Supplier Performance Management Metrics and ...
Supplier Performance Management Metrics and ...
What is Supplier Performance Management?
Supplier Performance Management is the strategic approach used to measure, evaluate and improve the performance of suppliers on a consistent basis. Historically it has involved assessing key metrics like on-time delivery, quality, and cost.
In simple terms, SPM is all about making sure you are actually getting what you were promised in negotiations and contracts. On a broader scale, it&#;s about creating a data-informed way to manage the performance of your suppliers in a consistent way and ensure you have the right suppliers to meet the needs of your business.
By monitoring and managing supplier performance in a data-driven and consistent way, procurement can ensure the company has healthier supplier relationships while driving efficiency and achieving cost savings. In this way, it is a cornerstone of effective operational procurement.
What&#;s the difference between SRM and SPM?
SPM is tactical and operational in nature. It is primarily concerned with evaluating and improving the performance of suppliers on a day-to-day basis. It involves setting specific performance metrics, such as quality, delivery, cost, and risk.
On the other hand, supplier relationship management (SRM) focuses on building and maintaining strong, collaborative relationships with a select group of key suppliers. SRM has a more strategic and long-term focus than SPM. It involves communication strategies, joint development initiatives, and long-term planning to ensure that both parties benefit from the relationship.
Supplier Performance Management in Three Phases
Each procurement team will have their own framework for SPM. Typically a systematic approach will include at least three key phases:
1. Set Expectations
In this initial phase, clear performance criteria and metrics are established with your suppliers. This involves defining quality standards, delivery timelines, cost parameters, and supplier risk management protocols.
2. Monitor and Evaluate Performance
Once expectations are set, the next phase involves tracking supplier performance against the defined metrics. It is wise to conduct regular assessments and performance reviews using supplier scorecards and spend analytics data. Active performance evaluation helps procurement identify areas for improvement and ensures suppliers are meeting the agreed-upon standards.
3. Feedback and Continuous Improvement
The third phase focuses on providing constructive feedback to suppliers and working collaboratively to address any performance gaps. This may involve joint improvement initiatives, training, or renegotiating terms. The aim is a continuous improvement program focused on supplier capabilities that ultimately strengthens the relationship.
This is just one example of an SPM framework with three phases. Whether your procurement team follows a three- or four phrase approach is less important than following a consistent and documented process for each types of suppliers.
Key Metrics to Measure Supplier Performance
For many procurement professionals, the foundation of supplier performance management involves the golden triangle of measuring time, quality, and cost of procuring a product or service.
- Cost
involves evaluating the financial efficiency of a supplier, ensuring competitive pricing and value for money.
- Time
focuses on the supplier&#;s ability to meet delivery schedules, minimizing lead times to maintain smooth operations.
- Quality
assesses the supplier&#;s consistency in meeting product or service standards, crucial for customer satisfaction and reducing defects.
Balancing these factors helps procurement achieve the company&#;s strategic objectives while maintaining effective and efficient supplier relationships.
A Balanced Scorecard for Supplier Performance Measurement
Supplier Performance Management has evolved greatly over the past decades. Today, many procurement leaders view SPM as a multi-faceted framework where supplier evaluation criteria can be adjusted over time to better suit the needs of business.
Common metrics or key performance indicators (KPIs) for measuring supplier performance can include:
Quality
Defect Rate: This KPI measures the percentage of products or services that fail to meet quality standards. A low defect rate indicates a supplier&#;s ability to consistently deliver high-quality outputs, reducing the need for rework and returns.
Compliance with Specifications: Ensures that the supplier adheres to agreed-upon technical and quality specifications. This KPI helps maintain product consistency and customer satisfaction.
Delivery
On-Time Delivery Rate: Tracks the percentage of orders delivered in full on or before the scheduled delivery date. High on-time delivery rates are crucial for maintaining smooth operations and meeting customer expectations.
Lead Time: Measures the time taken from order placement to delivery. Shorter lead times enhance agility and responsiveness in the supply chain.
Cost
Cost Variance: Compares actual costs with budgeted or expected costs. This KPI helps identify cost overruns and assess the supplier&#;s ability to provide cost-effective solutions.
Total Cost of Ownership (TCO): Evaluates the overall cost associated with a supplier, including direct and indirect costs. TCO provides a comprehensive view of the financial impact of the supplier relationship.
Risk
Supplier Risk Score: Assesses potential risks associated with a supplier, such as financial instability or geopolitical issues. This KPI helps in proactively managing and mitigating risks.
Incident Frequency: Tracks the number of supply chain disruptions or issues over a specific period. A lower frequency indicates a more reliable supplier.
Innovation and Responsiveness
Contribution to Innovation: Measures the supplier&#;s role in contributing to new products, processes, or ideas. This KPI encourages suppliers to collaborate on innovation initiatives.
Responsiveness: Evaluates how quickly and effectively a supplier responds to inquiries, issues, or changes in demand. High responsiveness is essential for maintaining strong supplier relationships.
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Sustainability
Sustainability Practices: Assesses the supplier&#;s commitment to environmental and social responsibility. This KPI reflects the growing importance of sustainability in supplier evaluations.
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While the foundation of supplier performance measurement is formed in the golden triangle of cost, time and quality metrics, new aspects like innovation, supply risk and sustainability give a more balanced view for high-performing SPM.
On a broader scale, the systematic evaluation, analysis and optimization of supplier performance forms a key part of supplier lifecycle management.
How to Manage Underperforming Suppliers in a Fair Way
A typical procurement team oversees 3,000 suppliers for each US $1 billion in corporate spend. At this scale, it&#;s likely that you&#;ll also need to deal with some underperforming suppliers.
Here are a few ways you can address performance issues with suppliers in a constructive way:
Maintain Open Communications
Initiate transparent discussions with the supplier to clearly outline performance issues. Ensure they understand the specific areas where they are failing to meet expectations and provide them with an opportunity to explain any challenges they face.
Collaborative Problem-Solving
Work together with the supplier to identify the root causes of underperformance. Collaboratively develop an action plan that outlines specific steps for improvement, setting realistic goals and timelines.
Support and Resources
Offer support, such as training or resources, to help the supplier address performance gaps. This demonstrates a commitment to the partnership and encourages improvement.
Regular Feedback
Implement a system for ongoing monitoring of the supplier&#;s progress against the agreed-upon action plan. Provide regular feedback to acknowledge improvements and address any remaining issues.
Performance Incentives
Consider introducing performance incentives to motivate improvement. Recognize and reward suppliers who make significant progress, reinforcing positive behavior and outcomes.
Clear Consequences
If performance does not improve despite support and collaboration, communicate the potential consequences clearly. This may involve reducing business or seeking alternative suppliers while maintaining fairness and professionalism.
It&#;s only realistic that supplier performance will vary across a managed category or a business unit. By following these steps, you can manage underperforming suppliers in a balanced and constructive manner, aiming for mutual benefit and long-term success.
Bottom line on Supplier Performance Management
Supplier performance management is one of the cornerstones of operational procurement. Each company will have their own key metrics and frameworks to evaluate supplier performance.
When you&#;re developing your own views on supplier performance, consider the time and effort needed to build long-lasting relationships with your key suppliers. A consistent SPM framework helps maintain open, constructive relationships and effectively manage underperforming suppliers.
Related articles and resources
Why Manage Supplier Performance? Success Demands It
There are some things we measure all the time, even if we are not consciously aware of it. Performance is one of them: we measure it in ourselves, gauging if we have done a good job that day and if we can be proud of ourselves for the effort we have put in, and we do it to those around us. This kind of measuring is not strictly quantifiable, however. Our intuition can tell us if we are doing a good job no matter which industry or job role we inhabit, but there is no automatically updated graph inside our heads giving us percentages of tasks fulfilled, levels of productivity, and targets yet to meet. How useful that would be!
Instead, we have to manually appraise ourselves. We check in and see how we&#;re doing; have we drank too much coffee, and now the afternoon&#;s productivity is in jeopardy? Have we filled our calendar realistically so that our tasks don&#;t overwhelm us, but we can still perform?
These kinds of actions show good self-management. They indicate you understand your optimal working conditions, and how to implement them for yourself so that you get the best out of your working day.
Supplier performance management should be no different.
Why Measure Supplier Performance?
Just as you and your team are the building blocks of your business, your suppliers are the building blocks of your service. They provide the tools you need in order to offer unparalleled services to your customers, and measuring their performance in set metrics only helps you and your team perform, too. Benefits of managing supplier performance include:
- Identification of and protection from risks such as poor-quality service and supply chain disruptions.
- Protecting and improving your brand&#;s reputation in an era of increased ethical scrutiny.
- Avoiding unnecessary costs and achieving savings for your business.
- Being able to rank and segment suppliers by a particular metric to identify if resources need to be diverted to improve scores.
What are the Issues?
This can be easier said than done. It can feel like a constant effort to measure continuously and manage supplier performances &#; particularly if your supplier numbers go into triple figures. It&#;s worth the effort, however:
&#;The pressure to improve supplier performance measurement is growing as companies increasingly recognise that poor supplier performance can significantly impact their business outcomes. Organisations that use a proactive approach to managing their supply chain can realise substantial benefits in areas like quality, cost and speed to market.&#; - Supplier Performance Measurement: Best Practices for Improved Outcomes (lpcentre.com)
Issues faced when embarking on the task of supplier performance management are not inconsiderable. If supplier information is out of date, then getting an accurate appraisal of performance is impossible. Similarly, if the process of updating supplier information is sluggish and fragmented &#; for example, if it involves chasing paper around your business through several departments or reaching out to the supplier directly &#; then it becomes a greater time cost. If you request updated information, but the response returns missing vital accreditations which you as a business are bound by policy to report on and publish, you have a much bigger problem trying to find this information out.
The issues don&#;t stop once you have the correct information.
Metrics and KPIs
&#;Once you have a clear idea of what improvements are required, you should identify measurement indicators by which you can measure and judge supplier improvement. The metrics you choose should appropriately and accurately reflect the needs of your business.&#; - Top Tips to Improve Poor Supplier Performance in Procurement (oxfordcollegeofprocurementandsupply.com)
The metrics you choose to monitor, as stated above, should reflect the needs of your business &#; these &#;needs&#; are often complex, spanning multiple factors. Cost savings are common, particularly in this time of recession. Ethical and environmental factors are also often key, with carbon emission reduction a focus in order to meet targets.
The Importance of Measuring Supplier Performance:
Your suppliers&#; performances in these areas directly affect your business&#;s performance in these areas. The benefits discussed earlier, such as risk-mitigation, protecting brand reputation, and cost savings are not benefits but necessities in reality.
Reward dynamic, robust suppliers able to meet the demands of your business, while suppliers who consistently cannot hit the mark need to be nurtured or cut loose. This is the nature of the times we are living in. It is up to your team to decide on the right call to make regarding whether it&#;s prudent to call time on a particular supplier, but that decision should always be based on data and facts.
This is where the importance of properly measuring supplier performance comes into play.
Properly measured, with clear metrics defined, your management process should produce a wealth of data for you to sift through and make founded, secure decisions. More weight given to different metrics will offer different results, and there is a wealth of software solutions out there to help with the data collection and analysis, should that be your choice. There are benefits to such software, including data accuracy and efficiency, which make them a strong contender when looking to improve your management processes.
Final Takeaways
While it has benefits, measuring supplier performance isn&#;t really an option. It&#;s an absolute necessity if you want to see your hard work pay off in any kind of meaningful way. It carries with it significant issues if done improperly or half-heartedly &#; but you&#;ll see the true benefits if you give it your full focus. Software, as most digital solutions do, offers a more streamlined vision of performance management with increased visibility and oversight. But as long as you are strategizing your efforts, you will reap more reward than teams who allow this crucial aspect of supply base management to pass them by.
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