Introduction:
Measuring supplier performance effectively is crucial for optimizing procurement processes and maintaining robust supply chain relationships. While traditional metrics like on-time delivery and cost reduction are essential, integrating qualitative aspects and segmenting suppliers can lead to more actionable insights. This blog post outlines a straightforward approach to supplier performance measurement, focusing on both quantitative and qualitative criteria to drive improvements and align procurement efforts with strategic goals.
Supplier Performance – What to measure?
Galileo said, “Measure what can be measured and make measurable what cannot be.” Supplier performance might be qualitative or quantitative. The usual quantitative metrics are:
- On-time delivery
- Quality (rejects)
- Reduction in cost
Most ERP or Procure-to-Pay software has these, and scorecards are easy to generate from various elements.
Your largest supplier difficulties may come from qualitative performance measurements. The procurement and accounts payable teams that deal with vendors daily may answer these. Questions may include:
- How successfully do our suppliers handle issues? (+Service quality versus SLAs)
- They provide what sort of technical help when needed?
- How much time do they spend developing new products and improving old ones?
This White Paper provides a supplier evaluation checklist for quantitative and qualitative performance criteria.
Segment Suppliers Because One Size Doesn’t Fit All
Treating all vendors equally is one of the most inefficient procurement approaches. Most mid-sized companies have hundreds of active and former suppliers. Focus on prioritising.
This situation fits the 80:20 guideline or ‘Pareto Principle’. Typically, 20% of suppliers account for 80% of indirect spending. If you doubt this, check your spending. Focussing on 20% of your suppliers will improve performance proportionally to 80% of your indirect cost.
Would you spend as much effort on a key supplier as one of your numerous office supplies suppliers when you could merely assess the latter’s on-time delivery rate and price?
Schedule frequent performance evaluations for your highest-spending vendors. Written actions and deadlines can push suppliers to perform better.
Keep it Simple Stupid
Don’t measure 15-20 KPIs for every supplier just because a metric exists for every use case. Start with the most important ones for your business, then go on to the nice ones. This data must be stored centrally so team members may access it at any time to do time-series studies on a supplier or supplier category. This ensures that suppliers receive KPI results and actionable evidence of their improvement or decline.
Zycus iPerform tracks supplier KPIs and lets Procurement engage on development projects and take real-time remedial action.
Innovation-based value measurement
Only for strategic suppliers, monitoring supplier value via innovation helps decide whether to keep their privileges or move on to better possibilities.
New product launches may be evaluated using a Stage Gate methodology. Verify supplier revenue and cash flows for financial soundness. Additionally, ask if they often offer suggestions for cost-cutting collaboration with your company.
Passing the ‘expansion test’ is another sign of a long-term strategic supplier. As you expand into a new geography, partnering with an existing supplier multiplies your benefits several times and gives your Procurement team the same points of contact, streamlining process efficiencies despite the added complexity.
Supplier innovation isn’t easy to measure in a supplier performance management process, but it’s worth discussing with your company.
Conclusion:
Efficient supplier performance measurement requires a balanced approach that incorporates both quantitative metrics and qualitative assessments. By focusing on key suppliers, simplifying performance indicators, and emphasizing innovation, organizations can enhance procurement processes and strengthen supplier relationships. Implementing these actionable strategies will not only improve supplier performance but also contribute to overall business success and operational efficiency.
