Supplier Performance Management

INTRODUCTION:

Today’s competitive market’s main aim is to satisfy customer needs in limited period of time. The faster the product is brought to the market the more competitive edge the company is likely to have as faster product availability is key to increasing sales. The importance of speed-to-market has made it essential companies to maintain an agile supply chain.

Supply chain management (SCM) is a key strategic factor for increasing organizational effectiveness and for better realization of organizational goals such as enhanced competitiveness, better customer care and increased profitability. The main objectives of SCM are:

• To minimize non-value-added activities
• Associated investment cost and operating cost
• Increase customer responsiveness and flexibility in the supply chain
• Enhance bottom-line performance
• Cost competitiveness

The Supply Chain Management Program integrates topics from manufacturing operations, purchasing, transportation, and physical distribution into a unified program. Successful supply chain management, then, coordinates and integrates all of these activities into a seamless process. It embraces and links all of the partners in the chain. In addition to the departments within the organization, these partners include vendors, carriers, third party companies, and information systems providers.

Vendor is an important constituent in the supply chain and supply chain management is truly vendor management as it is an essential component of a product’s sourcing strategy. Performance evaluation based vendor selection is a decision of strategic importance to an industry. It provides the organization with a much-needed visibility into the compliance and performance of their supplier base.  It works on the principle of Pareto where in a sourcing organization; it is most likely that 20 percent of a vendor base is delivering 80 percent of business value. However the problem is to identify which are those vendors that are critical to sourcing strategy and which are the ones that should be weeded out. This is done through vendor or supplier performance management.

SUPPLIER OR VENDOR PERFORMANCE MANAGEMENT:

Supplier or vendor Performance Management is the process of measuring, analyzing and effectively reporting the vendor’s performance to help in continuous process improvements and nurture a long lasting relationship with the vendor.  It helps in managing the following:

• Time & resource efficiency
• Alignment of vendor to organizational objectives
• Risk mitigation

Manufacturers adopt supplier performance management plans to reduce costs, lower supply chain risk factors and promote continuous improvement. A successful SPM process identifies potential supply chain execution issues earlier, giving manufacturers the opportunity to quickly resolve them. Suppliers that are examined under an SPM plan are typically measured against two factors:

• The expectations agreed upon in their original contract.
• The current performance norms of their particular marketplaces.

WAYS TO MEASURE SUPPLIER PERFORMANCE:

Key Performance Indicators (KPIs) are the most common way to measure a vendor’s performance. To measure real value, the organization must develop appropriate metrics that quantitatively measure even intangible aspects of vendor performance such as innovation, flexibility etc.

Supplier assessment can be achieved in 7 steps:

1. Align supplier performance goals with organizational goals and objectives –

A supplier strategy should be formulated that relates to the overall organizational goals and objectives. If a company is pursuing lean and just -in- time deliveries, the key suppliers need to be on a lean journey themselves as the lack of synchronization can impact cost, quality and delivery.

1. Determine an evaluation approach –

The aspects of supplier performance that companies may wish to evaluate include:

• Financial health – Indicators of financial health are sales, profitability and liquidity.

• Operational performance metrics- It includes on-time delivery, quality, lead time, responsiveness etc.

• Business processes and practices – Reviews how a supplier runs its business and provides a product or service at the best value. Information can be obtained through questionnaires, surveys or site visits to suppliers.

• Enabling behaviors or cultural factors – Business models such as lean and six sigma are enabling behaviors such as continuous improvement and teamwork. For example, a supplier does not have a continuous improvement culture, it is unlikely that supplier will be in sync with the demands of a customer that values continuous improvement methodologies and expects the same drive to improve in its supply base.

• Risk factors- An important aspect of evaluating suppliers is to understand and mitigate risk. One can uncover risk factors in financial health, operational performance environment, business processes and practices, and enabling behaviors or cultural factors. Risk cannot be determined solely by using past performance to predict the future

1. Develop a method to collect information about suppliers – Methods include paper questionnaires, web based questionnaires, extracts from current systems, site visits and third-party standard certification.

1. Design and develop a robust assessment system-

Organizations need to choose an approach to evaluating suppliers. Approaches may include:

• Accepting a third-party standard, such as ISO 9001 and its sector specific derivatives or good manufacturing practices.

• Bench-marking performance against industry leaders

• Developing KPIs and scorecards based on system data or internal customer feedback.

• Developing your own certification or evaluation and measuring performance against it.

In the apparel industry, PLM is the tool where all supplier related data resides in the system. As the relationship with the vendor starts at the product development stage, it is the PLM that should have supplier performance management capabilities .Supplier scorecard within PLM can enable informed decision-making during the product development cycle. The ranking based on KPIs can provide information about suppliers who are at the bottom of performance metrics and thus perfect cases for either development or removal from the system. PLM with supplier performance capabilities can provide much needed visibility in an objective manner for supplier selection and subsequent product development with that supplier.

1. Deploy the system- One of the biggest difficulties in assessment systems is deployment. For systems that require data extraction, IT may need to develop and then link information from different systems. For questionnaire based systems, the questionnaires can become difficult for both internal and supplier participants to respond to. On-site evaluations or audits require training of personnel. Subject matter expertise, survey instrument development expertise and knowledge of IT are needed to avoid the pitfalls in deploying all these approaches.
2. Give feedback to suppliers – Many organizations send performance report cards to their suppliers. Customer companies need to discuss with their important suppliers on performance and work on the critical issues of the relationship. This requires a two-way flow of information.
3. Produce results from measuring supplier performance – Measuring supplier performance is about understanding, communicating and then improving supplier performance. Supplier performance measurement can lead to supplier development, and supplier performance improvement. Companies should work with suppliers to develop action plans as a result of assessments. They should then track performance to these plans to close the loop and realize the full benefits from the supplier performance measurement process.

DEFINING ACCEPTABLE VENDOR PERFORMANCE:

Defining Acceptable Vendor Performance requires the creation of a scorecard. Scorecard is a report card that can be provided to the vendor (and purchasing people) so that they can easily see their performance against standard expectations (and perhaps against the performance of other suppliers).

Steps to measure:

• Set the target service level for each vendor metric.
• Establish what defines satisfactory performance for every measured action.
• Define your scoring system.
• Tailor your targets as necessary.

After collecting the data, understanding how to interpret the data and determine whether acceptable vendor performance is achievable, many importers choose to design and utilize vendor report card.

For example, here is a report card resulting from a performance metric implementation. It measures on-time shipments and the goal is set to 98% on-time performance. This vendor only performs at 57% on time; therefore, there is clear room for improvement. The sample size in this example is small, but the impact can be quite large on even the most basic supply chain.

An Article by:-

Sehaj Ahluwalia and Akansha Das

National Institute of Fashion Technology, Bengaluru