price and delivery performance, says Moore. "You also need to consider such things as what joint development opportunities might be available with this supplier or whether this supplier can offset your own R&D costs by providing engineering talent and resources." Companies should not waste effort on suppliers that do not fundamentally impact either their cost structure or their ability to deliver core missions, he says, noting that this will likely be no more than 15 percent of the supply base.

Interestingly, the Aberdeen study found that there is no middle ground on this subject. Best-in-class companies either focus on the top 10 percent of their suppliers or they connect and share information with 100 percent. "A very common trait of industry average and laggard performers is that they share information with 50 percent of their suppliers," Bharadwaj says.

"We see a number of companies that are struggling with the organizational issues."
- Meg Lloyd of Oracle

In addition to identifying key suppliers in their current supply base, companies need to be able to evaluate new suppliers as well. This requires "an advanced decision support tool that allows you to evaluate multiple parameters and then optimize based on business objectives," says Tim Minahan, senior vice president of marketing at Procuri, Atlanta. In Procuri's case, that involves three things: the ability to evaluate thousands of line items on multiple price and non-price factors; the ability for suppliers to offer alternative bids or bundles to differentiate themselves and perhaps offer a better value; and constraint-based scenarios that take into account various business concerns. These might include the need to meet set-aside requirements for minority-owned businesses, for example, or a requirement that a critical part only be sourced from suppliers within 500 miles of the plant. "Companies constantly are trading off cost, performance and risk and our optimization engine allows them to come up with an allocation strategy that works for their business," Minahan says.

Emptoris, Burlington, Mass., has a supplier qualification solution that uses detailed questionnaires that suppliers can answer via the Web. "This helps companies narrow down their list of potential suppliers to determine which ones they actually want to engage with," says CEO Avner Schneur.

Supplier Networks
To connect to core suppliers and automate communications, many turn to third-party supplier networks, such as those managed by Ariba, E2open, Oracle and many other vendors.

"Automating core suppliers clearly has become an industry best practice," says Crandell. "Automation not only allows companies to streamline and enforce consistency in processes, it also enables functions like contract compliance." The Ariba supplier network currently has more than 140,000 participating suppliers with a volume twice that of eBay. "We process a purchase order every two seconds," Crandell says.
"Automation of basic processes provides value on both sides of transactions, in terms of reducing headcount and having accurate data," says Lorenzo Martinelli, executive vice president at E2open, Redwood City, Calif. "But the real value of automation is that it allows timely information so companies can practice exception management." Finding out there was a problem at a supplier review meeting a month after the fact helps no one, Martinelli says. "You need real-time visibility of problems so you can start working with the supplier on a resolution. Then you measure the supplier on how quickly it is able to respond to the problem." That there will be problems is a given, he says. "Otherwise you can be sure you are running fat somewhere. As companies move toward a lean model, the question is not whether you will have problems, but how quickly you can respond."

Kinaxis, Ottawa, focuses specifically on this issue with its RapidResponse solution, which is used by OEMs to manage their contract-manufacturing supply. "Users are able to have visibility to all their suppliers in one common environment," says Kerry Zuber, director of business consulting. Within this application environment, they also can run a variety of "what if" scenarios to determine, for example, whether supplier inventory and production can support new order demand. "They are able create a private plan within RapidResponse and, if it is feasible, immediately make order commitments against that inventory," Zuber says.

Another way to communicate and collaborate with suppliers is through a supplier portal. According to a benchmark study from Purchasing Magazine, the use of and demand for supplier portals is on the rise. Forty-nine percent of its respondents currently are using portals for communications and commerce with suppliers and another 35 percent say they plan on using portals in the future.

One advantage to portals is that suppliers can be made responsible for keeping their own information up to date. This self-service feature is employed by the TotalSupplier portal from Procuri, though Minahan says it is "empowerment without choice." The portal is a very structured environment, where a supplier comes in and provides information that a buying organization needs, he says. This eliminates situations "where you have buyers or supply chain folks running around and trying to identify all this information. Does a supplier have its insurance certification? Is it ISO 9000 certified? Does it have alternative parts we need to be in compliance with environmental regulations? The information is all there in a central repository."

Procuri's system also can monitor attributes of the supplier through the portal, Minahan says. "Using the insurance certificate as an example, if this is something that needs to be renewed every year, we can alert the supplier that it is coming due and needs to be updated. That alert can then be escalated to a commodity manager if action is not taken, or the system can even shut out the supplier from doing more business. Basically, it allows the buying organization to proactively monitor suppliers and mitigate risk."

Portals also provide a forum for collaboration, enabling buyers and suppliers to establish a corrective action plan when something goes wrong, says Lloyd. "Our iSupplier Portal gives buyers and suppliers a real-time view of what each other are doing." For example, she says, "a supplier can log onto iSupplier and see all of the orders that the buying organization has for them. They can acknowledge those orders or respond that they cannot meet the requested date and offer a promise date to which they are willing to commit. So there is collaboration even before the order is committed."

Oracle also uses its portal to give suppliers visibility to their performance scorecards. "This really puts supplier management into the hands of the supplier," Lloyd says. "A supplier can come in and see how it is doing and, if it is not doing well, see what it needs to fix."

Performance Management
Supplier performance monitoring is a major part of SRM and is an area where companies rapidly are moving from management by spreadsheet to more sophisticated software solutions. The Aberdeen study found that use of spreadsheets for supplier performance measurement will drop by 66 percent within two years and use of in-house applications will drop by 32 percent. Companies will instead use ERP or best-of-breed systems or will outsource this function. Within two years, only 8 percent of enterprises surveyed will not have a supplier performance measurement program in place.

Effective performance measurement of suppliers begins with negotiation of the contract, says Martinelli. "Companies need to see that performance measures are built into the contract during the negotiation process. There is no value in measuring something if there is no contractual commitment to support it."

It also is important to establish clear, standardized metrics and measurements so the supplier has no doubt about what a company's requirements are, says Lloyd. "Then you have to have software that will automatically collect and compute those metrics-the percentage of deliveries that are on time, the percentage of returns, the quality number, adherence to pricing and so on." Oracle uses its Daily Business Intelligence application for this function. "The idea is to have a single version of the truth regarding how the supplier is doing," she says.

That is not always as straightforward as it may seem because there are qualitative measures as well as quantitative ones, says Govil. Again, this is where supplier responsiveness comes in. "If I have a demand surge-say I was expecting production of 100,000 units but I now need 130,000-can the supplier ramp up production to meet that increase in the time frame I need? There needs to be a way to assign a value to these qualitative things as well as to quantitative measures so you can have apples-to-apples comparisons," he says.

Emptoris uses a supplier assessment to help with this task. "We create a decision tree with a significant number of questions related to the supplier's specific domain area," says Schneur. These questions are submitted to different people in the organization, in different ways, to make sure that the supplier is meeting all of the organization's various needs. One Emptoris customer, a large aerospace and defense company, uses the supplier assessment to classify suppliers based on their ability to come up with innovative ideas, he says. "This process really helps distinguish between suppliers based on all of their capabilities," he says.

Another reason for supplier monitoring is early detection of problems that could lead to failures or disruptions. That is the purpose behind Open Ratings, a Dun & Bradstreet company based in Waltham, Mass., that uses machine learning and pattern recognition technologies to spot suppliers that are heading for trouble. AMR Research, Boston, cites an aerospace company that implemented Open Ratings as an early warning system after two significant supplier failures that cost the company several million dollars. This user combines the risk scores generated by Open Ratings and financial scores from Dun & Bradstreet to come up with a composite score that rates suppliers either as safe, in need of close monitoring, or requiring action in the form of risk mitigation or prior approval of orders. After 11 months, AMR reports, 15 new suppliers at the A&D company had been blocked for being high risk and 300 orders across 100 suppliers were stopped and redirected to new suppliers.

Supplier performance measures are an important factor in achieving continuous improvement, which is a central, though hard to measure benefit of SRM. It is documented in the Aberdeen study by a widening of the gap between high and low performers the longer a supply visibility and performance program was in place. "Follow-up interviews with various enterprises confirmed that the more mature the program, the more value it delivers," says Bharadwaj. "Companies need to make sure technology investments in this area can support a continuous improvement cycle."