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Supplier Performance Measurement: Keeping It Simple But Actionable

By Shalaka Desai
In Supplier Management
Sep 3rd, 2018
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Stay tuned for Part II of this blog where we will move on from Supplier Performance to Supplier Risks and how they play into the overall health of your organization’s supply chain.

The ‘2017 Procure-to-Pay for Indirect Spend’ report by Paystream Advisors indicated that cost control and supplier negotiations constitute the biggest improvement area for Procurement. A 2018 Hackett research report titled ‘The CPO Agenda: Keeping Pace With and Enabling Enterprise-Level Digital Transformation’ observed that the #1 strategic priority of CPOs this year is improving the stakeholder experience. Incidentally, one of the top value drivers of this stakeholder experience is improved supplier outcomes.

Supplier performance and healthy supplier relationships are undoubtedly at the core of Procurement.

Supplier Performance – What to Measure?

To quote Galileo, “Measure what can be measured and make measurable what cannot be.” Supplier Performance measures can be both qualitative and quantitative. Typical quantitative measures include:

  1. On time delivery
  2. Quality (e.g. rejects)
  3. Price
  4. Cost reduction

Most of these would already be a part of your ERP or Procure-to-Pay software and it’s easy to create scorecards out of multiple factors.

Some of your biggest supplier challenges can come out of qualitative performance measures. Answers to these can be sought directly from teams who interact with suppliers on a day-to-day basis i.e. Procurement and Accounts Payable. Potential questions include:

  1. How well do our suppliers resolve problems? (+Overall service quality against agreed SLAs)
  2. What kind of technical support do they give when we need it?
  3. How much do they focus on new product development and on incrementally innovating with their existing offerings?

Read this White Paper to get a supplier evaluation checklist as you tackle various quantitative and qualitative performance measures.

Segment Suppliers Because One Size Doesn’t Fit All

Treating all suppliers the same is one of the most inefficiency-inducing practices a Procurement team could do. A typical mid-enterprise organization has hundreds of active and past suppliers in its database. Prioritize on prioritizing.

The 80:20 rule or the ‘Pareto Principle’ applies well in this context. More often than not, about 20% of your suppliers constitute about 80% of your indirect spends. Do a quick analysis on your spends if you don’t believe this. Focusing on just 20% of your suppliers will therefore lead to performance enhancements proportionate to 80% of your indirect spend.

Would you want to spend the same amount of time on a strategic supplier as you spend on one of your many office supplies suppliers when you could just measure the latter’s on time delivery rate and price and just be done with it?

For suppliers contributing to your highest spend percentages, set time and plan ahead for regular performance reviews. Written action items and following up based on pre-determined timelines can motivate suppliers to perform better.

KISS – Keep it Simple Stupid

Don’t go measuring 15-20 KPIs for every supplier just because a metric exists for every use case you can think of. Prioritize the ones that matter to your business with the highest level of criticality first and then move on to the more ‘good-to-have’ ones. Maintaining a central repository of this data – one that several team members can access anytime they want – is necessary to ensure you get time-series analyses on a particular supplier or supplier category. This means that you don’t just keep conveying KPI results to suppliers but also have actionable evidence for whether they improve or deteriorate over time.

Zycus iPerform for example, tracks supplier KPIs while enabling Procurement to collaborate on development programs and setting up corrective actions in real time. Read this White Paper for iPerform data benchmarks and best practices for creating supplier scorecards.

Measuring Value through Innovation

Recommended only for strategic suppliers, measuring supplier value through the kind of innovation they do gives a good justification for whether they should continue enjoying their privileges or it’s time to move on to better options.

You could use something like a Stage Gate model to evaluate new product introductions. Check supplier’s revenue and cash flows for their financial health. Parallely, check if they provide regular inputs on how they could collaborate with your organization to reduce costs.

Another indicator of a strategic supplier who’s here to stay is if they pass the ‘expansion test’. If an existing supplier partners with your organization as you expand into a new geography, your benefits from one supplier have now multiplied several times over and your Procurement team has the same points of contact to deal with, thereby streamlining process efficiencies despite the added complexities.

Supplier Innovation isn’t one of the low hanging fruits when it comes to building a regular supplier performance management practice, but it is certainly worth starting discussions within your organization around tracking it.

Stay tuned for Part II of this blog where we will move on from Supplier Performance to Supplier Risks and how they play into the overall health of your organization’s supply chain.


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