What is supplier performance management and its importance?
Monitoring and evaluating the performance of suppliers in terms of quality, punctuality, cost, and other important indicators is known as supplier performance management. It tries to improve product or service delivery, optimize supplier relationships, and reduce potential hazards. Through continuous monitoring and collaboration, businesses can ensure reliable and efficient supply chains, fostering better overall outcomes. Supplier performance management is crucial for maintaining consistent product quality, on-time deliveries, and cost control. It reduces risks, strengthens relationships, and enhances supply chain efficiency, contributing to business success.
Every company invests a considerable amount of time and effort in the supplier selection process, but in the long run, how do they evaluate if the supplier’s performance is meeting the desired standards? And how important is the measurement of supplier performance for a business? Almost all companies are already deploying some form of supplier performance measurement, be it in the form of key performance indicators (KPIs), or more sophisticated data gathering, and on-site assessment programs. Also, when businesses evaluate the performance of their supplier, the shortcomings in the adherence to standards can be easily detected; thus, promoting improvement.
Here are seven steps to critically evaluate your suppliers, which can result in meaningful outcomes and better return on investment (Supplier management process)
Align performance goals
Smart businesses must first have a clear-cut supplier strategy that relates to the overall organizational objectives and goals. In the long run, this will also help them to enhance their supply chain management. To achieve this, organizations can pursue continuous improvement programs and methodologies such as Six Sigma, lean enterprise, lean sigma, continuous improvement, operational excellence, and total quality management. Typically, companies trying to get to the next level of excellence need to have key suppliers aligned with their own organizational direction. Lack of synchronization in supplier activities and organizational goals can adversely impact cost, quality, and delivery.
Choose evaluation approach
Companies must evaluate some of these critical aspects of supplier performance, including financial health, operational execution, metrics business processes, and practices enabling behaviors or cultural factors risk factors. These factors can help review and understand the supplier’s readiness to comply with the organizational requirements and also efficiently meet the supply chain management requisites and guidelines. There is a need to establish key performance indicators for supply chain management which will help in evaluating the performance of every supplier or entity involvede in the supply chain.
Develop information collection method
The methods of information collection regarding the supplier performance include paper questionnaires, web-based questionnaires, extracts from current systems, site visits, and third-party standard certification. However, all these methods have their own challenges and complications. Companies must choose the method that best suits their purpose and gives them the optimal results.
Design a robust assessment system
No matter which components of a supplier performance assessment system an organization develops, a significant challenge lies in creating a system that is based on metrics both relevant to the business and based on generally accepted best practices. Designing and developing a robust supplier performance assessment system requires in-depth business knowledge, familiarity with high-performance systems, and expertise of measurement methodologies. Furthermore, it also requires expertise in adequately constructing the questions to elicit accurate responses and correctly measure performance.
Roll out the system
One of the most significant difficulties in assessment systems is the deployment. Primarily due to the vast number of challenges associated with each of the supplier assessment systems. Survey instrument development expertise, subject matter expertise, and knowledge of IT are needed to avoid the pitfalls in deploying all these approaches.
Provide actionable feedback
Customer companies need to have a real dialogue and discussion with their suppliers on performance and work on the critical issues of the performance. This requires a two-way flow of information. If the results of supplier performance measurement and supplier assessment are not actionable or expectations of actions are not communicated, those actions will not be put into practice.
Measuring supplier performance metrics is all about understanding, communicating, and then implementing the necessary corrective action for improving supplier performance. What companies need to do is to work with suppliers to develop action plans as a result of assessments. They should then track performance to these plans to close the loop and realize the full benefits of the supplier performance measurement process.