Supplier Performance Management
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[edit] Introduction
The previous wiki discussed supply chain risk and how important it is in today’s efficiency based supply chains where a single disruption can cost a corporation six, seven, or even eight figures and when more than 80% of supply managers reported in a recent Aberdeen study on Supply Risk Management that their companies experienced supply disruptions within the last 24 months. This is why the companion wiki on supply chain risk discussed the need for resilience, flexible processes, and risk management.
One of the major strategies that was cited for risk management was the adoption of risk mitigating sourcing strategies aligned with the organization’s supply base management strategies. Supply base management can be formally defined as the process of determining not only what the right number of suppliers are but who the right suppliers are. However, this is only the foundation of good supply base management which also includes continual proactive supplier development where the organization works with its suppliers to drive continual performance improvements.
This is part of the rationale for supplier performance management. Best-in-class organizations have best-in-class supply bases that continually exhibit best-in-class performance across the supply chain. Since performance improvement is a continual process, and not a one-time deal that happens by chance, performance needs to be managed and best-in-class sourcing organizations manage their performance and that of their suppliers.
Supplier Performance Management (SPM) is a business practice that is used to measure, analyze, and manage the performance of an organization’s performance in an effort to cut costs, alleviate risks, and drive continuous improvement. The ultimate intent is to identify potential issues and their root causes so that they can be resolved to everyone’s benefit as early as possible.
Considering that Aberdeen found that companies with formal performance measurement programs were able to improve supplier performance by 27% and that enterprises that shared performance data with suppliers generated 61% greater improvements in supplier performance than enterprises that withheld this data, the benefits of supplier performance management compared to the costs of trying to recover from a preventable disruption are phenomenal.
Proactive supplier performance management programs can improve service levels by 10 to 30%, improve invoice accuracy by 10 to 20%, and reduce inventory levels while increasing on-shelf availability. (For more advantages of supplier performance management, check out Aberdeen Group’s “Supplier Performance Measurement Benchmark Report”.)
[edit] The Basic Supplier Performance Management Cycle
Successful supplier performance management is a continuous cycle of supply and capability assessment, performance monitoring, and improvement identification. A good starting point is the Aberdeen C5 operational supplier management framework: connect, coordinate, check, control, and cultivate. (Aberdeen uses monitor and improve, but this wiki prefers check and cultivate.)
The cycle starts with integrating suppliers into an exchange, proceeds to a synchronization of buyer requirements with supplier capabilities, implements scorecards and metrics to measure performance, tracks performance against SLAs, identifies exceptional situations, resolves problems and disruptions according to business objectives, and employs analytics to identify defect patterns and unpredictability to eliminate root causes and identify new opportunities in an effort to remove cost from the supply chain.
The cycle defines a number of requirements that must be met before a good performance management methodology can be put in place. Collaboration systems are required to successfully integrate suppliers into the organization’s systems and processes, visibility is required to properly align supplier capabilities to the organization’s requirements, well-defined metrics need to be defined to asses performance, and monitoring systems that support granular data need to be implemented to automatically detect deviations and exceptional events. Data needs to be timely and reliable from organizational suppliers.
These requirements are wrought with challenges. Without good data collection and analysis systems, the detection of defect and supplier unpredictability patterns can take weeks or months. Without good collaboration systems, coordinating internal functions is challenging enough without trying to coordinate internal functions and external schedules. Thus, the selection of appropriate technologies is critical.
A synchronized view to the data for all internal and external shareholders is critical. There can be no meaningful discussion about performance improvement if different users are measuring data points against different metrics. However, this is challenging since every company operates differently, follows different processes, and interprets data in different ways. Again, good technology choices will help the organization in this endeavor.
So, how does an organization achieve a synchronized view with shared scorecards and metrics? Hard work, dedication, and outside expertise. This is not an area that an organization should attempt to master on its own. Bring in consulting experts for quick ramp-up and deployment of best of breed solutions. Although this wiki is not going to recommend a specific solution, there are a number of companies in the space, that are now offering these solutions. Just make sure that whomever and whatever is selected for supplier performance management integrates well with the e-Sourcing and e-Procurement systems the organization has adopted, since SPM tools are another piece of the framework, and not a be-all end-all solution.
[edit] Three Deadly Myths of SPM
It’s a well known fact that managing supplier performance is important. Effective supplier performance management yields both bottom-line savings and top-line competitive advantages that most companies simply cannot afford to ignore. But supplier performance management is still the exception and not the rule in most companies.
Why isn’t Supplier Performance Management the Rule? This is difficult to pin down. It could be because SPM is only one letter off from SRM, Supplier Relationship Management, and it could be confused for the same thing, which it is not. Technically, SPM is a subset of SRM, but many companies undertake SRM initiatives without any consideration to performance, and many of the first generation SRM solutions that hit the market place had little or no SPM functionality. Furthermore, some companies that adopt SPM just adopt SPM with no consideration for the other, softer, facets of SRM.
It might be because there are a number of myths circulating about what is required to implement true Supplier Performance Management, many of which are unfounded and untrue. The reason SPM has not obtained wide-spread adoption will probably remain unknown, but there is no reason that some of the myths cannot be dispelled once and for all. To start, this wiki will attempt to dispel three of the most common myths that typically prevent SPM solutions from being adopted and given their rightful place in the organization’s suite of sourcing and procurement applications.
[edit] Myth #1: The Data Has to be Fixed First
This is a version of the often repeated “garbage-in, garbage-out” mantra. This issues goes back to when first-generation procurement vendors were trying to load data into their on-line catalogues. Over time, it became apparent that customers who went “all in”, even if only with a small percentage of suppliers and catalogue content, were getting far more value than those who waited and conducted online commerce with suppliers who were already catalog-enabled. In other words, customers who worked hard to get as much spend as possible flowing through a system obtained the greatest value. Getting the spend into the system accelerated the process of cleansing the data.
Thus, while it is true that an organization needs reasonably good data before embarking on a data-intensive effort such as SPM, it does not need perfect data and the faster the organization gets started, the faster the organization will see a reward. Furthermore, any competent SRM vendor should be able to handle whatever data the organization has, and extract some value from whatever data the organization is able to provide. Besides, if an organization’s data is truly garbage, then SPM is the fastest way to begin cleaning it up.
[edit] Myth #2: Supplier Scorecards are the same as SPM
This is not true. Reporting is not the same as managing, as this myth seems to imply. Furthermore, supplier performance management is more than just a tactical exercise in supplier monitoring. Scorecards are one component of SPM, and an important one, but a scorecard is not the same thing as having a strategy and a process for getting the most out of a supply base. For one thing, scorecards take too long to produce. Most scorecards require significant manual effort and, at most companies, are nothing more than a custom Excel spreadsheet. Quarterly scorecards are the best most companies can muster.
[edit] Myth #3: Once the ERP is upgraded, it will be enough for SPM
ERP has been promising basic sourcing and procurement capabilities for years, and the systems, have not even met these goals. Best-of-Breed vendors have been delivering complete sourcing cycle and procurement cycle platforms for years now, and those with second generation offerings are at least five years ahead of ERP vendors, if not more.
Any consideration granted to this risk simply equates to unnecessary delay and increased risk. In manufacturing, some estimates state that a $1B manufacturing company experiences 30-50 moderate-to-survey supply disruptions a year, each costing about $100,000 to resolve. Considering that a good performance system could help to spot indicators of potential disruptions before they happen, allowing corrective actions to be taken before they happen, a $1B company could save a few million just on disruption avoidance alone, not to mention the savings that will come from productivity improvements!
[edit] Best Practices
Many of the ten best practices that are included below grow out of the C5 (connect, coordinate, check, control, and cultivate) Aberdeen operational supplier management framework, as discussed in Aberdeen Group’s “Supplier Performance Measurement Benchmark Report”.
[edit] Open Communication
The first best practice is open communication and data sharing between parties to make sure that everyone is on the same page.
[edit] Strategic Supplier Selection
The second best practice is strategic supplier selection (often known as supplier rationalization) for strategic engagements. This generally means concentrating purchases with a small set of suppliers to provide the buyer with greater leverage and fewer suppliers to proactively manage in performance and quality improvement initiatives. This does not mean single sourcing, as that is wrought with risk.
[edit] Mutual Performance Targets
The third best practice is the definition of mutually agreed upon performance targets and mutually agreed upon metrics. Create joint action plans with suppliers to meet these targets.
[edit] Continual Scorecarding
The fourth best practice is continual scorecarding to insure that the metrics are continuously up to date. Scorecarding should be done at least monthly, data tracked at a granular level by location, trade lane and product family, and linked to customer facing metrics. Linking primary KPIs across processes helps supply managers understand how their metrics link up with those of their customer facing peers.
[edit] Proactive Monitoring
The fifth best practice is proactive monitoring of the supply chain on a regular basis. This is usually done by way of business process management (BPM) technology that can alert stakeholders to exceptional conditions, assign accountability, track resolution progress, and automatically update affected systems.
[edit] Cross-Functional Problem Resolution
The sixth best practice is the implementation of cross-functional problem resolution consistent with overall business objectives. Considering that there is a huge opportunity cost associated with human productivity losses from resolving supplier performance problems, it is vital that problems are resolved quickly and correctly. Leading companies use pre-programmed rule-management systems to guide them through intelligent resolution strategies. These systems are updated regularly with best practices.
[edit] Control Points
The seventh best practice is the implementation of control points at suppliers to minimize mistakes. Utilize technology to check that items and quantities on supplier’s shipping documents on open order lines reflect those on the most up-to-date purchase order.
[edit] Predictive Analytics
The eighth best practice is the use of predictive analytics and KPIs to transform supplier scorecards into forward looking risk management instruments to identify potential problems well before they materialize. Best in class firms scorecard, but leading firms are now using predictive analytics to spot inflection points and KPI correlations that identify potential capacity issues, lead time variability, quality, or supplier financial issues before they show up as a metric on a scorecard.
[edit] Supplier Development
Predictive analytics are good, but supplier improvement is better. Work with suppliers to help them improve their processes, systems, and capabilities. This will improve quality, reduce deviations, and increase a supplier’s capability to meet customer needs.
[edit] SPM Systems
Finally, it should go without saying that the best way to achieve supplier performance management is to implement appropriate systems built on best practices that manage data, provide standardized tools and templates, and come with useful, relevant reporting.
[edit] Steps to Success
In Aberdeen’s “Supplier Performance Measurement Benchmark Report”, they identified Steps to Success for laggards, average performers, and best-in-class enterprises alike. As these steps were thought out, generally applicable and on-target, they will be repeated as-is and the reader referred to Aberdeen’s report for additional insights.
[edit] Laggard Steps to Success:
- Measure supplier performance constantly, and at least monthly. This is one of our best practices and key to continued success.
- Improve visibility into supplier activity and inbound shipments. This will insure that the data is not only up to date but reliable.
- Measure the downstream impact of supply disruptions. This will assist in the creation of actionable contingency plans that will minimize the cost of such disruptions when they can not be avoided.
- Create a cross-functional review team. A key to sourcing success in general, it is especially true in supply risk management and supplier performance management.
[edit] Industry Norm Steps to Success:
- Transform procurement and material managers into supply base developers. This is the essence of strategic sourcing best practices and improves supplier performance management efforts across the board.
- Implement supply chain management technology and manage supply disruptions based on business goals. This is another best practices that ensures that downtime and costs associated with a disruption are kept to a minimum.
- Insert control points at suppliers. Yet another best practice, this helps catch potential mistakes that could be costly before they happen and streamlines operations.
- Make scorecarding more granular. Good scorecards are granular scorecards and allow an organization to quickly zoom in on the root cause of a problem.
[edit] Best in Class Next Steps:
- Apply statistical process control techniques and kick it up a notch.
- Adopt business process management technology. A best practice that allows an organization to catch exceptions as soon as the relevant data enters the system and stop small problems before they blossom into large problems.
- Evolve the scorecard into a forward-looking risk management instrument. This best practice can assist the organization in identifying potential supply chain problems before they happen, giving the organization time to take corrective action before its monitoring systems even notice a blip. It is the ultimate evolution of supply performance management.
[edit] Next Steps for Everyone:
Ask an expert. As the great Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” The best learn from the best. Look externally for best-in-class providers that can help the organization become best-in-class in supplier performance management.
[edit] A Selected Bibliography
Beyond the Scorecard: Five Performance Management Tips to Save Money, Improve Quality, and Build Better Relationships by Krishna Kurup, CVM Solutions, Executive Brief, February 2008
Collaborative Performance Enhancement = Successful Supply Chain Management by Nilesh Anand
Home Depot Turns Its Attention to Supplier Performance Management by Robert J. Bowman, June 2006
How Procurement Leaders are Using Supplier Relationship Management to Achieve High Performance by Accenture, 2006
Scoring that Delivers Results by Beth Barling, CPO Agenda, Spring 2007
Seven Steps to Measure Supplier Performance by Sherry Gordon, Quality Progress, August 2006
Supplier Management RFP 2007 by Procuri, Denali Consulting, GE, Austin Tetra, SciQuest
(The) Supplier Performance Management Benchmark Report Program Adoption Lags, Despite Clear Evidence of Value by Kevin R. Fitzgerald of Aberdeen Group, September 2005
Supplier Performance Management Guide by Gentex, December 2003
Supplier Relationship Management by EPIQ Technologies
Supplier Relationship Management (SRM) 2005-2006 by CapGemini, September 2005
Supplier Relationship Management and Procurement: Driving Value Through Best Practices by Vanessa C. Smith, ASUG/SAP, 2006
Supply Base Rationalization by Roberta Duffy, January 2005
Tiered Supplier Management by Anna E. Flynn, September 2004
[edit] Authors
Michael Lamoureux, PhD
[edit] Editors
David Bush
