Measuring supplier performance is essential to keeping a supply chain running effectively and without issues, as well as making sure all supplier relationships are as efficient and cost-effective as possible.
It involves reviewing suppliers against a set of key metrics – allowing procurement teams to make changes to their plan at the earliest opportunity to maximise value and minimise inefficient activity.
So, how can procurement teams get the most value from supplier performance management? And what are the key benefits they can expect to see? DeepStream explains…
What Is Supplier Performance Management?
Supplier performance management (SPM) refers to the process of evaluating, managing and measuring the performance of supply chain vendors to ensure they are meeting and exceeding the terms outlined in a procurement agreement.
The goal of SPM is continuous improvement – ensuring suppliers are meeting their obligations set out in their bid for supplier contracts and identifying areas in which these relationships can be improved, in terms of speed, cost, scale and more.
Key supplier performance measures include product quality, product delivery, supply cost, supplier responsiveness, and overall supplier relationship management.
Why Is Supplier Performance Management Important?
Supplier performance management is important because it keeps suppliers on track toward completing measurable goals that boost performance.
This means that the supply chain can become more efficient – reacting quicker to delays or challenges and getting the most value out of positive areas of performance, such as speed to market and increasing demand.
This can be achieved through:
Assessing a supplier’s ability to consistently and effectively meet defined performance criteria.
Identifying potential supplier risks and taking measures to mitigate those risks.
Fostering a culture of learning within a supply chain and encouraging suppliers to grow through constant improvement and critical analysis.
Developing strong, collaborative relationships with suppliers based on trust.
How Is Supplier Performance Management Measured?
Supplier performance management is measured through several key KPIs and metrics that help quantify and determine the effectiveness of a supplier strategy. Some of these include:
Defect Rate: A percentage of defective products or services.
Quality Audit Results: The results of quality audits conducted at supplier facilities.
Customer Complaints: The rate of customer complaints received related to supplied products or services.
On-Time Delivery: Percentage of orders delivered on, or before the delivery date.
Lead Time: The time taken from order placement to delivery.
Fill Rate: Percentage of finished orders fulfilled by the supplier.
Total Cost of Ownership: The total cost of acquiring and managing products or services.
Price Variance: Deviation in price from that agreed in the initial contract signing.
Communication & Responsiveness: How quickly and effectively a supplier responds to queries and requests.
Flexibility: The supplier's ability to adapt to changes in demand or supply availability.
Relationship Satisfaction: Surveys and feedback relating to the quality of service provided by a supplier.
Collaboration Effectiveness: How well a supplier collaborates with other organisations, including response time and effective communication.
Compliance & Risk Metrics:
Regulatory Compliance: How well a supplier complies with national and international product regulations.
Risk Management: Assessment of supplier risk factors that could affect their ability to keep up with demand.
Continuous Improvement Metrics:
Improvement Initiatives: The number or impact of any improvement initiatives implemented by the supplier.
Performance Development: A supplier’s commitment to continuous development and upskilling of staff.
Looking to streamline the supplier performance management process to achieve effortless data management and supplier communication?
Which Factors Should Be Considered When Setting Goals for Suppliers?
Setting supplier goals is an important aspect of the performance management process, as it outlines achievable yet ambitious targets for suppliers to work towards to improve the quality and output of the relationship.
Below are several key considerations to keep in mind when setting supplier goals:
Targets need to be specific, measurable, achievable, relevant and time-bound.
The supplier goals should align with the overall company strategy, and not detract from it.
Performance must be clearly defined by quantifiable metrics – rather than subjective evaluation – to inform performance improvements.
Importance & Impact
Rank goals in order of importance and assess their overall company impact to drive the greatest results from the process.
Produce a clear and defined understanding of a supplier's current performance level to measure against future output.
What Is the Process of Supplier Performance Management?
What exactly does the supplier performance management process look like and which key steps must be followed?
Below is a step-by-step guide on how to conduct an effective performance management process:
Define Performance Objectives
It’s important to start the process by outlining the specific performance objectives and relaying these to suppliers. Established objectives must comply with the S.M.A.R.T. target rules and align with the overall strategic goals of the buyer.
Identify Performance Metrics
This step involves researching and understanding which metrics are most relevant and valuable in helping suppliers toward the desired goals. It’s important to have no more than five metrics, to avoid diluting the effort and value of each.
Establish a Performance Measurement System
Establish the procedures and tools that will be used to gather accurate performance data.
Gather Performance Data
Using the newly defined metrics, gather performance data via the established measurement systems. Ensure all recorded data is stored accurately for later use. For example, centralized procurement software keeps all data aligned in a single database, providing reports and dashboards that drive decisions.
Evaluate Supplier Performance
Analyse all collected data and measure it against the defined objectives and overall company goals. Identify the areas in which supplier performance needs to be improved, then offer constructive feedback to the supplier on how they can improve and how this will be measured.
It’s important to repeat this process during set intervals (for example, quarterly)to keep suppliers updated and informed on where they can improve.
How To Communicate Performance Feedback to Suppliers
Supplier feedback is critical to meeting performance objectives. When handled clearly and sensitively, it equips suppliers with the knowledge needed to reduce any errors, bridge the gaps in any missed objectives and increase the value of positive performance.
The key steps for offering constructive feedback include:
Before providing feedback, it’s important to prepare the relevant data, details and talking points that will be put forward to the supplier.
Schedule a Meeting
Next, it’s essential to arrange a meeting with the supplier at a time that suits both parties, leaving at least two hours for debate and discussion.
Use a Constructive Approach
Approach the feedback meeting with an open, positive and constructive mindset.
Whenever talking about a supplier weakness, always be sure to provide clear insights and examples to demonstrate the point.
Be Objective & Balanced
When providing feedback on supplier weaknesses, be sure to commend the supplier on their strengths to remain balanced and aspirational.
Instead of pointing out problems, suggest potential fixes and solutions for those problems to remain constructive.
Allow the supplier to express their view on the feedback and take them into account when planning solutions.
Seek Agreement & Commitment
Always seek firm commitment with the supplier on agreed terms and goals going forward.
DeepStream’s RFX software is designed to support the whole source-to-contract process – from bid invites to managing and reviewing supplier performance.
It is packed full of features that can help strengthen supplier relationships, including a downloadable audit trail, centralized exchange, efficient evaluation and team permissions.
What Are the Benefits of Supplier Performance Management?
Supplier performance management is designed to improve the relationship between supplier and buyer – improving output and aligning goals. Therefore, it comes with a range of potential benefits, including:
Enhanced Supplier Relationship
With effective supplier performance management, the working relationship between supplier and client also grows stronger, leading to greater trust and shared goals between the two parties.
Supply Chain Reactivity
With improved supplier performance comes an ability to react to supply and demand spikes to avoid delays and increase speed to market.
Supply Chain Performance
The overall speed and performance of the supply chain will increase with improved supplier performance.
With effective supplier performance management, potential risks can be spotted in advance and steps can be taken to mitigate them.
Overall costs of shipping and supply will drop as more efficient methods of supplier transport and stock orders are discovered.
What Are Some Challenges in Supplier Performance Management?
Despite the many benefits of supplier performance management, the process can also pose potential challenges.
However, these can often be mitigated through planning and a strong supplier performance management framework. Some of the key challenges to address include:
Data Availability & Accuracy
Ensuring current data is both available and accurate can be a challenge. Suppliers providing incomplete or inconsistent data can skew projections or performance analysis. The best way to mitigate this risk is by meeting with suppliers to set the groundwork for a unified, unchangeable method for data collection.
Performance Metrics & Measurements
Irrelevant or sub-optimal metrics can also pose challenges in providing an inaccurate picture of supplier performance. Therefore, understanding which performance metrics are best suited to a particular product or supplier is key. This can be achieved through the regular reviewing of data against wider company goals, to ensure they are aligned and provide relevant insights.
Data Integration & System Compatibility
Implementing data from different systems can be a complex task, and those systems may not always be compatible.The best way to mitigate this challenge is by using digital RFX software that consolidates and unifies data from multiple sources in a single, seamless platform.
Supplier Cooperation & Engagement
Encouraging suppliers to actively participate and contribute to supply performance management can be a challenge.The best way to encourage participation from supply staff is to align goals and share mutual objectives that reward both businesses.
Subjectivity & Bias
Sometimes evaluating supplier performance can be clouded by bias. To mitigate this risk, it’s important to have multiple parties regularly fact-check data. This data should also be stored in an online platform with a comprehensive audit trail that all parties can access for complete transparency.
Frequently Asked Questions (FAQs)
Q: What is the supplier performance management framework?
A: Supplier performance management is a business practice used to analyse and manage supplier data to inform future procurement decisions. A supplier performance management framework is therefore a structured approach to this goal, including a set of practices and techniques to help evaluate and measure performance.
Q: How do you measure KPI for supplier performance?
A: When measuring KPIs for supplier performance, there are some key practices to keep in mind. First, it’s important to define clear objectives for the KPI, including what it measures, in which unit of measurement and over what timeframe. Next, it’s important to establish the methods that will be used to gather and store this data. Once these steps are complete, the next task is to analyse the data to inform and review performance targets.