Supplier Performance Management
How to move from a pure cost-reduction vendor relationship to supplier partnership focused on value creation?
In an increasingly competitive environment, purchasing teams need to continue to deliver additional savings, maintain effective supplier relationships and actively contribute to improving company margins.
Purchasing departments often focus solely on squeezing suppliers to get better prices, even though this can do long-term harm to the partnership.
But is this the most effective way to get the best out of your suppliers ?
An approach that focuses solely on cost reduction is a risky gamble
While cost reduction is important it must not be the only goal for your strategic supplier relationships. The significant risks of focusing solely on cost reduction are :
- Lower prices can detriment product and service quality
- Lower prices may not be sustainable if, the supplier is being opportunistic and ignoring the long-term, strategic ramifications to their cost model
- Lower prices carry the risk of supply shortages, when suppliers prioritize deliveries to their “strategic” customers
- Lower prices can weaken the supplier financially by excessively eroding their margins
- Lower prices can affect the quality of the customer-supplier relationship, creating a climate of tension and mistrust
A structured analytical approach focused on continuous improvement
Which approach should be favored? What is the best way to improve supplier relationships while getting the best out of them? What are expected short- and long-term results?
Based on the analysis of more than 100 purchasing implementation projects with major international corporations, a fundamental trend has emerged around structuring of the processes, organizations, and systems for assessing supplier performance.
The trend is to deploy a continuous improvement process based on a factual system for measuring supplier performance, on action plans drawn up and implemented in a collaborative manner, and on sharing gains achieved for an overall win-win approach.
This best practice process (recurring generally on an annual or quarterly basis) can be broken down into a number of key stages :
1- Prepare/Create the supplier assessment campaign
- Select suppliers for assessment
- Select products/services for assessment
- Identify in-house assessors (purchasers, quality team, product/service users, etc.)
- Choose an internal questionnaire from the template library or draft a new, or adapt an existing assessment questionnaire
- Choose a supplier questionnaire from the template library to collect supplier data
2- Launch the assessment campaign and monitor inputs
- Notify the assessment team of the launch of the assessment campaign
- Send out the supplier questionnaire
- Monitor input and follow up with contributors
3- Collect, validate, and consolidate data and produce performance indicators
- Collect data from in-house contributors
- Collect and validate supplier data entered via the supplier portal
- Collect supplier data from third-party companies (D&B, Bureau Van Dijk, etc.)
- Preview performance indicators
- Consolidate data against various analytical dimensions (by supplier, by company, by period, by assessment criteria, etc.)
- Draw up a supplier scorecard that objectively measures performance from all assessment angles
- Generate supplier risk profile
4- Analyze supplier performance and risk
- Analyze supplier performance indicators
- Performance over time
- Benchmarks with other suppliers
- Comparison with the best-in-class in the market
- Analyze the impact of identified supplier risks
- Identify areas for improvement and action levers
- Quantify potential gains and estimating quantitative targets
5- Communicate with supplier and deliver performance review
- Issue consolidated scorecard, with analysis and improvement opportunities identified
- Communicate key incidents noted over the assessment period
- Conduct performance review meeting with key supplier-side stakeholders
- Discuss priority improvement ideas
- Set targets and launch collaborative progress plans
6- Create progress plans
- Draft a detailed progress plan that involves a mixed customer/supplier team
- Define the target KPI values, the gains to be achieved, and the allocated means and resources
- Monitor the state of the progress plan
7- Assess effectiveness of actions and gains
- Analyze any discrepancies between targets and performance
- Assess gains achieved by both parties
Automating and simplifying process management
This best-practice procedure, while complicated to manage manually, can be automated using performance management specific software. A software solution that can manage the end-to-end process is preferred because of the amount of information to be collected and processed and the sophistication of the indicators and KPIs and other analyses that need to be generated and shared.
The Ivalua software suite includes a comprehensive supplier performance management solution that is embedded in the supplier relationship management modules.
Rather than requiring IT resources, Ivalua SRM is designed to let functional administrators or process owners to manage the assessment campaigns, the data collection, the production of indicators and reports, and the sharing of these with suppliers or in-house stakeholders. The administrator will be responsible for drafting and monitoring assessment campaigns. In addition, Commodity Leaders and Key Account Managers are generally involved in monitoring, reviewing and analyzing action plans.
Implementing Supplier Performance Management in Ivalua follows this process:
- Define the key stages of the assessment process: Who assesses each supplier? What are the citeria? What is the frequency of assessment?
- Draw up questionnaire templates that are tailored to each commodity.
- Define the assessors and contributors for each category of question (in-house or suppliers).
- Draw up a common supplier scorecard.
- Define a common method for analyzing performance and risk.
- Define the format of the performance review with the supplier.
- Define the format of the supplier progress plan and formalize the targets.
Naturally, the more familiar the company is with supplier assessment, the faster the implementation will move. Depending on your maturity with supplier assessments the implementation can take anywhere from a few weeks to several months.
In our experience we’ve identified some critical success factors: First, the most difficult task is to achieve agreement among all stakeholders on the common questionnaires and the supplier performance indicators; second, it is important for the project to have executive sponsorship to minimize internal wrangling and shorten the decision-making cycles.
To speed implementation tools such as Ivalua have pre-defined processes, templates, and supplier scorecards, drawn from best practice and from feedback with prior projects. In most instances, this means the standard version is easilyadapted to the specific needs of each company.
What information must be collected to achieve “useful” assessments?
In order to deliver a useful analysis of supplier performance, various kinds of information must be collected:
- Quantitative data on the supplier’s operational performance (non-compliance, service quality, adherence to deadlines, supply shortages, etc.)
Most of this data can be extracted from the ERP or existing company systems and requires little or no manual input.
- Qualitative and quantitative data to assess risk levels, in terms of the supplier, as a company, and the supplier’s products and services. Most of this data can be sourced from in-house contributors and external data providers (financial data, sustainable development, etc.)
- Data from internal stakeholders which may not show up in quantitative data, can nevertheless be important. Factors that may be critical in some sectors include supplier relationship quality, team competence, responsiveness in a crisis, security and confidentiality guarantees, and capacity to innovate.
All important incidents that influence these qualitative criteria must be noted in the assessment system and taken up with the supplier during the performance review. The more accurate, irrefutable, and factual the information provided by the purchaser (audit reports, photos, etc.), the more likely the supplier will be to take this feedback seriously and do what is needed to rectify the issues.
Similarly, it is a good idea to provide feedback on excellent supplier practices that have been identified for one particular entity or country, and then to extend this to the entire customer/supplier relationship.
- Data on supplier selling prices. The supplier cost breakdown method is definitely the most effective in understanding supplier performance ; this method involves asking suppliers to provide a breakdown of their selling price according to various cost components (raw materials, labor, investment in machinery, R&D, etc.) and margins. This method allows supplier costs to be compared item by item and ranked by category. This makes it easier to focus on mutual cost-drivers and clearly delineate where the supplier’s direct value is. When the discussion naturally focuses on which levers can be used to achieve target performance, and how the supplier’s customer can actively contribute to these levers; rather than on negotiating final price only while everyone is under pressure to bring down purchase prices; then sustainable savings are achievable (and in many case larger than cost reductions from simply pressuring the supplier.)
A productivity index is then created as a barometer of supplier performance, regarding their direct and indirect costs.
Armed with this deep understanding of your suppliers in the market, purchasers can help their suppliers make productivity gains and become more competitive, while still helping to drive down costs.
Advantages of a formal, structured supplier performance assessment process
The first advantage of this type of process is that it exists and that suppliers are aware of it: feedback from companies implementing this procedure suggests that the simple fact of having a structured, systematic assessment that is shared with the supplier, as well as a regular performance reviews will increase supplier awareness and improve their performance.
The implementation of a shared assessment procedure within the company has numerous other advantages:
- A systematic procedure is set up to analyze key supplier performance
- Supplier performance can be compared across many countries or divisions
- Assessments from different entities can be consolidated to achieve an overall grade for each supplier
- Collection, analysis, and reporting times are considerably shortened
- The company saves time during data collection and can therefore spend more time analyzing and monitoring action plans.
A win-win supplier relationship that is fluid and long-lasting
The purpose of this business process is to empower the purchaser so that they are less of a price negotiator and more of a partner manager, with the goal being to help the supplier reduce costs, improve operational performance, and control risk.
One of the keys to a successful process is to share the qualitative and quantitative gains between the supplier and the customer. It should be seen as a win-win approach by both parties to ensure its longevity.
This process is typically reserved for strategic suppliers, who generally account for less than 5% of the total active suppliers. This will maximize the return on the time the assessment and purchasing team invests in this process. This should be an well developed, and clearly articulated process that focusses on a limited number of strategic suppliers with maximum leverage, rather than a showy assessment that is attempted for the majority of suppliers.
Over the last 15 years, these principles have largely been adopted in the automotive sector, with some major corporations funding organizational consultants to help their suppliers improve performance and reduce costs. The procedure is increasingly expanding into other industrial sectors, such as aeronautics, electronics, and heavy industry, and it is starting to take hold in services companies such as banking, insurance, IT, etc.