Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results

by Sherry Gordon

Overview

Understanding supplier performance is vital to ensuring a well-functioning supply network. This how-to book will help you develop and implement an evaluation process to help you reduce costs, lower risk, and improve both the performance of your company and your suppliers. This practical text includes examples of best practices that companies are using to evaluate suppliers and illustrates how to get beyond collecting data for the sake of data to achieving real results. It shows how to get at the meaning behind supplier metrics, and choose measurements that are meaningful both in the context of your company's goals and also for the supplier. Supplier Evaluation and Performance Excellence helps you get at the root causes of supplier problems that even suppliers may be unaware of and enable them to make high-impact improvements.Many firms do not know where to begin in the supplier evaluation process, what ways would work best, or even what kind of results they want to get. They know that they should be measuring supplier performance, but may not understand why or what they would gain from it. This book is geared toward managers at two types of companies: those who know that they should be measuring supplier performance but don't know where to start, and companies who want ideas about how to improve or revitalize a current program.

Product Details

ISBN-13:	9781932159806
Publisher:	Ross, J. Publishing, Incorporated
Publication date:	04/01/2008
Edition description:	New Edition
Pages:	256
Product dimensions:	6.00(w) x 9.10(h) x 0.70(d)

About the Author

Sherry Gordon is President of Value Chain Group, a supply management and performance excellence consultancy. She is a pioneer in enterprise measurement and process improvement techniques. After the acquisition of her previous company, Valuedge, she became Vice President, Supplier Performance at Emptoris, a leading provider of enterprise supply management software solutions. Valuedge's supplier assessment software became part of Emptoris' software suite. Before founding Valuedge, she ran the New England Suppliers Institute (NESI), a non-profit organization focused on improving customer-supplier business relationships and on using lean enterprise practices to improve supplier performance. Sherry has worked for manufacturing and distribution companies as well as management consulting firms. She is a frequent speaker on enterprise performance improvement and supply chain topics. Mrs. Gordon has a B.A. from University of Michigan, an M.A. from Columbia University, and an MBA from Simmons Graduate School of Management.

Read an Excerpt

CHAPTER 1

INTRODUCTION

SUPPLY MANAGEMENT TODAY

The field of supply management has been undergoing a transformation from a tactical, transaction-oriented function to a strategic capability at many companies. Senior executives are discovering that a good, integrated supply management capability is not only a necessity but also a competitive advantage. Management is realizing the potential for procurement to add cash to the bottom line instead of viewing procurement as just a cost center. And where supply management often worked as an arm of materials management or finance, it now operates at executive levels. A function that reported low in the organization now has assumed titles like CPO (Chief Procurement Officer) and Corporate Vice President of Supplier Quality and Performance Management, positions that didn't exist until several years ago and now report directly to the CEO in many large organizations. No longer the purview of administrators and clerks, procurement and supply management have come of age. Now master's-level degree programs in supply management and procurement at universities attract bright and capable candidates who can look forward to a profession with a career track and a future in the executive ranks.

What are the forces transforming supply management?

• Increased dependence on outsourcing goods and services

• Globalization

• Supply management technology

• Time and market responsiveness

• Performance improvement methodologies

Companies have been steadily increasing the percent of goods that they outsource over the past 10 years. Increased outsourcing has in turn increased the level of dependence on suppliers for the elements of cost, quality, time/responsiveness, and technology.

Information technology has become a key enabler in supply management. Information technology has facilitated order-of-magnitude improvements and scaling of supply management processes such as sourcing, negotiation, spend analysis, contract management, and supplier performance management. These and other software tools are radically changing the way business is conducted between customers and suppliers. Initially, and in some cases even today, sourcing software was perceived negatively, as a way for customers to get the lowest price in a reverse auction at the expense of suppliers and as a detriment to the customer-supplier relationship. Technology cannot overcome longstanding poor purchasing practices such as choosing suppliers on price alone; it will only speed up that process. When well deployed and within a set of good business processes and practices, procurement software is an indispensable supply management enabler. It has been a driver in the transformation of supply management. Typically, business processes take longer to catch up with technology. However, technology tools and their rapid adoption are revolutionizing the supply management profession and have become a competitive necessity.

VALUE OF EFFECTIVE SPM

The immediate return on investment in a sourcing event is simple and visible: The price was $X; after the event the price is $Y, so what you saved ($S) = $X – $Y. Most procurement people are measured by price savings for products and services. And these savings will directly impact the bottom line. As the cost of goods sold goes down, profit margins go up. Sourcing and negotiations technologies have improved and scaled the process and are now widely accepted and adopted. However, focusing only on price savings in sourcing means potentially missing some big opportunities. A huge opportunity exists with your suppliers who are on board: capitalizing on the relationship. What is the value of a high-performing supply base? Sourcing focuses on cost reduction of goods and services. Optimizing the customer-supplier relationship and achieving performance excellence also reduces cost and risk, two of the biggest concerns of companies today. The better you know your suppliers, good points and bad points, the less likelihood of unpleasant surprises. But it is distinctly different from the sourcing process in that it is more than a cost reduction function — it can also create value for both the customer's enterprise and the supplier. In fact, excellence in supplier performance management can help enhance the sourcing process so that you choose those suppliers more likely to add value to the company.

Do any of these questions pertain to your company?

• Have you negotiated with suppliers and squeezed out most of the cost?

• When prices of certain commodities such as oil, steel, and transportation rise, do they impact your suppliers' cost structure to the point where their margins cannot tolerate any further price reductions? Could demanding lower prices weaken or put some of your suppliers out of business?

• How do you derive value from the relationship beyond lower prices?

• Do you know whether your suppliers are fully compliant with contract terms and that you are actually getting what you negotiated?

• Do you know how well your supply base is performing?

• Do you know who all your suppliers are and which are most critical to your company?

• Does your company have quality problems, customer complaints, and warranty returns? Do you know what portion of them is caused by suppliers?

• Are you aware of what types of risks lie in your supply base? Do you know where they are and how to begin to uncover them? Mitigate them?

When suppliers are viewed as an extension of the customer's enterprise, ideally their importance to the business can be viewed less as cost centers and more as partners with the potential to add value to the business. Some of the ways that suppliers can add value include the following:

• Using suppliers as a source of new technology in areas that complement customer competencies but where customers do not wish to invest.

• Working collaboratively with suppliers to develop new technology.

• Gathering best practices and great ideas from suppliers and adopting them within one's own organization.

• Capitalizing on the synergies of collaborative problem solving and idea sharing.

• Working jointly on improvement projects that benefit both parties. Initially, the project may benefit the supplier, and ultimately, improved performance benefits the customer.

• Being able to get innovative new products to market due to supplier contributions in new product development.

• Developing faster cycle times in the order to delivery process due to the agility of one's supply base can give companies a competitive advantage in speed of order fulfillment.

• Choosing a diverse supply base. Doing business with diverse suppliers can help strengthen a company's ability to conduct business across all cultures and geographies in its area and expand its market potential.

However, when relationships are purely arm's-length, adversarial or price-driven and performance is unpredictable, suppliers are in the position to indeed drive more cost than value. And even though unpredictable performance is not acceptable, a customer may be unable to do anything about the situation, at least immediately. Or, more likely, the customer may be unaware of the dimensions and root causes of the problems with supplier performance. Some of these root causes may even originate with the customer, whose own business practices exacerbate performance problems and reward the wrong supplier behaviors and business practices.

WHAT IS SUPPLIER PERFORMANCE MANAGEMENT?

We define supplier performance management as:

The process of evaluating, measuring, and monitoring supplier performance and suppliers' business processes and practices for the purposes of reducing costs, mitigating risk, and driving continuous improvement.

Managing supplier performance helps companies focus resources on value-added activities instead of reacting to supplier-performance-induced problems (i.e., defects, expediting, excess inventory, late deliveries to customers, work stoppages, reduction of market competitiveness, etc.). By better understanding supplier performance via increasing performance visibility, companies can better monitor and manage key relationships by taking steps to prevent or remedy problems. And, on the positive side, they can identify and leverage suppliers capable of innovation and continuous improvement who will add value to the relationship.

Supplier performance excellence gives companies competitive advantage. To the extent that suppliers perform well, companies enjoy a competitive boost, since this performance is reflected in lower costs, improved responsiveness to customers, better-quality goods and services, and technological advantage. Thus, there has been a recent increase in interest in measuring supplier performance.

Suppliers, however, do not view their companies as needing to be "managed". In fact, many may have business practices and processes that are better and more robust than those of their customers and may have a thing or two to teach their customers about performance excellence. Thus, supplier performance management (SPM) might be more appropriately viewed as business relationship management, which we define as:

In what ways, and how effectively, the firm ensures a two-way flow of understanding between the company and its suppliers, specifically as it pertains to communicating and negotiating requirements and performance expectations with the supply chain.

In order to get from the concept of managing supplier performance to managing business relationships for mutual benefit, a lot of insight is needed into not only supplier performance, typically defined as quantifiable performance metrics, but also the means to achieve performance excellence through best business processes and practices as well as through enabling behaviors and culture. Business relationship management entails involving the appropriate functions and using effective methods to communicate with suppliers. In the case of key suppliers, the communications will likely include exchanges of information about company history, capabilities, financial and market performance, and future business plans. These communications will involve multiple levels of staff starting from senior management on down from both sides.

Currently there are several terms being applied to this area. One is supplier relationship management (SRM), which includes elements of performance tracking and management, relationship development and management, and even supplier performance improvement activities through supplier development. Others include SPM, which implies a focus on performance only. In this book, we address what business practices, processes, tools, techniques, structures, approaches, culture, behaviors, and even technology can enable supplier performance excellence as well as excellence in business relationships.

Some companies approach supplier performance as an area where measurement means only those metrics that can be objectively quantified. Any metrics that do not come from an objective source, usually defined as the company's internal enterprise management system or financial systems, are considered qualitative and therefore unacceptable. In the realm of relationships, not all is objectively quantifiable. In fact, the saying is that perception is typically reality, whether or not there are any measurements to back up the perception. For that reason, SPM cannot give supply managers a complete picture without including qualitative metrics. Relationships are messy, subjective, and open to perception. And both perceived objective and nonobjective measurements can ultimately be disputed. Therefore, both objective measurements and perceptual measurements are needed to assess suppliers because, ultimately, even quantitative measurements in an enterprise are open to subjective actions. While the saying is that you manage what you measure or you get what you measure, the corollary is that "whatever you can measure most easily and accurately is what you end up measuring."

As an example of how even one of the most hard-core quantitative metrics is still open to subjectivity, let's take a look at on-time delivery. When a supplier's product arrives at the customer, it can be considered to be on time because a date is entered into a system at the time it is received. However, on-time delivery can still be open to dispute. Perhaps the item sat on the customer's dock for three days before it was officially received into the system. Or, it was several days early, and the customer changed its policy and rejected early shipments. Or part of the shipment was rejected by the customer for a quality problem that the customer caused by not giving the supplier the most up-to-date work instructions. Or the customer gave the supplier the order in significantly less than the supplier's agreed-upon lead time. Or the customer bricked in the dock, the supplier's driver could not find the dock, which was now moved to a different building, and the driver returned with the item undelivered (a true incident that happened to a small electromechanical supplier). Or the customer even closed off the dock at the end of a quarter and turned away deliveries in order to reduce its inventory position (an incident that occurred in a semiconductor industry business downturn). The possibilities for the subjectivity of quantitative supplier performance measures under the guise of being strictly quantitative are endless. And the possibilities for disagreement on the parameters for these metrics within the customer's organization itself are also endless. How many organizations have arguments about whether on time means plus-or-minus three days? Or whether on-time delivery to a customer is measured by the date the shipment left the dock plus a few days and not what time it actually arrives at the customer?

Therefore, the purpose of measuring supplier performance is not to come up with foolproof, fail-safe, neat, and perfectly quantifiable measurements and metrics and to judge each supplier thumbs up or thumbs down. It is an ongoing and iterative process of communicating expectations about performance and the relationship and continuously working to improve both performance and the relationship in that process. This ongoing iterative process is taking place both within the customer's organization among the various stakeholders and among customers and their suppliers. The perfect scorecard, much like the concept of the perfect order, is a moving target and a nirvana at which a customer is never going to arrive. But, nonetheless, it is a discussion and negotiation point that helps customers and suppliers come to terms with and improve (or dissolve or rethink) their relationships.

CURRENT STATE OF SUPPLIER PERFORMANCE MANAGEMENT

With the global economy and increase in global sourcing, interest in improving ways of managing supplier performance has been increasing. When I speak to groups of supply managers and supplier quality managers, I typically ask the group how many of them are measuring supplier performance. Usually about 50 to 75 percent of the room will raise their hands. But when I ask how many are satisfied with their systems or approaches for doing this, very few — and often no — people will raise their hands. Managing supplier performance is full of challenges and difficulties for a number of reasons. The biggest challenge is that just coming up with metrics, even what appear to be the "right" metrics, does not typically produce any results. The questions that I am asked most often are

• What metrics should I use?

• What metrics do others (in my industry) use?

• My boss says that I need to get a scorecard in place in the next six months. Where do I begin?

Standalone metrics or metrics borrowed from other companies have a low chance of success because

• They are not part of an overall supply management program.

• They do not relate to any overall company or procurement goals and objectives.

• They are often data collection exercises with no teeth enforcing compliance and no actions resulting from them.

The purpose of this book is to provide a guide to developing a successful SPM and improvement process and to demystify the process and make it accessible to most types of companies and organizations.

For manufacturing companies, the traditional approach to measuring performance has been through scorecards derived from enterprise resource planning (ERP) system data. Based upon an AMR Research survey of 100 manufacturing companies in 2006, figure 1.1 shows the most common metrics that the surveyed manufacturing companies track.

Several things are striking about these metrics: how few of them are tracked in common by more than 60 percent of the respondents, how internally focused many of the metrics are, and how few of the metrics provide data useful for driving continuous improvement. One is left to wonder what these companies actually do with the data. In the case of supplier-oriented metrics (supplier raw material quality and on-time delivery), one may question whether the information is shared with suppliers in any meaningful way or at all.

(Continues…)

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Excerpted from "Supplier Evaluation and Performance Excellence"
by .
Copyright © 2008 Sherry R. Gordon.
Excerpted by permission of J. Ross Publishing, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Foreword,
Preface,
Acknowledgments,
About the Author,
Web Added Value,
Chapter 1 Introduction,
Chapter 2 Getting Started,
Chapter 3 Choosing the Team and Developing the Plan,
Chapter 4 Developing an Evaluation Strategy,
Chapter 5 Determining What to Measure,
Chapter 6 Evaluation Approaches,
Chapter 7 Using Technology for Supplier Evaluation,
Chapter 8 Designing the Process,
Chapter 9 Measuring and Managing Supplier Performance,
Chapter 10 Recognition and Rewards,
Chapter 11 Supplier Development,