MetricStream

Best Practices
in Supplier Quality
Management
Two years after Target suffered a massive data even though the fault may lie with a supplier. These
breach due to vulnerabilities in a third-party vendor’s costs can consume a significant portion of revenue,
systems, the retail giant discovered another major yet many companies fail to measure and track
issue in its supply chain. In August 2016, the company them in a consistent manner. As a result, they end
announced that Welspun, one of the world’s largest up wasting millions of dollars on poor quality every
textile manufacturers, had been substituting year, without knowing where or how to recover
Egyptian cotton in sheets sold in Target stores with these costs.
another, lower grade cotton.
Although the COPQ in the supply chain cannot be
While Target was quick to contain the damage -- eliminated completely – since no supplier is perfect
terminating all ties with Welspun, and promising a – calculating these metrics can help you identify
refund to customers who had purchased the products opportunities for cost savings, as well as problem
in question – the incident raised serious concerns areas to address. For instance, by understanding
about quality management in an increasingly vast how the COPQ is affected by delays in supply delivery,
and complex supply chain: How do you keep quality you can proactively work with suppliers to expedite
issues in check when dealing with hundreds of future deliveries. The COPQ metrics can also help
suppliers? How do you determine if these suppliers you calculate supplier charge-backs accurately, and
are meeting quality standards? How do you lower thereby recover costs faster.
quality costs?
While measuring the COPQ for suppliers, it is
With these questions in mind, here are six best important to consider a range of internal and
practices to strengthen your supplier quality external cost factors (see Fig. 1 below). It is also useful
management program: to measure the costs of good quality i.e. (a) the costs
of preventing supplier quality issues with a quality
1. Measure and Track the Cost of Poor management system, and (b) the costs of appraising
and monitoring supplier quality. Companies that
Supplier Quality
invest more resources on good quality have fewer
supplier quality issues, and, therefore, a lower cost
If a product quality issue arises, it is often the parent
of poor quality.
company who bears the Cost of Poor Quality (COPQ),

Quality Cost

Cost of Poor Quality Cost of Good Quality

Internal Costs External Costs Prevention Costs Appraisal Costs

• Waste & rework • Customer • Quality control plans • Quality audits
complaints
• Re-testing • Quality policies and • Inspection of
• Recalls procedures incoming products
• Expedited
shipping • Warranties • Quality training and • Supplier
awareness programs performance rating
• Failure analysis • Penalties
• Backorders • Lost
opportunities
• Downgraded
price • Reputational
damage

Fig. 1: Measuring the Cost of Quality – Factors to Consider

2. Align Supplier Risk Management with
Quality Audits

With companies being held to increasingly high

quality standards, supplier quality audits play a
pivotal role in ensuring that the products delivered
by suppliers meet pre-defined quality specifications.
However, instead of trying to audit all suppliers at
once, it is much more efficient to classify suppliers by
risk, and then prioritize audit activities accordingly.
Generally, suppliers that are high risk are those that
are critical to your product’s availability and quality,
and therefore, require more frequent on-site audits
to ensure that they have adequate quality controls Types of Supplier Quality Audits
and measures. Lower risk suppliers are those that
have no direct product impact, and therefore require Product Audits
fewer audits. Evaluate the supplier’s products,
ingredients, and services
Once all suppliers have been assessed and
classified based on risk, plan and schedule audits System Audits
to identify quality gaps, issues, and opportunities Assess the effectiveness of the supplier’s
for optimization. Also, instead of using audits as quality management systems, processes,
a chance to police and punish suppliers, create a and policies
positive experience -- help suppliers understand
the importance of the audit, give them the time to Process Audits
respond to queries, and work with them to address Analyze product manufacturing processes,
identified issues. equipment, and working conditions

1 2 3 4
Audit Planning Audit Scheduling Audit Execution Audit Reporting
• Identify audit • Schedule audits • Conduct an initial • Report audit
objectives & scope focusing on high meeting to brief observations and
• Prioritize audits risk suppliers first suppliers non-conformities
based on supplier • Identify lead • Observe & listen for • Discuss findings
risk auditor non-conformities with suppliers
• Incorporate results • Notify the • Take photos or • Generate final
of previous audits supplier of audit videos as evidence, if audit report
requirements appropriate

5 6
Corrective Action Audit Verification and Follow-up
• Ensure that the supplier • Verify that the corrective
conducts a root cause action is implemented
analysis of the issue • Conduct follow-up audits to
• Work with suppliers to ensure that the issue is resolved
implement corrective action

Fig. 2: Conducting a Supplier Quality Audit

3. Rationalize Suppliers for Better 4. Standardize Supplier Quality and
Quality Control Performance Metrics

The larger the supply chain, the more challenging While each department may have their own methods
and costly it can be to maintain and monitor supplier for measuring supplier performance with respect to
quality. One way of dealing with this challenge is quality, a good practice is to develop a consistent set
to step back at periodic intervals, and look at how of supplier metrics and KPIs that are applicable to all
to optimize the supply chain, so as to bring greater departments. Standardized metrics give you a broad
order, control, and efficiency to supplier quality view of performance and quality trends in the supply
management. This process of supplier rationalization chain, helping you determine areas of concern, as
enables you to determine if you have an optimal well as opportunities for improvement or further
number of suppliers, and if those suppliers have the investment.
right capabilities to meet quality requirements.
Many companies measure these metrics with
Some companies rationalize their supply chain supplier scorecards. Not only do these tools help
based on the suppliers that are critical to their rank a supplier’s performance relative to the rest
business, eliminating the ones that are not. Others of the supply chain, but they also help in tracking
do it based on supplier competence, the range improvements or failures in the supplier’s quality
of products provided, or the uniqueness of the over time. There are multiple performance metrics
supplier’s offering. Quality itself is a parameter in that can be tracked through supplier score cards, but
rationalization – suppliers that fail to meet pre- some important focus areas are quality, delivery, and
defined quality or performance specifications can responsiveness. Suppliers can also be tracked based
pose a significant risk and might need to be removed on their compliance with requirements such as CTPAT
from the supply chain. Whatever the approach, the (Customs Trade Partnership Against Terrorism) and
goal of rationalization is to build a supply chain that social accountability. Each of these categories can
is the best fit for your organization and its quality have an assigned weight which rolls up together with
requirements. other metrics into an overall supplier score.
 Metrics

Product Quality Delivery Responsiveness

• Success of new product • % of on-time and complete • # of emergency orders

introductions deliverables shipped within agreed lead
time
• % of products non- • % of late deliverables
compliant with quality • # of emergency requests for
standards change

• # of returned products/ • Overall communications

customer complaints with suppliers

• % of defective products
received

• # of corrective action
requests

Fig. 3: Supplier Quality Score

5. Enable a Collaborative Approach to 6. Gain Better Visibility into Supplier

Corrective Action Quality with Technology

The sooner you identify and correct supplier quality In a vast global supply chain, one of the biggest
issues and non-conformances, the better your challenges companies face is a lack of sufficient and
performance. The key is to ensure that you have timely visibility into supplier quality. This is where
strong internal processes and clearly defined roles technology can help by integrating supplier data
and responsibilities to alert suppliers to a non- in a centralized system, while also mapping each
conformance, initiate a Supplier Corrective Action supplier to the associated products/ ingredients,
Request (SCAR), ensure that a root cause analysis risks, policies, controls, and issues. Thus, you
is performed, and follow up on corrective and get a comprehensive, cohesive view of supplier
preventive action. quality which, in turn, enhances traceability and
accountability for any issues that arise.
Problems often arise when SCARs are thrown at
suppliers without any guidance or support, leaving Technology also makes quality management
them confused and unsure about how to respond. processes simpler and more efficient by
A better approach would be to communicate and streamlining and automating workflows such as
collaborate closely with suppliers at each stage, giving supplier performance monitoring and quality risk
them as much information as possible about the assessments. Advanced tools such as offline and
issue or non-conformance, and suggesting corrective mobile auditing applications make it easy for auditors
action priorities along with examples. Taking the to enter their findings on the go at remote supplier
time to train suppliers periodically on quality policies locations (even without network connectivity).
and compliance requirements also goes a long way
towards preventing quality issues. Interactive reports, dashboards, and analytics can
add further value by helping you harness supplier
Managing and monitoring supplier corrective actions quality information from across the enterprise, slice
may seem costly in the short term. However, in the and dice this data from various angles, and pull out
long run, it can help you build stronger relationships timely and intelligent insights to support decision-
with suppliers, reduce the recurrence of non- making. Therefore, instead of sifting through
conformances, and thereby lower costs. multiple spreadsheets and word documents, you get
all the quality information you need in one common
view, and can drill down to analyze the data in detail.
Quick Tip
Better Performance through Better
Companies are often quick to pull up suppliers
Supplier Relationships
for non-conformance issues, while failing to

Supplier quality management is not just about recognize those that demonstrate consistent
avoiding costly recalls, penalties, and lawsuits. When quality. Consider motivating your suppliers
done well, it generates significant value for your with rewards or recognition for compliance
business by strengthening overall product quality,
with quality standards, or readiness to report
enhancing your company’s reputation and credibility,
and respond to issues quickly. Incentivizing
lowering costs, and driving superior business
performance. suppliers can go a long way towards
strengthening overall quality.
The key to achieving these objectives is to remember
that suppliers are an extension of your enterprise,
and not a separate entity. Quality standards, audits,
and other processes must be enforced with the same
rigor and commitment in the supply chain as in the
rest of your organization.

When you position supplier quality as a core

business activity that is integrated with broader
supplier governance and relationship management
efforts, you will be well-positioned to drive superior
performance, quality, and credibility throughout the
enterprise.

MetricStream is the market leader in enterprise-wide Governance, Risk, Compliance (GRC) and Quality Management
Solutions. MetricStream solutions are used by leading global corporations in diverse industries such as Financial
Services, Healthcare, Life Sciences, Energy and Utilities, Food, Retail, CPG, Government, Hi-tech and Manufacturing
to manage their risk management programs, quality management processes, regulatory and industry-mandated
compliance and other corporate governance initiatives.

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