Best Practice: Supplier Report Cards



By Dr. Barry Lawrence, Texas A&M University



Senthil Gunasekaran, Texas A&M University










Pradip Krishnadevarajan, Texas A&M University



Wholesaler-distributors run complicated business models. The intricacies of business relationships combined with significant deployed assets makes for expensive operations. Operations expenses are driven by relationships, however. Suppliers have capacity and customers have needs. It is the mismatch between the two that creates the need for distributors and their capabilities. Most of our blogs to date have dealt with managing the customer relationship and methods to minimize its impact on operations. In this blog post, we address supplier impact and the use of the best practice tool — the supplier report card.

The current No. 1 best-selling NAW Institute for Distribution Excellence book, Optimizing Distributor Profitability: Best Practices to a Stronger Bottom Line (available at http://www.naw.org/optimizdistprof), details best practices, their implementation, and return-on-investment (ROI). These practices are valid in any economy, but the significance of one best practice versus another may change under different market conditions. Each month in this blog, we have introduced a best practice and how it can improve earnings and/or ROI under current economic conditions. We encourage you as you participate in this blog to ask questions, debate results, and offer your own experiences with such practices, so that we may further the knowledge of the community and the understanding of the science of distribution.



The book breaks business processes into seven groups (SOURCE, STOCK, STORE, SELL, SHIP, SUPPLY CHAIN PLANNING and SUPPORT SERVICES) based on various distributor asset categories. This month, we focus on SOURCE as shown in exhibit 1.








Best Practice: Supplier Report Cards

Supplier report cards are not a new concept, but how firms use them often falls short of best practice. In the supplier relationship, the most important criteria are the profitability the products/services provide, as well as the loyalty, performance, and level of services a distributor needs to offer to sell its product.

Exhibit 2 presents a Supplier Stratification model that demonstrates how to evaluate supplier relationships.





The profitability of products/services is a function of the supplier’s quality and innovation combined with the strength of the brand. Supplier loyalty is usually measured by the level of exclusivity the supplier gives to the distributor. If the supplier will sell to anyone and everyone, the competition will drive out all profitability. Distributor services are the levels of support a distributor must provide for less than cost to drive sales of a supplier’s product. Technical support, warranties, repair, and other services often cost more than the customer is willing to pay. Each of the foregoing can be tied directly to ROI, but the numbers are often soft.

Supplier performance, on the other hand, can be directly tied to expenses and asset efficiency (hard numbers). Some key metrics are lead time, variability of that lead time, incomplete orders, quality issues, and other channel specific ones. Performance metrics can usually be captured easily and placed in a supplier report card to assist in process improvement. The practice levels for supplier performance measurement are as follows:

COMMON practice: (1) No defined performance measurement (2) Based on on-time delivery (reactive measurement only) and quality

GOOD practice: Based on a single factor (1) On-time delivery (2) Lead time (3) Quality and delivery completeness

BEST practice: Based on multiple factors (1) On-time delivery (2) Lead time (3) Quality and delivery completeness (4) Lead-time variability (5) Combination methodology-supplier performance index (SPI)

To be clear, a supplier report card is a collaborative effort where a distributor is seeking to create an awareness of improvement opportunities. There are multiple ways a supplier can respond to a report card. One method is to wad it up and throw it away.

A second method, the theoretically correct one, is to proactively use the information to improve its processes for all customers.

A third method is to leave things as they are and make it up to a distributor. Some suppliers will simply make sure the distributor, who is measuring them, gets better treatment at the expense of other customers. Others will compensate the distributor for the cost of covering their failures. These cases often reflect challenges the supplier cannot overcome.

Case Studies

A distributor of automotive parts was having problems with supplier performance. The distributor had the foresight to reach an agreement with its suppliers on the length of lead times and their variability. Each supplier gave a stated lead time plus or minus a certain amount of time (variability). Later, when the distributor started measuring, it discovered safety stocks were running 38% higher than the supplier’s stated lead times should have required.
The distributor issued the report to each supplier. Some of the suppliers improved their performance, but most indicated that foreign demand (remember this was during the massive expansion of China and India demand for cars) was creating significant backlogs. These suppliers offered instead to directly compensate the distributor through rebates until the problems could be resolved.

Many readers may be thinking their suppliers would never do such a thing, and that this distributor must have had so much power that the suppliers were forced into action. This was actually a midsized distributor dealing with large suppliers, however. The suppliers were more concerned about what their performance failures might do to the distributor’s ability to support the end users.

An example that demonstrates how much impact reporting results can have is one about a small fishing distributor. This distributor had annual sales of $3 million and was dealing with a $3 billion supplier. The distributor discovered through inventory stratification that 80% of the supplier’s products were in the “C” and “D” categories. The distributor couldn’t buy in smaller quantities due to minimum order amounts, and line-card restrictions forced it to carry the slow-move items. The distributor decided to drop the supplier.

To the distributor’s surprise, the local supplier sales rep decided to investigate why the line was dropped. When he found out why, he asked for the data and an explanation of ways the supplier could improve. The distributor explained about the line-card rules and minimums. The sales rep took the information back and, through new minimum requirements and a different incentive program, was able to design a process that worked.

In retrospect, the response is not so surprising. This distributor was well known by peers for cutting-edge best practices. The word would have gotten out at the next fishing show and could have damaged the supplier’s reputation.

Bottom Line

The supplier report card adds value through either reduced inventory or other service costs or direct compensation from suppliers. The investment is minimal (make up a report) and so is the risk. Whatever the supplier does will be beneficial. Ever since quality management made its way into the manufacturing environment, suppliers have been using metrics to improve their operations. The supplier report card will be viewed by most as an opportunity. Those who do not will simply ignore it — a pretty good ROI with low risk.

About this Blog

“Managing in an Uncertain Economy” is a blog created by the Council for Research on Distributor Best Practices (CRDBP). The mission of the CRDBP, created by the NAW Institute for Distribution Excellence and the Supply Chain Systems Laboratory at Texas A&M University, is to create competitive advantage for wholesaler-distributors through development of research, tools, and education. CRDBP encourages readers of this blog to send in comments and e-mail this blog to other interested parties.

Best Practice: Setting the Min -- Reorder Point (ROP)



By Dr. Barry Lawrence, Texas A&M University



Senthil Gunasekaran, Texas A&M University










Pradip Krishnadevarajan, Texas A&M University



The most difficult purchasing process to understand is setting the Reorder Point (ROP) also known as the “min.” The ROP will constitute the vast majority of the distributor’s inventory and will determine the most important critical success factor, customer service. Each product has an ROP that is often determined by some form of guesswork. Customer expectations have increased over the past 20 years along two axes: availability and selection. Increased availability means a larger ROP. Increased selection means more ROPs. Both mean more inventory. A larger offering leads to many slow-moving products. Slow-moving products often have ROPs that are very high, compared to sales, which leads to inventory increasing at a faster rate when adding new products.

The current No. 1 best-selling NAW Institute for Distribution Excellence book, Optimizing Distributor Profitability: Best Practices to a Stronger Bottom Line (available at http://www.naw.org/optimizdistprof), details best practices, their implementation, and ROI. These practices are valid in any economy, but the significance of one best practice versus another may change under different market conditions. Each month in this blog, we have introduced a best practice and how it can improve earnings and/or ROI under current economic conditions. We encourage you as you participate in this blog to ask questions, debate results, and offer your own experiences with such practices, so that we may further the knowledge of the community and the understanding of the science of distribution.







The book breaks business processes into seven groups (SOURCE, STOCK, STORE, SELL, SHIP, SUPPLY CHAIN PLANNING and SUPPORT SERVICES) based on various distributor asset categories. This month, we focus on STOCK as shown in exhibit 1.



Best Practice: Setting the Min (ROP)

The ROP is usually determined by one of two methods: an estimate made by a purchasing specialist or by the information system after receiving input from a purchasing specialist. The first process is static in that it does not change over time unless the purchasing person revisits it. In many distributor environments, this is impractical due to the large number of products. The second process is not static, since the system will change the ROP as the forecast and, perhaps, supplier performance changes. Both methods fall far short of what is possible from both a calculation and relationship management best practice standpoint, however.

We will explore the levels of best practice, the value they provide, and what differing members of the organization must do to achieve the best results.

The practice levels for “Setting the Min” are as follows:

COMMON practice: 1) Fixed percentage of safety stock 2) Multiplier set by planner 3) Standard days of supply 4) Service driven (expediting) 5) Static lead time by planner 6) No forecast error in ROP 7) same service level for all items.

GOOD practice: 1) Statistical replenishment 2) Lead time variability measurement 3) Demand variability measurement (forecast error) 4) Service levels driven by inventory stratification.

BEST practice: 1) Dynamic safety stock 2) Actual demand distributions 3) Multi-echelon inventory optimization 4) Service level determined by inventory stratification and financial constraints (service vs. cost matrix).

The common practices have a great deal of guesswork and tend to be slow to respond to market changes. Take for example the popular standard “days of supply.” The firm determines how many days of inventory it wants to carry and sets up rules that may or may not vary by product type or sales. When supply becomes uncertain due to products going on allocation or disruptions in shipping, customer service failures will occur until someone adjusts the rules. If the days of supply requirement was set high due to poor supplier performance or forecasting difficulty, the days of supply may not get adjusted at all when things improve, thus leaving the firm with too much inventory. All of the common practices lack responsiveness, which leads to customer service failures and/or excess inventory (usually both).

Good practice considers changes in the key inventory drivers, lead-time, and forecast performance, and ties the service level to inventory stratification. The ROP moves with changes in the inventory drivers and reduces or increases inventory thereby preventing stockouts while holding down inventory.

Best practice engages more of the firm’s resources to guarantee a high ROI. In addition to changing the ROP as business conditions change and products gain or lose popularity, best practice uses hub-and-spoke techniques to further reduce inventory. Best practice also treats all inventories as an investment that is measured against other opportunities before deployment. The role of ROP in the replenishment process is shown in exhibit 2.




A home products distributor improved its reorder point and resulting inventory levels in stages. At the beginning of the process, the firm had very large inventories with most products carried in all locations. Gross margin return-on-inventory investment (GMROII) for the entire firm was at 170%. The firm was under extreme pressure by ownership to increase its ROI. The company implemented inventory stratification, statistical reorder points, hub-and-spoke, and a new value proposition for the sales force to deliver.

The first step, inventory stratification, involved using a combination process, as described in the Optimizing Distributor Profitability book, to determine inventory status. The inventory management model is shown in exhibit 3.



“D” items were first removed from inventory resulting in an increase in GMROII to 220%. The next step was to improve forecasting and set dynamic ROPs. The process involved combination forecasting, which we’ve described in our previous blog posts. By tying forecasting improvement to a dynamic ROP (one that changes when forecast and supplier performance change), the firm was able to further improve its GMROII to 235% as safety stocks declined. No attempt was made to improve supplier performance.

The next step was multi-echelon inventory management. The firm first went about consolidating “C” item inventory into Regional Distribution Centers (RDCs). “C” items at branch level would be held at the RDC and removed from the branches. This process involved a great deal of inventory and increased GMROII to greater than 280% after implementation. The reduction was driven by the “square root rule of inventory” where inventories combined from multiple locations will reduce to the square root of the number sites the item is taken from times the average inventory per site.

An example: The firm combined three locations’ “C” inventories into one RDC. Each location had an average “C” inventory of $800,000. The new inventory eventually settled at the RDC at $1,385,000 (square root of 3 times $800K) from the original $2,400,000 (three sites at $800K), a reduction of $1,015,000. Hub-and-spoke essentially reduces the ROP to zero at the branch and moves it back to the RDC. The RDC is able to operate with far less inventory by sales volume since the larger volume leads to better forecasting and supplier performance. Safety stock also gets combined allowing for further reductions.

The final step was to develop a value proposition for the sales force. The changes might cause customers to become concerned that service would decline. The firm designed a value proposition built around reinvesting in “A” inventory. The sales force message was: “We are increasing our fill rates on our most important items (examples listed here) that you use the most. To do so, we will consolidate items you rarely or never use (more examples here). I’ll work with you on those items to make sure you can get them quickly when you need.”

The net effect was a reduction on inventory of $25,000,000 even after increasing “A” item inventory. The increase in “A” items more than compensated for the decreased inventory in “D” items. Fill rates increased as a result leading to an increase in sales. The company had calculated its inventory holding cost at 40%, so the overall impact of the program was a $10,000,000 increase in the bottom line. Earnings increased by nearly 80%.

The most important component was the value proposition delivered by the sales force. The firm had to invest in inventory training for salespeople as well as for operations people. Management had to go through a paradigm shift since they had never considered training the sales force on operations issues before.

The process included many tools (forecasting improvement, inventory stratification, value proposition development, etc.), but the key issue was tying all these things to the ROP. Many firms implement improvements without considering this all-important issue. How will it impact the min? Developing a plan for that process is key to all inventory improvement plans.

About this Blog

“Managing in an Uncertain Economy” is a blog created by the Council for Research on Distributor Best Practices (CRDBP). The mission of the CRDBP, created by the NAW Institute for Distribution Excellence and the Supply Chain Systems Laboratory at Texas A&M University, is to create competitive advantage for wholesaler-distributors through development of research, tools, and education. CRDBP encourages readers of this blog to send in comments and e-mail this blog to other interested parties.