April 20, 2023 | Sourcing Strategy
Effective supplier performance management involves activities that focus on improving the performance and capability of suppliers. This results in better performance, quality, shorter cycle times and lower costs. However, poor supplier performance can affect all these goals. In this blog, we look at the best practices to tackle this.
Identify key indicators that align with your business priorities. Measure these indicators to track and optimize supplier performance. For example, if timely delivery is critical, measure the supplier’s on-time delivery performance. If quality is an issue, establish quality metrics such as defect rates.
Be sure to regularly review these metrics with the supplier and discuss any areas where they are falling short on. Incentivize suppliers on achieving these key performance indicators. This way you have a measurable and tangible way of gauging the quality of supplier performance and visibility into areas of strength and scope of improvement.
Here are some examples of key performance indicators which may be useful to monitor:
You can learn in detail about the supplier performance metrics here.
Once the business needs, goals, priorities and appropriate KPIs are identified, the next step is to articulate these to the supplier. This includes not just delivery times and quality standards but also communication protocols, reporting requirements and any other relevant details.
When businesses are upfront about their intentions, it is easier for suppliers to take proactive measures and achieve goals. It is also important to outline potential consequences if the requirements are not met or indicate how they will be incentivized for meeting the goals. Finally, ensure that both the parties understand and agree to these expectations before signing the contract.
Leading businesses invest in performance management services and/or use a supplier performance management software to tackle poor supplier performance. One of the main benefits of such software is being able to create and maintain supplier scorecards. They enable capturing quantitative and qualitative performance data, opinions and feedback about each supplier. Scorecards can be built for a category, on a country-by-country basis, for a group of selected suppliers, or even a different scorecard for individual suppliers. The scorecards can run automatically, and the results can come in from across your company -- from production data that’s straight out of the ERP system or even from the supplier themselves – including from their ERP. So, while discussing performance with suppliers, businesses have data to leverage.
One of the crucial steps to improve poor supplier performance is to identify its root causes. This can be done by conducting a thorough review of supplier operations and processes. This includes but is not limited to analyzing all supplier data, conducting audits and inspecting supplier facilities. After the root causes are identified, collaborate with the supplier and create a plan to address these causes by re-strategizing, optimizing processes, additional training or amending new ways of operating.
When a supplier continues to display poor performance despite all measures taken by the business, it may be necessary to impose penalties. If a supplier consistently fails to meet your expectations despite your best efforts, it may be time to consider alternative suppliers. When evaluating potential new suppliers, it’s important to consider their capabilities, capacity, quality standards, and pricing. It’s also essential to communicate your expectations clearly and ensure they understand what’s required of them.
However, this should be the last resort. Additionally, ensure that all documents and communications pertaining to supplier performance issues are precisely documented.
By following these approaches, you can not only address poor supplier performance but also establish a strong and productive relationship with your suppliers. This can lead to improved quality, faster delivery times and better overall performance, ultimately improving the bottom line.