The Smart Vendor-Audit Checklist
Softub's audit form helps the spa maker recruit a trouble-free crew of vendors. A bonus: the new suppliers have great ideas to share
For years Fortune 500 companies have demanded that potential vendors jump through hoops to get their business. Few small companies carry the same clout; in fact, one bad supplier could put a growing business out of business. At Softub, a $15-million builder of hot tubs in Chatsworth, Calif., one almost did.
Four years ago Softub contracted out the assembly of the motor, pump, and control unit that provides heat and jet action to the hot tubs. Chief executive Tom Thornbury felt confident about the vendor after meeting with the owner twice and because other customers raved about it. "That was back when I was the purchasing department. That might have been the problem," he says. It wasn't long before equipment failures surfaced during testing -- and in customers' homes. Soon after, the supplier went belly-up, and Softub was stuck servicing damaged tubs and trying to mollify the dealers that hadn't quit. Thornbury estimates the cost of the foul-up at about $500,000. "If we had done a better job of surveying our suppliers," he says, "this might not have happened."
Two-thirds of Softub's product cost is in materials purchased from about 200 vendors, which range from large producers of sheet metal to mom-and-pop makers of nuts and bolts. Softub strives to keep its inventory low, so if a vendor's goods are faulty, part of the spa maker's line is quickly shut down and workers are sent home. Two years ago, after several other incidents involving substandard parts, Softub decided to do things differently.
The big change: an audit team, led by purchasing agent Gary Anderson, goes out to grill vendor candidates. Ten of Softub's 130 employees participate; an engineer may check on technical specifications, for example. The team members receive information about the vendor, as well as trade-journal articles with tips on evaluating suppliers. They spend anywhere from two hours to two days with each prospect, getting to know everyone from the president to the factory workers while noting things such as oil slicks around the machinery.
To ensure that the audits would be effective, Anderson designed a vendor survey form, which acts primarily as a checklist. "It isn't a cure-all; it's only part of the analysis. But it forces the team to focus on specific areas so we don't forget anything when we're on a visit," he says. The form, which Anderson created in less than two weeks, also generates discussion about crucial issues, such as timeliness of delivery. Back at Softub, copies of the completed form go to purchasing, quality control, operations, and the finance department for their input. (One candidate on a short list was screened out when an engineer who'd received the form spotted a possible quality problem.) Anderson also verifies a supplier's claims with at least three of its other customers. When all the information is in -- and after all necessary product testing has been completed -- management meets and selects one vendor.
"The payoff is that we're recruiting a better breed of supplier," says Thornbury. With less chance of issuing purchase orders that suppliers can't satisfy, Softub experiences fewer product defects. And vendor turnover has been halved. That's significant because every time the company switches suppliers, it must repeat the survey process as well as test a new prospect's product, which can take months and cost hundreds of dollars a day.
The improved supplier base brings another big advantage: smart ideas. One vendor gave Softub's employees a free course on handling electronic parts that are sensitive to static electricity. "We're developing partnerships," says Thornbury, "in which we have a pretty free exchange of information. Also, as we've gotten to know our vendors better, there are fewer surprises. In a manufacturing operation, surprises can be lethal."
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VENDOR SURVEY FORM
Report by: Date:
Telephone: Fax #:
Years in business:
Number of employees:
Square footage of building(s):
Age of building(s):
Type of building(s):
Q. C. manager:
Annual sales in dollars:
Main product line:
Minor product line:
D & B requested: (yes/no/attached)
Q. C. Department
Equipment calibrated: (yes/no)
Calibration tags in place: (yes/no)
Travelers in place at work stations: (yes/no)
Military or ISO rating:
Total Q. C. employees:
Capacity percentage of total production:
Safety devices in place: (yes/no)
General safety condition: (good/average/poor)
General employee demeanor: (good/average/poor)
Equipment condition: (good/average/poor)
Regular maintenance schedules maintained: (yes/no)
Does the factory appear busy?: (yes/no)
Is the equipment running?: (yes/no)
Are there stock piles of raw material?: (yes/no)
Are there stock piles of finished goods?: (yes/no)
Is the shipping dock busy?: (yes/no)
How does vendor intend to meet our requirements?:
Overall impression: (excellent/good/average/poor)
Should Softub do business with this company?:
Please circle one: (1-should not do business with/2-caution rating/3-average/4-good rating/5-world class rating)
White - Purchasing
Canary - Q. C.
Pink - Operations
Softub's managers point out the virtues of their vendor checklist:
"We check how busy vendors are in relation to their size. Say they're using only an eighth of a building's footage. Why is it empty? Did they lose business? The ones we'll end up doing business with can answer easily. And if you notice they don't have the proper space, you'll want to know where they keep their material. Will they have to leave it outside in the rain? They might show you a fancy brochure, and you find they're operating out of five garages."
"We want to make sure a supplier's sales manager will work with its manufacturing people to meet our needs. When we hit a problem, the sales manager is our liaison. Does he have the influence to change schedules on the production line? Also, the vendor's ability to turn out a quality product is often reflected by the quality-control manager's experience. We want to know all about that."
"Once we went into a place where they said they made circuit boards, but they really specialized in making custom boards in very small volumes. We needed someone who could make thousands a month."
"When we get back to the office, we always check with other customers to ask if the supplier delivers on time or has quality problems."
"We always request a Dun & Bradstreet report unless it's a mom-and-pop shop. Our chief financial officer also looks at the report. We want to know if the company owes more than it's worth. If it does, our finance department will call their finance people and ask more detailed questions."
"We don't have the expertise, the manpower, or the time to look into every procedure. If a large company (or the military) has done an audit on the supplier and given it a rating, it gives us a good idea if that supplier has sound systems and procedures in place. Why not let the big company do the work for us?"
"International ratings are important because we sell our product overseas. If a vendor is already certified to sell in that country, we feel more confident that its product will pass inspection."
"Our impression of [one] supplier was really favorable, and we've learned from it, too. During our audit, we saw illustrated work instructions hanging in front of every station on the line. Each sheet had a checklist of things the operator was supposed to do. We started using similar instructions here. We asked the supplier to send one of its engineers to help us do it."
"If the place is messy and dirty, that's an indicator of the kind of service and product you're going to get. But if we see a board with tools hanging there so that when a tool is in use you see a black silhouette, that's a pretty good sign. It means people aren't wasting time looking for things, and they're probably not going to ship us a product with tie wraps in places where they don't belong."
"[One company operating at 50% of capacity] has the resources to make our product. But the 50% capacity would trigger us to check its financials and talk to its management, because it should be a little busier. We'd also ask how many shifts it's running, how many hours a day it's using certain machines, how many people it has now, and how many people it's had there before."
"One big accident and a company can get sued and be out of business. Are first-aid charts posted on the walls? Are people wearing safety glasses? We want to know what a vendor is doing to prevent accidents. It's also a good indication of its management philosophy."
"If a vendor is doing preventive maintenance, there are records we can see. If machines are down, it could cost a company hundreds of thousands of dollars a day. Good companies will monitor their machines religiously."
"The pink copy goes to operations. If the supplier is ISO 9000 certified or doing business with a Fortune 500 company, we'll request a copy of its quality manual."