Optimising & Measuring Supplier Performance & Key Metrics
In principal, all business works on the principle of supply and demand. In today’s competitive global economy all organisations regardless of the nature of their business are reliant upon supplier performance and service. Hence all business need to understand what it is they require and make certain that suppliers perform in providing the service and support that is required.
Essentially the concept that a distributor will carry what people demand the most is now redundant and suppliers now appreciate all kind of business. Hence is important that you understand what it is you will demand and set out arrangements to ensuring that your supplier performs as required.
As a business, you must rely on suppliers for your goods & services, and you must utilise the supply of these to run a successful business. . The question however is their offering in accordance to what you require/ need and whether the supplier performance is up to par.
In order to improve on customer satisfaction and loyalty, ignoring supplier performance is detrimental to a business. Most customers are happy to pay little extra for quality and so there should be a practice in the organisation for supplier performance review.
Where does an organisation start in developing a supplier management programme? There are 4 main steps to look at:
1. Conduct a rigorous analysis of corporate spend within your organisation
This is a fact which is often overlooked. Enterprise spend is critical to establishing a supplier management program and other improvements within the supply chain.
2. Conduct audits of those suppliers considered most critical/strategic to the business
This is where you start to segment your supply base. Supplier assessment will soon reveal whether the supplier is up to speed and auditing tools will help determine that.
3. Establish key metrics for measuring supplier performance.
There are a dozen different combinations of commonly measured metrics. However, the most common to start with are:
* on-time delivery
* quality
* service
* price competitiveness
Ensure that the metrics which you choose to measure should be aligned with your overall strategy. An example is; if you are in the business of buying plastic drums, then on-time delivery is a critical factor. However, if you are in the business of Internet Marketing, on-time delivery may not be major issue compared to reliability of your supplier to provide uninterrupted Internet connectivity.
4. Apply the supplier performance measurement program to the most critical/strategic suppliers.
The results will give you some perspective and allow you to work closely with your critical suppliers to build strong relationships and iron out issues more openly with data to back up your case.
Supply management executives can breathe easy…just a little knowing that maximising the value with their suppliers means that they can remain competitive in this environment.
From the perspective of the top level executives, a successful supplier management program means:
* That they now have data with which they can collaborate with their suppliers to improve processes and reduce wastage
* That the executives can now improve workflows and develop corrective measures by involving internal stakeholders in the organisation as well as the suppliers
* They are now able to work more closely with top suppliers who have all the ticks in the right places
Finally, some key decisions to get the whole process rolling are to make some very important decisions about designing a supplier performance management programme. They include:
* Which suppliers will be measured?
* Which performance metrics will be measured?
* How supplier performance data will be used
* How supplier performance data will be shared with suppliers
Once you get the hang of this, optimising supplier performance will mean that the lines of communications with you and your supplier are always open and with a healthy working relationship, you can both work towards a common goal – retaining customer loyalty
When attempting to purchase supplies you require, there are a few things that you will need to consider. Supplier performance management is paramount to successful procurement, hence is something that you will need to constantly check and ensure. Let’s start out with the basics, which are the following:
Availability of Supplies
What supplies (goods & services) are available when you need to purchase or require them?
How much of said supply is available
Quality of Supplies
How the supplies perform, and whether or not they can be relied upon.
Promptness
How quickly the company can deliver the supply to you.
Level of Service
Service, Product Packaging, support, delivery promptness.
The first one, being the availability, is the most important. Whatever business you may be in, you know that it is of a competitive nature. If your supplier is constantly coming up short, then this will impact your delivery and end results with client and ultimately loss of business. The problem here is that it has a downstream impact to your end client, meaning if they cannot get what they want the time they want it then they will look elsewhere. Hence, you concern should always be on how big the impact is that you have left with the break of service? How does the non availability of you require impact and disrupt your business. You need to monitor this and make you eradicate any situation.
Along with the availability, also of high focus is the notion of quality. This is of particular importance when the good or service is part of your end offering to client. Defective products and/ or bad service can have a detrimental impact of your service and on client (and employee) experience. As such a regular check on quality needs to be maintained.
Promptness is the next important point in supplier performance. You might get the supplies you need, but what happens if they do not come on time, or not everything you require is sent when requested or do not provide the services you require? This will put you back to square one, where you did not have enough required supply to meet customer needs. It goes directly into the next point, which is the level of service. If you have not received your goods/ services on time, will you be able to rectify with the support service department. Even when the supplier delivers, and sometimes it fails miserable.
These are things that occur in business, but you need to make certain you are able prevent these shortcoming. As such one way you can mitigate against these issues from occurring is by creating supplier management program and/or performance scorecard, which will assist you to determine which suppliers are most desirable and best fit for your business and which of the others you need to manage or exit out of arrangement.
The first thing that you will need to do is to identify all the suppliers that you have arrangements with and list them according to their spend contribution and strategic importance to your organisation. Furthermore for each department in your organisation you will be doing a supplier performance evaluation, indentifying and ranking each suppliers importance at that lower level. As is often the case, one supplier might be critical in one department but not relevant in another. So be prepared to work to identify at the lower levels. You can keep track of the different statistics using a spreadsheets and databases, so you can ascertain service and product behaviours based on facts.
The facts of supplier performance are usually pretty simple, and for the most part speak for themselves. You will want to take a look at the availability first. How often does the supplier have what you need? To determine this you will look at the number of times in a year you have ordered from them, versus the number of times that you have ordered from other companies. Then you will need to take each supplier and measure exactly how reliable they have been by measuring all of the categories.
As the Procurement manager/ or supply owner of your organisation, you need to make sure that each supplier is able to meet your demands. Remember that you are the customer, and without you the supplier endures bad outcomes. So it’s in their interest to understand what it is you know. So the question is how is it you can bring all of the suppliers up to par? A certain scorecard system needs to be implemented, and it is as follows:
Determine which Resources your Organisation needs the Most and Make them the Priority
Create a Performance Scorecard to Share with your Suppliers
Look at Suppliers Across your Organisation and Determine How they are Doing
Provide Feedback and Let the Supplier know How They are tracking and what needs to improved
Make Your Choices Depending on Success
When you have a program in place it is important to determine exactly how often you need to asses and set metrics to measure the effectiveness of your supplier performance. In addition to the effectiveness of the supplier, you should also determine whether or not the program is cost-effective. In other words, look at the amount of savings and contribution to the bottom line that you are realising as opposed to losses you may have incurred as a result of mismanagement of your supply.
This is a very basic understanding of supplier performance management. Many things will be learned as you go along, and you will find that the more you learn, the better off your organisation is overall. Remember that once this research is completed, it would be best to compile it into a report for employees and suppliers to look over. The idea is to not only drive up your supply intake, but also to educate your suppliers on how they can serve you better. Without you, the suppliers would be ‘virtually nothing’, which is why they need to make sure you are able to please your customers. Ironically, they are in the same boat as you, and they will need to make the same assessments on their own services. An intact and effective supplier management program in the long run will ensure mutual benefits success to all parties concerned in the future.
In conclusion, supplier performance management is absolutely paramount to any effective procurement program. Too often organisations are caught out by locking in arrangements with suppliers and not managing their ongoing performance. A contract arrangement is only as good if the ongoing performance of the committed part is as agreed. Any deviation needs and should be managed.
Michael O’Brien is a Partner at Epago Group. He and his partners have a combined experience of over 20 years in the procurement consulting and corporate event management business. Visit today to learn more about managed services in Australia Epago provides.
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