4 Key Supplier Performance Management Best Practices
In a globalized and outsourced environment, it is crucial for companies to manage the performance of suppliers, particularly in the executive suite. Companies typically spend half of every dollar on goods and services purchased from external suppliers. They tend to focus more on their core competencies and outsource no-core operations. This increases the dependency on […]READ MORE >>
In a globalized and outsourced environment, it is crucial for companies to manage the performance of suppliers, particularly in the executive suite. Companies typically spend half of every dollar on goods and services purchased from external suppliers. They tend to focus more on their core competencies and outsource no-core operations. This increases the dependency on suppliers. In certain industries, the purchases from external suppliers range from 70% to 80%. This increased dependency on suppliers not only increases an organization’s supply risk but also exposes them to scenarios such as safety issues or lack of regulatory compliance. To continually improve the operational performance, you must not only select appropriate suppliers but also manage their performance over time.
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Supplier Performance Management Best Practices
Supplier performance management best practices #1: Build supplier scorecards
Supplier performance management is crucial for companies to align KPIs with business goals. If you want to ensure quality products/ services from suppliers, you must develop a formal agreement that can clearly help suppliers understand your needs. A written agreement enforces accountability and helps companies to reduce risks. Building a supplier scorecard improves the ability to track, measure and analyze supplier performance while identifying hidden cost drivers and risks.
Supplier performance management best practices #2: Improve supplier evaluation process
Factors such as sales, profitability, and liquidity are typical indicators of financial strength. Assess the financial strength of key suppliers and identify negative trends in advance of any major problem. It is not necessary to rely solely on financial reports as operational performance metrics can reveal many potential financial issues for companies. Obtain reports from suppliers or conduct internal supplier evaluation to measure suppliers’ performance. Business processes and practices can also help you understand how a supplier runs its business.
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Supplier performance management best practices #3: Identify gaps, prioritize and communicate
Scorecards, financial metrics, reports and alerts can help you analyze the gap between the target and the actual performance for suppliers. Use this information to review the impact of performance gaps on their business in order to prioritize and communicate the priorities of the gaps. Ask for a remediation plan to focus on objectives that need improvement. The use of collaborative supplier portals can help improve coordination between both parties in such a situation.
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Supplier performance management best practices #4: Reward suppliers
Supplier performance management should focus more on raising standards rather than simply maintaining them. For that, your supplier agreements should include provisions to reward great performance apart from penalizing shortcomings. Most companies weight the balance in favor of penalties, that merely support the maintenance of performance levels and miss out on incentivizing supplier performance improvement.
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