In 2003, AMR Research introduced the concept of the demand-driven supply network (DDSN), a system of technologies and business processes that senses and responds to a real–time demand signal that is broadcast across a network of customers, suppliers, and employees. A key piece of that DDSN strategy is supplier performance management (SPM).

Through scorecards and dashboards, supplier performance management provides both the customer and the supplier a view of the supplier's performance to the customer's key metrics for cost, quality, delivery, and service. These key performance indicators (KPI) measure the supplier's success in terms of the customers' needs and provide a direct way of reviewing the value of the partnership between the two companies.

There is strong need for such a review process. In a recent AMR Research study of 455 supply chain decision makers in the United States and Europe, we found that companies have large gaps between their business process priorities and performance in four areas:

• Managing and reducing materials costs.
• Improving manufacturing efficiency.
• Optimizing overall internal supply chain costs.
• Reducing supply chain risk.

A supplier performance management strategy can help companies close these gaps. SPM helps customers and suppliers develop a common focus on the supply network's output and on business-value drivers. The ultimate goal of a SPM strategy is to develop strategically aligned partnerships. As the old adage implies, two companies working together will achieve more than just one. SPM, therefore, provides a means for companies to measure their success during their demand-driven journey.

A key part of supplier performance management is effective metric management. Metric management involves measuring suppliers to the business requirements and expectations, usually in a scorecard format. Similar to the monthly and quarterly business results that companies use to measure their profit-and-loss and balance-sheet activities, scorecards disclose the health of the relationship between the customer and supplier.

The aforementioned AMR study found that although the majority of suppliers receive scorecard information, more than 50 percent of them only review their scorecards within their sales account teams or in various pockets of their organizations as needed (see Exhibit 1). The majority of companies do not utilize this information either internally or externally to collaboratively enhance the value of their supply chain. With the majority of companies not using their customer's KPI data/scorecards, those previously mentioned supply chain priority and performance gaps will only remain.

In contrast, leading suppliers (which represent only 26 percent of the population) utilize their scorecard data to make their supply chains demand-driven. These leading companies focus on the final customer's demand requirements, share their ideas, and collaborate to achieve the best value for both their business and their customer's business.

So what separates the leaders from the rest? When we queried suppliers that are followers, we found that they do receive scorecards from their customers. However, these scorecards were either filled with erroneous, one-way information, or the measurements were made by multiple segments of the company with numerous conflicting KPIs. The bottom line is that suppliers either do not trust one-way communication or they are confused by the conflicting messages.

We find that customers' with these types of suppliers have two common organizational traits. They are usually decentralized with little or no center-led strategic procurement objectives, and they are mired in the details of the supplier KPIs. Companies are often so buried in the evaluation of what to measure, who should measure, and how often to measure that they fail to align their business objectives and strategies to the supply base.

In contrast, successful SPM programs start with a strategic review of the supplier network based on product requirements. They then establish critical measurements of success by collaborating cross-functionally, both internally and externally. Finally, the leading companies evaluate their suppliers based on the value they bring to the supply chain. This focus is clearly different from the traditional one-way philosophy based on the enforcement of metrics pushed from the customer to the suppliers.

For companies to provide the right measurements that are trusted by their suppliers, they first need to align their supplier's performance measurement to their business objectives. The most successful organizations start with a center-led strategy for the entire supply management organization and supply base. These organizations then work collaboratively across the entire enterprise to plan a successful SPM practice. The most successful SPM practices are those that:

• Establish overall supplier performance expectations.
• Develop supplier evaluation strategies and processes.
• Set a standard scorecard format for supplier KPIs and business requirements.
• Maintain repeatable data collection and scorecard updates across the enterprise.
• Evaluate suppliers based on performance expectations.
• Include supplier ranking, corrective actions, supplier development, and supply-base rationalization.
• Tie supplier assessment to the customer's strategy for commodity, supplier, and product management as well as spend analytics.
• In addition, we have found that the most advanced companies use real-time performance measurements as the barometer of the relationship. These companies:
• Offer alert messaging that indicates KPI changes.
• Provide dashboard analytics.
• Use these tools for predictive analysis and for identifying potential trends and risks with the suppliers and in the supply chain.

In Exhibit 2, AMR Research defines the demand-driven SPM maturity model in four stages: reacting, anticipating, collaborating, and orchestrating. In our research we found that the majority of companies to date are still at an anticipating level with some at the collaborating stage. In other words, while most companies may be gathering supplier performance data, they are not using the information in an established collaborative framework for supply development, rationalization, and business strategy.

Procurement organizations that drive their SPM programs toward collaborating and orchestrating know that if they use the information correctly, their jobs are easier. With these companies, we find that scorecards contain not only basic financial, quality, performance and responsiveness, and service elements, but also innovation, risk, and operations metrics.

Perhaps the biggest difference, however, is how leading companies are using the information proactively to affect customer demand. Alerts notify both suppliers and internal stakeholders, such as the buyer and production teams, of areas that are either marginal or nonconforming or that may significantly affect their scorecard. In the most advanced (orchestrating) companies, dashboards process the scorecard information in real time and predict areas of potential failure as an effort to mitigate risk.

We find that the most advanced SPM companies are in the consumer products, aerospace and defense, and high-tech industries. The companies in these industries are in the collaborating stage, with some entering the orchestrating stage. The companies in the orchestrating stage are starting to provide one view or score and are using it to reshape the supply base as it meets the demand-driven requirements.

Regardless of industry or even company size, SPM is critical to a successful DDSN strategy. It is those companies that utilize SPM programs in the strategic alignment of their business that gain the most from the supply chain. The question now is: Where do you sit?