All organizations must quantify and manage their risks effectively in order to be successful over time. When dealing with suppliers, there are substantial risks and potential for disaster in the form of bankruptcy, environmental problems, delivery failure, lack of materials, poor performance, or product defects. Most organizations recognize that these risks exist, but do not take sufficient steps to manage them effectively. While it is true that the level of risk can not be reduced to zero and all disasters can not be prevented, there are still many steps an organization can take to mitigate these supplier risks. One important and cost effective step is to monitor and manage the performance of suppliers periodically. This article will provide an overview of ways that companies can reduce their risks and leverage additional value by effectively managing the performance of their supply base.
By measuring and monitoring supplier performance on an ongoing basis, companies can realize some significant benefits. First, companies can avoid costly and potentially devastating supply disruptions. Second, companies can reduce overall risk to other adverse scenarios like defects, environmental problems, or safety issues with a supplier’s process, materials, or products. Third, companies that implement successful supplier performance management programs will be better able to spot problems early and begin to implement corrective actions before the problem becomes a big headache or hits the bottom line. These benefits are easily quantifiable. If a company knows that there are usually 100 supply disruptions during a year and each disruption costs an average of $100,000 dollars, the monetary benefit of preventing even some of these disruptions would be in the millions each year.
The benefits to a company with an effective supplier performance management program do not only encompass risk mitigation or prevention of problems. There are also positive benefits. One benefit is improved collaboration between suppliers that can lead to better coordination and enables the company and supplier to better meet the company’s business objectives. Another benefit that can arise is increased efficiency and productivity for the organization as it interacts with its suppliers. In addition, a good supplier performance management system can also let suppliers take initiative to perform tasks like updating their information to ensure that everything is current. It can also improve invoice accuracy and reduce expenses. This prevents errors and can make it easier for suppliers to do business with the company.
Company Goals and Strategy
It is very important that the supplier performance management program has well defined objectives. These objectives should be tied to the overall company strategy and the goals for the organization. Without an alignment between a supplier performance management program and the goals and strategy of the company, the program will be at best ineffective and may result in wasted resources. The goals of the program should also be tied into the overall spending of the company and should consequently reflect the company’s spending and strategic priorities. This means that areas of greater spend and/or greater strategic focus for the company should receive more attention and focus in the program.
In addition to being aligned with overall company strategy, the objectives for the program should also not be vague or nebulous. They should be clearly defined, specific, measurable, and should include a timeline. They should also be written down and there should be no doubt about what the objectives and the key measurements that define success are within the organization. The program should designate the key people that will be involved in the program and should specify the resources required. These things will be required to obtain buy in and support of senior management. It may also make sense to try the program with a select group of suppliers to gain experience, make adjustments, and quantify results before rolling it out to other suppliers.
Areas of Focus
The areas that company chooses to measure and manage and the criteria used will be a direct result of the company’s goals and strategy and the objectives for the supplier performance management program. There are a wide variety of areas of supplier performance that may be measured. It is important to select the ones that are most important for the organization. Common areas that companies choose to measure include financial health (risk of bankruptcy, liquidity, sales, etc), operational performance (quality, lead times, customer services, etc), contract compliance, business processes (defect prevention, inspections, etc), and overall cost. There are other metrics that may be important to aparticular company. These metrics should be defined as Key Performance Indicators (KPIs)
Another factor that should influence the choice of evaluation methodology includes the type of suppliers that a company has. In the supplier performance management program, it is important for company personnel to focus on the higher value and more strategic suppliers since these suppliers contribute the greatest amount of risks. It often doesn’t make economic sense to include low dollar value, one time business, or non-strategic suppliers in this type of program. By grouping these top suppliers together and examining the company’s relationships with them, some common attributes will become evident. These attributes of the relationship can be used to develop the areas and metrics with which to measure.
It is also important to work with the suppliers when developing these metrics and areas of focus. Some of the companies that are best at examining supplier performance continually interact with their suppliers, communicate with them frequently, and use a mutually agreed upon system of metrics. This is a more collaborative approach with suppliers and ensures that supplier know what is expected of them. They can also make business plans and take steps to meet the goals and objective that were set for them. The suppliers are also acutely aware of whether or not they have performed well or have performed poorly.