Supplier performance management is a critical initiative in supply chain governance for organizations dealing with multiple suppliers. The globalized manufacturing and sourcing mantra has made companies focus on their core competencies and outsource the rest of the non-core business to suppliers across the globe. Companies in service industry such as banking, financial services and IT have also started realizing significant advantages in sourcing good and services from multiple suppliers while benefiting through improved pricing and enhanced services. Companies are becoming highly dependent on their suppliers and have to assess and manage their supplier's performance to reduce business risks and revenue losses.
For manufacturers High-Technology, Pharmaceutical, Energy, Automotive and Construction industries, this becomes even more important as they spend on average 50%-80% of the total product cost on raw materials and parts procured from multiple suppliers across different parts of the world. Manufacturers with a large or mission-critical supply chain are working on strategies and techniques to gain cost advantages by efficiently managing their suppliers, without sacrificing quality and flexibility.
Supplier performance management can help companies have better visibility into supplier deliverables and offer benefits to uncover and remove hidden cost drivers from poor quality, increase competitive advantage by reducing order cycle times, chargebacks for non-conforming material and supplies, gain insight on how to best leverage their supply base, and align practices between themselves and their suppliers.
Supplier Performance Management is a critical component of the entire supply chain governance and integrates with supplier quality and supply chain risk management processes. It includes critical processes to define, measure and control supplier performance to meet business goals.
An effective Supplier Performance Management system addresses the following:
Supplier Performance Measurement and Management
Evaluating Supplier Performance through Scorecards and Supplier Rating
In particular, Supplier scorecards are an integral part of the supplier performance management process. It should define categories or groupings of metrics/KPIs by which suppliers will be measured, such as, cost of poor quality, delivery cost, inventory cost, response index, order fulfillment score, order visibility score, returns/charge-back score and can be extended to custom categories such as vendor risk, innovation, customer complaints and corporate social responsibility.
A proactive organization should integrate supplier performance scorecards with real-time data to measure and identify key supplier related events, which could impact business operations and revenue. Supplier quality events such as supplier corrective actions (SCAR)/root cause analysis, supplier audit findings and customer complaints should be linked with Quality KPI in scorecards to enable a real-time quality score for suppliers. Furthermore, scorecard metrics and KPIs should be well integrated with loss and supplier risk management functionality allowing users to define multi-level thresholds and weighting for every risk. Real-time integration of supplier scorecards with supplier quality and risk management events will enable companies to give supplier ratings and generate executive reports such as top performing supplier for quality score, suppliers with poor score for corporate social responsibility, highly innovative and cost efficient supplier etc.
An effective supplier scorecard system for supplier performance measurement should use data based on real-time information, allow weighting of their various components to determine an overall score, providing trending information on the supplier's performance over time, and enable comparison to other similar suppliers that server the company.
Increasing global competition, changing product customization, price and margin pressures and increasing customer expectations are forcing companies to evaluate their external supplier performance system as part of their supply chain governance initiative. A proactive and effective organization should take necessary steps to manage supplier performance by defining and managing supplier scorecards and evaluate supplier effectiveness against SLAs laid out in contract.