Note: This post was written in 2011. We’ve written more content with new research since then, including the Supply Chain Management Buyer Report – 2016.
I recently had the opportunity to chat with Sherry Gordon, President at Value Chain Group. Sherry’s one of the leading experts in supplier performance management, and a former supply chain software executive. In our conversation, I asked her what it would take to make scorecarding a more beneficial practice. She had some great advice that I wanted to share on performance management.
These best practices can help guide effective scorecard and performance management initiatives that benefit sourcing experts, purchasers and other supply chain leaders that use supplier relationship and performance management software.
1. Build Scorecards Around Business Goals
Quality is more important than quantity when it comes to performance metrics and key performance indicators (KPIs). Further, the best scorecards align KPIs with business goals.
Before developing scorecards, company executives need to understand the business case—how better supplier performance can support overall business goals and strategies by the following:
- Uncovering hidden cost drivers and risks
- Finding business and performance improvement opportunities
- Reducing risks and supplier cost
- Discovering additional value from suppliers
Establishing supplier performance expectations is the first step to any successful performance management program.
2. Establish Processes to Evaluate Performance
Once the right metrics have been built into the scorecard, managers need to create specific business processes to communicate performance with suppliers. Managers will need to establish how suppliers will be recognized and rewarded for good performance, how new business will be awarded to existing suppliers as well as when to disengage with an underperforming supplier.
Sherry mentioned that one complication for many service companies is that they do not posses the systems that can collect and provide performance metrics. In these instances, internal stakeholder surveys can be used to measure performance data.
3. Communicate Information to Suppliers and Take Action
Scorecards are built, KPIs are set and performances are measured. But a lack of action on these evaluations leads to no change in supplier performance. With metrics in place and performance evaluations established, it is then critical that scorecard results are actually shared with each supplier – and that improvement actions are taken. From initial service level agreements (SLAs) to contract re-negotiations, performance managers should constantly keep communication lines with suppliers open. This dialogue between customers and suppliers can strengthen the relationship and provide insights for both groups about areas that can be improved.
Luckily, software solutions are making the performance managers’ job easier. Both standalone/niche supplier performance management (SPM) applications and SPM applications within enterprise suites provide scorecarding capabilities and performance data that is easy to access, share and analyze.
I asked Charles Dominick, President of Next Level Purchasing, how improved technology will assist the communication process. “The direction that supplier relationship applications are going is encouraging because it makes the whole process easier to implement and less intimidating,” said Dominick.
4. Share Information Internally
Beyond communicating with suppliers on their performance, this information needs to be visible internally. Stakeholders outside of procurement and supply management who are impacted by supplier performance all need access, as supplier performance affects the entire business. A product manager at a tablet computer company could use performance data on its touchscreen suppliers to determine the next product iteration. Additionally, the manager could evaluate which suppliers may be candidates for collaborative product development. These are examples of how advanced supply chains can wholesale improve the business, rather than just reduce costs and logistical efficiency.
To mitigate risk, it is critical that supplier scorecard information is shared with stakeholders throughout the organization whose work is impacted by supplier performance. For example, performance data can be shared with financial managers to help paint a clearer picture of how susceptible the supply base is to unforeseen supplier bankruptcies. Additionally, supplier performance is a leading indicator for supply risk, and poor performance may indicate troubles ahead. Supplier performance data can provide risk assessment managers with early warning signs and provide time to take action.
Improving the Supplier Base with Performance Management
By aligning scorecard metrics and business goals, improving evaluation processes and communicating performance with both suppliers and stakeholders, performance managers can greatly improve their operations’ efficiency. Holistically evaluating suppliers and working to improve performance empowers managers to fill the gaps in their supply base and establish a stronger foundation to build upon.
Managers can showcase high performance at a supplier performance, and show how these role models achieved their success. In addition, when assessing future suppliers, managers can look for new suppliers that excel where their current suppliers have fallen short.
Has your organization implemented a successful supplier scorecarding program? What advice would you have for others to increase the value of these programs? Reach out and let me know at firstname.lastname@example.org.