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SUPPLY CHAIN MANAGEMENT

Seven Steps To
Measure Supplier
Performance
by Sherry Gordon

very organization knows it should be when asked whether they are satisfied with their

E assessing supplier performance. Most are


deploying some sort of supplier perfor-
mance measurement, whether it is a couple of rudi-
supplier assessment capabilities and results.
With increased reliance on suppliers for one’s
own ability to meet customer requirements and
mentary key performance indicators (KPIs) or expectations, and even, in some cases, to comply
more sophisticated data gathering and on-site with legal and regulatory requirements, organiza-
assessment programs. But few purchasing and tions are under increasing pressure to avoid sup-
quality professionals are likely to answer “yes” plier problems and to attract and retain the high
performers, particularly among their strategic sup-
pliers or long-term partners.
How can an organization turn thought into action
In 50 Words and effectively use internal resources to improve the
Or Less performance of these key suppliers and, at the same
time, produce results and a return on investment?
• Understanding supplier performance is a given in The following seven steps comprise a process for
developing and deploying supplier assessment:
today’s business environment. 1. Align supplier performance goals with organi-
zational goals and objectives.
• Paying attention to performance both prevents 2. Determine an evaluation approach.
problems and promotes improvement. 3. Develop a method to collect information
about suppliers.
• Seven steps to focusing on strategic and long-term 4. Design and develop a robust assessment system.
5. Deploy a supplier performance assessment
suppliers can produce meaningful results and system.
return on investment. 6. Give feedback to suppliers on their performance.
7. Produce results from measuring supplier per-
formance.

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1. Align Performance Goals 2. Choose Evaluation Approach
Determining what performance your organiza- The aspects of supplier performance that compa-
tion wants from its supply chain cannot be done in nies may wish to evaluate include:
a vacuum. You must first have in place a supplier • Financial health.
strategy that relates to overall organizational goals • Operational performance metrics.
and objectives. • Business processes and practices.
Many organizations are pursuing continuous • Enabling behaviors or cultural factors.
improvement programs and methodologies such • Risk factors.
as Six Sigma, lean enterprise, lean sigma, continu- Financial health. Financial health is most impor-
ous improvement, operational excellence and total tant for key suppliers or long-term partners. Typical
quality management. Typically, organizations try- indicators of financial strength include factors such
ing to get to the next level of excellence need to as sales, profitability and liquidity. Financial data
have key suppliers aligned with their own organi- can be obtained via Dun & Bradstreet or other cred-
zational direction. it reports, banks and trade references.
If a company is pursuing lean and just-in-time Data are, of course, more accessible for publicly
deliveries, key suppliers need to be on a lean jour- traded companies than for privately held ones. So,
ney themselves, because the lack of synchronization sometimes the best way to get financial information
can adversely impact cost, quality and delivery. If a is to ask suppliers directly.
company is committed to Six Sigma and has devel- The challenge lies in being able to spot negative
oped a fact based culture, then the company will trends in advance of a major problem. It is not nec-
require a similar approach to performance improve- essary to rely solely on financial reporting tools,
ment from its important suppliers. because an understanding of a supplier’s opera-
Alternatively, if a company has not articulated tional performance metrics and business processes
an enterprise improvement strategy, the drive to and practices can reveal potential financial issues.
allocate the resources to measure and improve sup- Operational performance metrics. Operational
plier performance will be less strong. It is difficult performance metrics can cover many areas, such as
to ask suppliers to “do what I say and not what I on-time delivery, quality, lead times, responsive-
do.” Additionally, commitment of resources from ness (rescheduling, order status), inventory turns
upper management to such a program may be dif- and customer service call response time.
ficult if continuous improvement is not valued There are several ways to obtain these metrics:
within the culture. extract them from your own enterprise system,

Why Measure Supplier


Performance?
An enterprise should measure supplier performance because:
• You can’t manage what you don’t measure.
• If you measure suppliers, they will improve.
• You can uncover and remove hidden waste and cost drivers in the supply chain.
• You can facilitate supplier performance improvement.
• You can increase competitiveness by shrinking order cycle times and inventory levels.
• You can make informed business decisions that impact the enterprise.

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SUPPLY CHAIN MANAGEMENT

get reports from the supplier or conduct internal Six Sigma, the Malcolm Baldrige National Quality
supplier satisfaction surveys of the end user at the Award criteria and lean are enabling behaviors, such
customer. as customer focus, agility, continuous improvement
Business processes and practices. Business and teamwork.
processes and practices can be reviewed to see how If, for example, a supplier does not have a continu-
a supplier runs its business and provides a product ous improvement culture, it is unlikely that supplier
or service at the best value, on time and exactly as will be in sync with the demands of a customer that
required for its customers. This information is typi- values continuous improvement methodologies and
cally best practice based and qualitative, focused expects the same drive to improve in its supply base.
on processes and inherently independent of any Risk factors. An important aspect of evaluating
vertical business sector bias. suppliers is to understand and then mitigate risk.
Business processes and practices information can You can uncover risk factors in financial health,
be obtained through questionnaires or surveys or operational performance environment, business
during site visits to suppliers. This information is processes and practices, and enabling behaviors or
critical for creating and maintaining mutually ben- cultural factors. Risk cannot be determined solely
eficial long-term relationships. It is also some of the by using past performance to predict the future.
most resource intense information to obtain, both Financial risk factors may be the most obvious
for the customer and the supplier. area many companies focus on. The operational
Organizations should consider applying com- performance environment includes risk from deal-
mercially available supplier assessment software ing with foreign suppliers, such as trade relations,
tools for this purpose to scale the process. shipping and currency exchange.
Evaluating business processes and practices can The business processes and practices a supplier
help get at the root causes of supplier problems. Tra- has in place are also critical. For example, knowing
ditional quantitative metrics can highlight a problem what processes a supplier uses (if any) to, in turn,
or negative trend but cannot get at the root cause. manage its suppliers helps identify risk in lower
A supplier, for example, may make a product tiers of the supply base not visible to the customer
that meets quality standards but do this by inspect- organization.
ing quality into the product rather than through Another risk factor is the leadership in place at a
defect prevention methods. This can result in even- supplier. A leadership committed to investing in
tual degradation of quality, with the product hav- the workforce and enabling employee empower-
ing a poorer cost structure to support inspection. ment and input has a greater chance of success and
In the case of a service business, a company may overcoming business adversity as it arises. A cul-
need to add resources to maintain adequate service ture lacking teamwork and continuous improve-
levels because of the inefficiency of its internal ment indicates higher risk to the customer, as the
processes. chances of a supplier being responsive to systemic
Enabling behaviors or cultural factors. At the problems and getting to root causes of problems
heart of high performance business models such as and correcting them are slimmer.

FIGURE 1 Supplier Information Outputs

Internal feedback surveys

Performance Scorecards Overall performance


Supplier assessments metrics (KPIs)

Imported data

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3. Develop Information ered from too few people, and the validity may be
Collection Method questionable. Quality managers, site managers or
The challenge is the coverage problem—how to owners typically complete supplier surveys, and if
collect any of the above information for a large por- they don’t get others’ inputs, they simply tend to
tion of your supply base using current resources. paint a rosy picture of their own business.
Methods include paper questionnaires, web based Outputs of the various methods are shown in
questionnaires, extracts from current systems, site Figure 1 and can include:
visits and third-party standard certification. These • Reporting on survey results.
methods and their associated challenges are shown • Supplier performance metrics such as KPIs
in Table 1. derived from internal surveys or internal
Everyone thinks he or she can write a question- management systems.
naire, but most questionnaires, in fact, are poorly con- • Supplier assessment reporting, which can be
structed. They are typically vague, full of buzzwords, qualitative and quantitative.
ask for several pieces of information in one question • Ultimately and ideally, supplier performance
and are discouragingly too long. They are just plain scorecards containing a rollup or summary
difficult to fill out easily and quickly. In addition, the view of all results.
information gathered often is not actionable. Customers should create a holistic view of sup-
If the assessment system design is not optimal, plier performance, expose it to internal supplier
it will then be difficult to collect the information. relationship managers and give suppliers access to
Another drawback to questionnaire based supplier their performance indicators for increased collabo-
data gathering is that too few data points are gath- ration.

4. Design a Robust
Assessment System
TABLE 1 Supplier Information Collection Organizations need to choose an approach
to evaluating suppliers. Approaches may
Method Challenges include:
Paper questionnaires • Hard to construct sound information gath- • Accepting a third-party standard, such
ering instruments. as ISO 9001 and its sector specific
• Require knowledge of what to measure. derivatives or good manufacturing
• Difficult to deploy. practices.
• Suppliers procrastinate filling out. • Benchmarking performance against
Web based questionnaires • Require resources to develop. industry leaders.
(either for internal compa- • Compliance issues (internal and external). • Measuring performance against best
ny surveys of suppliers or practices, such as the Malcolm Baldrige
for suppliers to complete) National Quality Award criteria.
Extract from current • Data integrity. • Developing KPIs and scorecards based
systems • Require cleansing, massaging and on system data or internal customer
formatting. feedback.
• Data integrity disputes with suppliers. • Developing your own certification or
Site visits • Resource intensive for both customer evaluation and measuring performance
and supplier.
against it.
• Requires trained personnel. No matter which components of a suppli-
• Can be inconsistent. er assessment system an organization devel-
Certification to third-party • Conformance to procedures does not ops, a big challenge lies in creating a system
standards such as ISO guarantee best practice deployment.
founded on metrics both relevant to the
9001, ISO/TS 16949 and • Can move the focus away from perfor-
QS-9001 business and based on generally accepted
mance to documentation of procedures.
best practices.
• Not specific to performance, processes
and practices required by the customer.
Using available existing evaluation sys-
tems or third-party standards may be simpler

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SUPPLY CHAIN MANAGEMENT

but may not be aligned with the processes and prac- zations may have competencies in some areas that
tices critical to a company’s particular industry posi- exceed those of their customers.
tion, culture or strategy. In many cases, customers just drop the ball in the
Sometimes organizations collect data for the sake follow-up department, sending out results with no
of data or collect the types of data they have histori- dialogue about next steps for continuous improve-
cally gathered. They want to gather information ment and thus defeating part of the purpose of the
from suppliers but have not connected data either whole exercise.
to their organization’s business strategy or to the
performance that would best support their own 7. Produce Results
business models. Measuring supplier performance is about under-
Designing and developing a robust supplier per- standing, communicating and then improving sup-
formance measurement system requires deep busi- plier performance. If all the important components
ness knowledge, familiarity with high performance of a good supplier assessment system are in place
systems and knowledge of measurement method- and you and your supplier are getting relevant,
ologies. It requires expertise in properly construct- actionable results, then the suppliers can take the
ing the questions to elicit accurate responses and next step of improving their performance.
correctly measure performance. Supplier performance measurement can lead to
Thus, some companies use a combination of supplier development, and supplier performance
these approaches. improvement has the potential to impact the cus-
tomer financially and competitively.
5. Deploy the System An example is in purchased part lead times, which
One of the biggest difficulties in assessment sys- often make up a high proportion of overall lead
tems is deployment. For systems that require data times. Increased agility on the part of suppliers can
extraction and massage, IT may need to develop translate into greater responsiveness by customers
and then link information from disparate systems. to their end users. Removing time from the supply
For questionnaire based systems, the question- chain also removes costs.
naires themselves can become unwieldy and difficult Companies need to work with suppliers to devel-
for both internal and supplier participants to respond op action plans as a result of assessments. They
to. As for on-site evaluations or audits, they require should then track performance to these plans to
training of personnel, preferably a cross functional close the loop and realize the full benefits from the
team, and are resource intensive to properly deploy. supplier performance measurement process.
Subject matter expertise, survey instrument devel-
BIBLIOGRAPHY
opment expertise and knowledge of IT are needed to
avoid the pitfalls in deploying all these approaches. Arter, Dennis R., Quality Audits for Improved Performance,
third edition, ASQ Quality Press, 2003 (a basic guide to
6. Give Actionable Feedback the principles of quality auditing that can be applied to
Many organizations send performance report supplier audits).
cards to their suppliers. Suppliers often bristle at the Malcolm Baldrige National Quality Program, www.quality.
term “supplier management” because it implies one nist.gov (excellent resource on quality assessment using
organization managing another. Customer compa- the Baldrige criteria).
nies need to have a real dialogue with their important Bossert, James L., Supplier Management Handbook, ASQ
suppliers on performance and work on the critical Quality Press, 2004 (a classic, in its sixth edition, about
issues of the relationship. This requires a two-way customer-supplier relations; contains practical informa-
flow of information. tion on setting up supplier certification).
If the results of performance measurement and Cavinato, Joseph, and Ralph Kauffman, The Purchasing
supplier assessment are not actionable or expecta- Handbook: A Guide for the Purchasing and Supply Profes-
tions of actions are not communicated, those actions sional, McGraw-Hill, 2001 (the classic guide to everything
will not occur. This is a difficult piece of the supplier you need to know about supply management, including
performance puzzle because many supplier organi- information on supplier evaluation).

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Please
comment
Harding, Michael, and Mary Lu Harding, Purchasing, second
edition, Barron’s Educational Series, 2001 (a brief and practi- If you would like to comment on this article, please post
your remarks on the Quality Progress Discussion Board
cal guide to purchasing and supply management, it includes
at www.asq.org, or e-mail them to editor@asq.org.
chapters on sourcing and supplier certification (with a
checklist), as well as information on calcu-
lating total cost of ownership).
Juran, Joseph, and A. Blanton Godfrey, edi-
tors, Quality Handbook, McGraw-Hill,
1999 (a classic book on quality in its fifth
edition, contains a chapter on supplier
relations with a step-by-step planning
approach).
Maass, Richard A., John O. Brown and
James L. Bossert, Supplier Certification: A
Continuous Improvement Strategy, ASQ
Quality Press, 1990 (a how-to guide to
developing supplier certification).
Moody, Patricia E., Breakthrough Partnering:
Creating a Collective Enterprise Advantage,
John Wiley, 1995 (how to create long-term
relationships with suppliers that yield
productive results; the appendix contains
supplier assessments from several com-
panies).
Norausky, Patrick, Customer and Supplier
Innovation Team Guidebook, ASQ Quality
Press, 2000 (a how-to book with exercis-
es on creating customer-supplier inno-
vation teams; offers a cross functional
approach to extended enterprise perfor-
mance improvement).
Ross, David F., Competing Through Supply
Chain Management: Creating Market-
Winning Strategies Through Supply Chain
Partnerships, Kluwer Academic Pub-
lishers, 2000 (contains a good chapter on
approaches to supply chain quality and
performance measurement).

SHERRY GORDON is vice president, supplier


performance intelligence, for Emptoris Inc.,
an enterprise supply management software
company in Burlington, MA. She earned an
MBA from Simmons School of Management
in Boston. Gordon is a director of the New
England Suppliers Institute and has been an
examiner for the Massachusetts Quality
Award.

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