An effective process is needed to manage how suppliers are doing
Clients have recently asked me about vendor or supplier performance management more than any other
topic. These requests have come from industry, crown corporations and the Canadian public sector.
Here are ten tips based on my experience or good practice and pitfalls.
Performance: Remember it is about performance, not relationship. I am all in favour of strong relationships with suppliers, however everything must point to the delivery of value. Executive interaction, golf days and entertainment should all have clear objectives that deliver value to the organization.
Segmentation: We should have a clear segmentation for spend data. There are simple but powerful frameworks like the ArcBlue Supply Positioning Matrix or Kraljic Matrix that allow any organization to differentiate between key strategic areas of supply and commodities. Once they have been correctly positioned the suppliers that provide them can be categorized. While there are certain fundamentals that will remain constant for all suppliers our performance management frameworks and processes must then reflect the characteristics of the item or service being supplied.
Supplier versus vendor: We need to approach the market in an appropriate manner. The terms we use to describe goods or services set a tone for the interaction and can change our approach accordingly.
If a particular vendor does not work out, we can walk to the next one and buy the same item. If the area of supply is important to your organization the providers of the goods or service should be termed suppliers and treated as such.
Measurement: Create your KPIs from the needs of your organization and the impact that supplier non-performance has. Too often organizations measure what is easy to collect rather than what delivers the appropriate outcome. I also occasionally come across the opposite: an organization creates a measure that costs more to administer than the benefit it generates. A memorable case was an organization that asked me to help them find a way to enforce collection of information on an outsourced service. When I asked how they made the measurements when they ran the service, the reply was “we never managed to collect any of this data. Our engineers tell us it is not possible; however they (the supplier) have to.”
Action: Have a feedback process that’s effective in changing behaviour and also is administratively efficient. We need three things to get performance improvement:
» Data to indicate whether performance is satisfactory or not;
» A process to provide corrective input; and
» Sufficient resources to execute the process.
The process will not administer itself.
Trust: For suppliers and stakeholders to change their behaviour genuinely, based on the supplier performance measures, trust is required. Suppliers must be able to see the link between what they have done or not done and the scores. Stakeholders need to buy into the process and why these measures are important to them. Work must be done in taking both groups with you on the journey.
A few years ago I worked with an organization with a supplier wall of shame. Each week they printed posters showing the 20 worst-performing suppliers and put them on display to the public. One Friday, there were the 20 largest suppliers, each shamed on a poster. Clearly it was a system glitch. Following a review it became apparent that the client had duplicated every order. The top and best suppliers had not only realized the problem, they had advised the client of the error and not shipped unwanted product for which they had valid POs. A supplier performance team—completely disconnected from business operations—had then publically castigated them. This one event devalued an entire initiative and the supplier performance team lost the trust of everyone, including the CEO who had to apologize on national television.
In closing, whether you have a highly complex infrastructure or you are a lone buyer with a spreadsheet, creating a smart and effective process to apply a differentiated supplier performance management system is a necessary and fundamental responsibility for supply chain professionals.