Following supplier performance management best practices and using proper metrics could help you identify and deal with supply chain issues early on, avoiding stock-outs, production bottlenecks, or other complications that could arise due to unreliable suppliers.
Why use supplier performance management?
Pricing is crucial when choosing a supplier and measuring their performance, but it should only be one important aspect of your vendor evaluation policy.
In fact, in supplier performance management, pricing should come into play only after you have assessed your vendors in terms of quality, accuracy, and improvement.
Even though getting a good deal money-wise should be a key consideration, low material and delivery costs will not pay off if you consistently receive defective goods, if deliveries are always late or quantities off, or in case lead times are very long.
All of the mentioned shortfalls could greatly hinder your manufacturing processes and become hidden cost drivers, therefore it is always recommended to follow supplier performance management best practices.
Read more about Procurement Management.
Supplier performance management best practices
Your assessment of a supplier’s performance is not something you should base on a firm handshake or a gut feeling.
Supplier performance is a measurable quality that should be approached with cold, hard data.
If you have been in business with your vendors for some time, you should already have a large amount of data in your MRP system, procurement software, Excel, or any other solution you use to keep a finger on the pulse of your company.
Use that data to follow these supplier performance management best practices.
1. Know which KPIs are important to you
There is an array of different KPIs you could measure regarding the performance of your suppliers.
The ones below should all be applicable and should comprise the base for your assessment practice.
However, you should also consider any specific metrics that are important to your company strategy and image.
For example, if your company openly prides itself on using locally produced raw materials, then you should account for the localness of your suppliers, taking appropriate action when companies happen to move or start off-shoring production.
On Time In Full
OTIF is a widely used metric in most industries. It consists of two aspects – delivery time and amount.
A delivery is OTIF when the order is delivered:
- In the timeframe agreed upon
- In the quantity ordered
- With the goods passing quality control
The accuracy with which you measure OTIF is up to you to decide, but counting every minute or milligram would be excessive.
If you use an MRP system, be sure to measure lead time in your business days.
Additionally, decide whether you use average, median, or maximum lead time, and utilize it throughout your whole system.
At the end of the assessment period, divide the supplier’s OTIF deliveries by the total number of deliveries, then multiply the result by 100 to get the percentage of OTIF.
Average delay in days
If OTIF is a bit too rigid for your vendor evaluation, you can use this KPI instead.
To get the average delay of a supplier, just add up all the days their deliveries were delayed during the assessment period, then divide the number by the total number of deliveries.
Quantity ordered vs. quantity received
This metric can also be used if OTIF proves to be too rigid for your suppliers.
To get the percentage, divide the quantity received by the quantity ordered and multiply it by 100.
Advanced Shipping Notification accuracy
If your suppliers send out advanced shipping notifications, you can also assess the accuracy of those.
You can find the percentage of a supplier’s accurate Advanced Shipping Notifications by taking the number of accurate ASNs and dividing it by the total number of ASNs received, then multiplying the result by 100.
Total inspected units vs. units failing inspection
This KPI measures the material quality of the delivery.
It requires you to inspect the quality of the received items and to count the units failing inspection.
Divide the units failing inspection with the quantity received, then multiply by 100 in order to get the percentage of units failing inspection.
Rate of Return
Instead of the previous KPI, you can also use the Rate of Return.
In addition to low-quality goods, the RoR accounts for overdue and excess items.
You can find the Rate of Return by dividing the quantity of returned items with total items received, and multiplying it by 100.
In this case, the lower the rate, the better the supplier performance.
Improvement rate per KPI
You can start implementing the improvement rate metric after you have measured your vendors’ performance for a few assessment periods already.
Just compare their KPI scores month-by-month to see how much they have improved (or deteriorated).
A supplier demonstrating consistent improvements with each assessment is a good indicator of them being a valuable partner.
Also read about The 10 Most Important Manufacturing KPIs.
2. Create a supplier scorecard
In vendor performance management, it is absolutely crucial to take a structured approach to measuring the quality of your suppliers.
You can do that by creating a supplier scorecard with your vendor data and the criteria you need them to fulfill.
It is essential that your supplier evaluation practices serve your specific business interests.
That is why the KPIs used on the scorecard must align with the goals and strategy of your company.
Applying a random set of metrics could end up being useless, or even costlier than not using a scorecard to manage your supplier performance.
After deciding on the KPIs you are going to use, you should also determine the merit of each of them – which of them has more weight for your business than another?
3. Set up evaluation processes
Everything in business should have a plan.
So, in order to properly implement your new supplier performance management policy, you will also need to set the details for the tasks regarding it.
How long is the assessment period? Which KPIs are measured? How is the data collected? Is it put into the scorecard continuously or periodically? Who is in charge of the evaluation processes?
These questions seem basic, and they are – that means there is no way you can leave them unanswered.
4. Communicate the results to your suppliers
Commend high-quality performers, replace low-quality ones, it’s as easy as that.
It’s true, being a preferred supplier is already a reward in itself.
But an occasional “thanks for being a reliable partner” goes a long way in ensuring that the other party keeps providing you with the best they have.
And the ones failing to meet your standards?
First, communicate your dissatisfaction with their service and give them time to make improvements.
Be sure to bring the data you have collected to the table.
If they show better results in the next assessment period, good.
If not, it’s time to move on.
5. Communicate the results internally
Making the supplier performance management processes transparent for all the parties involved avoids unnecessary scuffles and creates ground for mutual development.
The supply chain affects your whole business – that is why stakeholders outside of the procurement department should be kept in the loop by having the results of the assessments shared with them.
For example, the finance department could use the data to help you determine whether or not a supplier is liable for bankruptcy.
Having a clear overview of the risks related to the supply of materials could also help your company to mitigate them early on.
When to look for a new supplier
Even if you have been in business with a supplier through the ups and downs, there can be a time when you must admit that the negatives outweigh the positives in the relationship.
These are some of the red flags you should keep an eye out for.
1. Constantly late or incomplete deliveries
If your supplier performance is becoming worse by the month, it’s time to replace them.
2. Quality is deteriorating
It is perfectly fine to receive a couple defective items once in a while, but when it becomes a norm, you should start thinking about finding a new vendor.
3. Getting in contact is difficult
Leaving your phone calls and emails unanswered is a clear sign that you are not a priority for your supplier.
4. Prices keep rising unrelated to the market
Unexpected price increases that are unrelated to changes in the market are a huge red flag indicating the supplier is in trouble.
5. Sub-par customer service
No personalized approach, no gratitude for your business, being asked for information you have already given, complaints from your staff – bad customer service can taint even great pricing and accuracy.
6. Constant invoicing errors
Invoicing errors point to problems in the accounts of the supplier, which is a great cause for concern for all parties involved.
Applying proper supplier performance management practices is necessary to identify, communicate, and eliminate discrepancies in your supply chain.
It could prove to be beneficial both to your company as well as those of your suppliers – pinpointing bad trends early on allows both parties to deal with them in a timely fashion.
There are certain times, however, when it is necessary to take drastic measures and back out of the partnership – these include instances when the quality of service has deteriorated constantly and shows no signs of improvement.
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