Supplier Evaluation and Performance Excellence

A Guide to Meaningful Metrics and Successful Results

Sherry Gordon

• Publisher: J. Ross Publishing
• Year: 2008
• ISBN:
  9781604276589
• Edition: 1
• Topic: Business
• Subtopic: Operations
• Index: Business

Understanding supplier performance is vital to ensuring a well-functioning supply network. This how-to book will help you develop and implement an evaluation process to help you reduce costs, lower risk, and improve both the performance of your company and your suppliers. This practical text includes examples of best practices that companies are using to evaluate suppliers and illustrates how to get beyond collecting data for the sake of data to achieving real results. It shows how to get at the meaning behind supplier metrics, and choose measurements that are meaningful both in the context of your company's goals and also for the supplier. Supplier Evaluation and Performance Excellence helps you get at the root causes of supplier problems that even suppliers may be unaware of and enable them to make high-impact improvements.Many firms do not know where to begin in the supplier evaluation process, what ways would work best, or even what kind of results they want to get. They know that they should be measuring supplier performance, but may not understand why or what they would gain from it. This book is geared toward managers at two types of companies: those who know that they should be measuring supplier performance but don't know where to start, and companies who want ideas about how to improve or revitalize a current program.

INTRODUCTION

SUPPLY MANAGEMENT TODAY

The field of supply management has been undergoing a transformation from a tactical, transaction-oriented function to a strategic capability at many companies. Senior executives are discovering that a good, integrated supply management capability is not only a necessity but also a competitive advantage. Management is realizing the potential for procurement to add cash to the bottom line instead of viewing procurement as just a cost center. And where supply management often worked as an arm of materials management or finance, it now operates at executive levels. A function that reported low in the organization now has assumed titles like CPO (Chief Procurement Officer) and Corporate Vice President of Supplier Quality and Performance Management, positions that didn’t exist until several years ago and now report directly to the CEO in many large organizations. No longer the purview of administrators and clerks, procurement and supply management have come of age. Now master’s-level degree programs in supply management and procurement at universities attract bright and capable candidates who can look forward to a profession with a career track and a future in the executive ranks.

What are the forces transforming supply management?

• Increased dependence on outsourcing goods and services
• Globalization
• Supply management technology
• Time and market responsiveness
• Performance improvement methodologies

Companies have been steadily increasing the percent of goods that they outsource over the past 10 years. Increased outsourcing has in turn increased the level of dependence on suppliers for the elements of cost, quality, time/responsiveness, and technology.

Information technology has become a key enabler in supply management. Information technology has facilitated order-of-magnitude improvements and scaling of supply management processes such as sourcing, negotiation, spend analysis, contract management, and supplier performance management. These and other software tools are radically changing the way business is conducted between customers and suppliers. Initially, and in some cases even today, sourcing software was perceived negatively, as a way for customers to get the lowest price in a reverse auction at the expense of suppliers and as a detriment to the customer-supplier relationship. Technology cannot overcome longstanding poor purchasing practices such as choosing suppliers on price alone; it will only speed up that process. When well deployed and within a set of good business processes and practices, procurement software is an indispensable supply management enabler. It has been a driver in the transformation of supply management. Typically, business processes take longer to catch up with technology. However, technology tools and their rapid adoption are revolutionizing the supply management profession and have become a competitive necessity.

VALUE OF EFFECTIVE SPM

The immediate return on investment in a sourcing event is simple and visible: The price was $X; after the event the price is $Y, so what you saved ($S) = $X – $Y. Most procurement people are measured by price savings for products and services. And these savings will directly impact the bottom line. As the cost of goods sold goes down, profit margins go up. Sourcing and negotiations technologies have improved and scaled the process and are now widely accepted and adopted. However, focusing only on price savings in sourcing means potentially missing some big opportunities. A huge opportunity exists with your suppliers who are on board: capitalizing on the relationship. What is the value of a high-performing supply base? Sourcing focuses on cost reduction of goods and services. Optimizing the customer-supplier relationship and achieving performance excellence also reduces cost and risk, two of the biggest concerns of companies today. The better you know your suppliers, good points and bad points, the less likelihood of unpleasant surprises. But it is distinctly different from the sourcing process in that it is more than a cost reduction function—it can also create value for both the customer’s enterprise and the supplier. In fact, excellence in supplier performance management can help enhance the sourcing process so that you choose those suppliers more likely to add value to the company.

Do any of these questions pertain to your company?

• Have you negotiated with suppliers and squeezed out most of the cost?
• When prices of certain commodities such as oil, steel, and transportation rise, do they impact your suppliers’ cost structure to the point where their margins cannot tolerate any further price reductions? Could demanding lower prices weaken or put some of your suppliers out of business?
• How do you derive value from the relationship beyond lower prices?
• Do you know whether your suppliers are fully compliant with contract terms and that you are actually getting what you negotiated?¹
• Do you know how well your supply base is performing?
• Do you know who all your suppliers are and which are most critical to your company?
• Does your company have quality problems, customer complaints, and warranty returns? Do you know what portion of them is caused by suppliers?
• Are you aware of what types of risks lie in your supply base? Do you know where they are and how to begin to uncover them? Mitigate them?

When suppliers are viewed as an extension of the customer’s enterprise, ideally their importance to the business can be viewed less as cost centers and more as partners with the potential to add value to the business. Some of the ways that suppliers can add value include the following:

• Using suppliers as a source of new technology in areas that complement customer competencies but where customers do not wish to invest.
• Working collaboratively with suppliers to develop new technology.
• Gathering best practices and great ideas from suppliers and adopting them within one’s own organization.
• Capitalizing on the synergies of collaborative problem solving and idea sharing.
• Working jointly on improvement projects that benefit both parties. Initially, the project may benefit the supplier, and ultimately, improved performance benefits the customer.
• Being able to get innovative new products to market due to supplier contributions in new product development.
• Developing faster cycle times in the order to delivery process due to the agility of one’s supply base can give companies a competitive advantage in speed of order fulfillment.
• Choosing a diverse supply base. Doing business with diverse suppliers can help strengthen a company’s ability to conduct business across all cultures and geographies in its area and expand its market potential.

However, when relationships are purely arm’s-length, adversarial or price-driven and performance is unpredictable, suppliers are in the position to indeed drive more cost than value. And even though unpredictable performance is not acceptable, a customer may be unable to do anything about the situation, at least immediately. Or, more likely, the customer may be unaware of the dimensions and root causes of the problems with supplier performance. Some of these root causes may even originate with the customer, whose own business practices exacerbate performance problems and reward the wrong supplier behaviors and business practices.

WHAT IS SUPPLIER PERFORMANCE MANAGEMENT?

We define supplier performance management as:

The process of evaluating, measuring, and monitoring supplier performance and suppliers’ business processes and practices for the purposes of reducing costs, mitigating risk, and driving continuous improvement.

Managing supplier performance helps companies focus resources on value-added activities instead of reacting to supplier-performance-induced problems (i.e., defects, expediting, excess inventory, late deliveries to customers, work stoppages, reduction of market competitiveness, etc.). By better understanding supplier performance via increasing performance visibility, companies can better monitor and manage key relationships by taking steps to prevent or remedy problems. And, on the positive side, they can identify and leverage suppliers capable of innovation and continuous improvement who will add value to the relationship.

Supplier performance excellence gives companies competitive advantage. To the extent that suppliers perform well, companies enjoy a competitive boost, since this performance is reflected in lower costs, improved responsiveness to customers, better-quality goods and services, and technological advantage. Thus, there has been a recent increase in interest in measuring supplier performance.

Suppliers, however, do not view their companies as needing to be “managed”. In fact, many may have business practices and processes that are better and more robust than those of their customers and may have a thing or two to teach their customers about performance excellence. Thus, supplier performance management (SPM) might be more appropriately viewed as business relationship management, which we define as:

In what ways, and how effectively, the firm ensures a two-way flow of understanding between the company and its suppliers, specifically as it pertains to communicating and negotiating requirements and performance expectations with the supply chain.

In order to get from the concept of managing supplier performance to managing business relationships for mutual benefit, a lot of insight is needed into not only supplier performance, typically defined as quantifiable performance metrics, but also the means to achieve performance excellence through best business processes and practices as well as through enabling behaviors and culture. Business relationship management entails involving the appropriate functions and using effective methods to communicate with suppliers. In the case of key suppliers, the communications will likely include exchanges of information about company history, capabilities, financial and market performance, and future business plans. These communications will involve multiple levels of staff starting from senior management on down from both sides.

Currently there are several terms being applied to this area. One is supplier relationship management (SRM), which includes elements of performance tracking and management, relationship development and management, and even supplier performance improvement activities through supplier development. Others include SPM, which implies a focus on performance only. In this book, we address what busine...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Foreword
• Preface
• Acknowledgments
• About The Author
• Web Added Value™
• Chapter 1 Introduction
• Chapter 2 Getting Started
• Chapter 3 Choosing The Team And Developing The Plan
• Chapter 4 Developing An Evaluation Strategy
• Chapter 5 Determining What To Measure
• Chapter 6 Evaluation Approaches
• Chapter 7 Using Technology For Supplier Evaluation
• Chapter 8 Designing The Process
• Chapter 9 Measuring And Managing Supplier Performance
• Chapter 10 Recognition And Rewards
• Chapter 11 Supplier Development