Supplier performance measures are a tool to determine whether your supplier is doing their work as expected. What is expected of the supplier should be as described in the supply contract or statement of work, specification, service level agreement or KPIs – or a mixture of some of these.
There are many tools to assist in measurement of supplier performance. Some are paper-based checklists, many are digitally enabled. Electronic performance measurement helps to set consistent measures for suppliers in similar categories or projects. This article will explore the benefits and disadvantages of standardized measures across different suppliers.
Before exploring this, we will provide an overview of supplier performance measures and their purpose.
Measurements for suppliers of goods and services
Supplier performance measures may have different considerations depending on whether we are buying goods or services. However, they typically address similar areas, which are important for the performance of the overall organization and its stakeholders. The table below includes some examples.
Table 1: Examples of measures of supplier performance
|Timeliness||On time delivery of goods or other information||Work completed or response time at or within a specified time period|
|Completeness||Delivery in full||Service completed for the expected duration or with the expected outcome|
|Quality||Low defect rate or unplanned failure||Low re-work, errors or complaints|
|Productivity||Yield, output, process efficiency||Utilization, process efficiency, learning curve|
|Regulatory Compliance||Working within legal standards, health and safety protocols or organizational guidelines|
|Social Responsibility||Sustainability, diversity or community initiatives|
|Innovation||Continuous improvement resulting in improved outcomes|
How should supplier performance measures be created?
Each measurement area is influenced by the business needs. These needs reflect the requirements of the stakeholder / end user, or address specific project requirements. In addition, the measurement area should also address the needs of the organization (for example, there may be an organization-wide requirement to improve working capital or corporate and social responsibility performance.
It is important that supplier performance measures are SMART:
In addition, supplier performance measures should:
- be few in number (perhaps 4 or 5 critical-to-quality areas)
- not require excessive resource to manage
- motivate the supplier to meet and exceed targets
Table 2: Examples of how supplier performance measures are created
|Business Need||Example Supplier Performance Measure||Example SMART Metric|
|Improved Quality||Product reliability improvement|
|Better Service||Customer experience improvement|
|Reduced Cost||Specification change resulting in lower operating cost|
How are supplier performance measures monitored on a daily basis?
It could be the responsibility of the supplier, the buying organization’s Procurement Department or their business stakeholders to monitor how suppliers are performing against these goals. Often, it is a joint effort because there may be commercial consequences of the supplier performing well or poorly. For example:
- Good supplier performance may trigger a bonus, or increased workload or a recognition incentive.
- Poor supplier performance may result in application of contractual remedies such as liquidated damages or other sanctions such as the supplier not being considered for additional projects for a period of time.
Often, periodic reviews of performance take place quarterly or annually, in addition to more routine corrective action planning. This helps to track trends and decide if targets should be adjusted or stretched based on previous performance or changing business needs.
Should supplier performance measurement be standardized?
Having consistent measures across similar suppliers / categories or across a project has advantages and disadvantages:
The advantages of standardized supplier performance measures:
- It enables performance standard measures, but supplier-specific targets
- It helps to compare suppliers against each other, creates aspirations and cross-fertilization of good practice
- It helps to compare performance against supplier price, cost and external benchmarks
- Suppliers may perceive this consistency as equitable
- Ease of reporting within organizational systems or tools
The disadvantages of standardized supplier performance measures:
- You may wish any incentives or sanctions to be targeted to what motivates that particular supplier
– For example, where you have flexibility to adjust payment terms to reward a small or medium-sized business or provide an award to an organization that relies on public relations successes to win new work
- Suppliers may be more committed to targets if they can contribute to the design of the performance measures or incentive scheme
– For example, you might wish to become a customer of choice for some important vendors and want them to feel empowered to strive for goals that help them too
- The measures and targets may be specific to your supplier development goals for specific vendors, to reflect their specific capabilities
– For example, you may wish a supplier to grow their capability or capacity to match your own organization’s requirements if they have the resources and aspiration to support you
Where the organization is utilizing digital tools to help gain a universal picture of supplier performance across a wide range of categories, projects or geographies, it can certainly be helpful to provide decision-makers with the facts they need to inform category, supplier and business strategies. However, having some flexibility within that regime is helpful to demonstrate to suppliers, customers and stakeholders that measurement is driven by their interests primarily rather than reporting for its own sake.