Enhancing Supplier Performance Management for More Profit, Less Risk

By Andy Rubinson and Jason Jablecki -- Supply Chain Management Review, 2/28/2008 7:58:00 AM

The supply chains of midsize to large enterprises today have one glaring trait in common: uncertainty. If each business unit is measuring suppliers with a different set of criteria (if any criteria is used at all), and not sharing data at the corporate level, how do you know which suppliers are achieving the desired outcomes? With no real visibility, how can you be sure that your most important supplier won’t suddenly experience quality issues that disrupt deliveries? How do you know if your business practices, and those of your suppliers, are in compliance with the latest government and industry regulations? Enter Supplier Performance Management (SPM).

Why SPM?

SPM is a management program and set of processes that help define, measure, and collaboratively enhance supplier performance to meet business goals. SPM will not eliminate uncertainty, but it can help you accurately gauge supplier performance and reduce risks. An effective SPM program should include:

• Defining SPM objectives aligned to a spend management strategy
• Defining a straightforward, repeatable process
• Establishing a supplier ownership and segmentation strategy
• Establishing key performance indicators (KPIs)
• Defining scorecard and survey templates
• Gathering performance data
• Analyzing results and communicating to suppliers
• Collaborating with suppliers to improve performance

With proper business alignment, SPM can manage risk, drive efficiencies in your supply base, enhance supplier relationships, and maximize performance on both sides. SPM can even boost revenue by freeing up resources for improving products, customer satisfaction and other functions that more directly impact the bottom line. Managing and rating suppliers also allows you to monitor your supply base and in-state ongoing improvements.

Certainly, adopting any new management practice and related technologies incurs upfront costs. However, the cost of tolerating an inefficient supply chain can cost much more. It can cost you the ability to compete. It can cost you market share. Conversely, effective SPM can dramatically improve supplier on-time delivery, fill rates and more.

How to Put SPM in Action

Whether your objective is to save money, boost quality, and/or achieve tighter regulatory compliance, document your objectives for an SPM program so that you can gain buy-in from senior executives—along with the managers and stakeholders in the business units who need to participate. Outline what you would like to accomplish in 12 to 24 months, how that relates to core business and operational goals, and how you will get there.

Your next step is to define a supplier ownership model within procurement and to segment your suppliers. Supplier segmentation models generally include categories such as: strategic, tactical, transactional, managed and so on. By stratifying your suppliers, you can determine which to bring into the program first. Ideally, you should start with a small number of strategic suppliers. Focus on those that deliver the highest value and align most closely with company goals and culture. Best-in-class organizations manage roughly 25 percent of their suppliers under the SPM process and historically show much higher performance gains than those managing less than 25 percent of their supply base.

Consider running a pilot program in a business unit or well-understood commodity with a handful of suppliers that grows over time. This phased approach provides your organization the experience to successfully implement SPM across the board. With your pilot results and long-term goals in hand, you can work with supply chain and operational executives to define the KPIs upon which you will measure and monitor your suppliers. KPIs differ from organization to organization. The important thing is that they remain consistent at the corporate level. Choose three to five metrics, such as quality, contract compliance, and cost. No matter how difficult, mandate those KPIs across every business unit. At the business unit level, managers may define more narrowly these KPIs according to their specific objectives, but be careful to avoid the frequent modification of top-level KPI categories so that executives can see trends companywide.

The next stage of the program is its lifeblood: the continuous measuring of the KPIs across your suppliers. Typically, companies conduct reviews on a quarterly or semiannual basis. You'll need to assign individuals to survey suppliers (and their customers and partners) to collect qualitative data. SPM software technology automates this process, and can merge that data with transactional data. Once this analysis is complete, you have a scorecard for each supplier.

The final stage of SPM involves coaching and rewarding. After managers have reviewed

scorecards with suppliers, they should develop an action plan with specific steps for improvement. This should be a collaborative process, versus a top-down mandate on your suppliers. Remember—these are your key business partners. It's imperative that they understand SPM as an opportunity to secure a long-term partnership with your company as well as improve processes and results for other customers. SPM also proactively warns of performance issues that could put their business at risk. You’ll want to reward suppliers appropriately. Some companies have instituted best practice programs as a way to motivate suppliers to be among those ranked best-in-class.

The 7 Foundational Principles of Supplier Performance Management

1. Know your end game

Then set metrics only for the elements that bring you there. SPM success, however, depends establishing the right KPIs to accurately measure supplier performance.

2. Face facts

This may require some sensitive change management tactics. It’s important that employees understand that SPM provides a more accurate assessment than their history with the supplier. For best results, hold your KPIs steady for 12 to 18 months. Otherwise, you risk frustrating employees and alienating your suppliers.

3. Be firm

Ensure that suppliers understand your program, its goals and its benefits before you implement it. Be clear that your company will enforce corrective action for problem areas, and that there will be consequences for those suppliers that don't take action to improve.

4. But work with (not on) suppliers

At the same time, try to avoid the teacher-student relationship. Collaborate. Involve suppliers in the process whenever possible. Some companies get good results when suppliers are allowed to rate themselves.

5. Assign SPM owners

Implementing SPM requires assigning owners to manage certain suppliers. While SPM is a centrally managed practice, it requires decentralized execution. At the end of the day, your business unit managers are the ones running the scorecards. Train SPM owners not only on the software, but the methodology as well.

6. Drive ongoing improvement, reset metrics

The output of the last performance review and its subsequent action plan should be the input to a supplier's next review period. As the top-level strategic goals of your organization change, so should the top-level criteria against which you measure suppliers.

7. Automate wherever possible

Look for SPM solutions that automate surveying and scorecard functions to minimize required resources. SPM solutions also exist that capture supplier data in a single repository, rather than disparate systems. The most effective solutions use process workflow to ensure users follow consistent processes and involve the right stakeholders. On-demand solutions are one cost-efficient option.

Andy Rubinson is Sourcing Solutions Marketing Manager and Jason Jablecki is an Applications Specialist with spend management solutions provider Ariba, Inc.

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