How do you measure supplier performance?
I’m often asked to talk about key performance metrics for supplier relationship management. Many key executives want supplier metrics to focus on value contribution like flexibility, continuous improvement, speed to market, innovation and organizational alignment, but most supplier metrics are still focused on price, delivery and quality, since they’re easy to measure. However, once margins are reduced to levels that sustain the supplier, quality reaches the capability of the supplier and deliveries are consistent, there’s not much improvement to single-dimension metrics without significant investment.
When we think about metrics, they need to be culturally acceptable to both organizations, timely, compatible with other metrics, simple and responsibility-linked. They should also be cost-effective, balanced, customer-focused and meaningful. After all, the objective is to indicate the degree of progress being made and confirm whether actions being taken are effective.
When I speak to groups about key performance metrics, I like to define what they are and what they are not. Key performance indicators (KPI’s) are always quantifiable, measurable and actionable. They measure factors critical to the success of the joint organizations and are tied to business goal alignment and screech targets. No more than 5 to 8 key metrics should be considered when looking both procurement and supplier performance and they must be consistent throughout the companies. Unfortunately, many metrics are vague and unclear, nice-to-know information, but not actionable, are refutable and are exhaustive sets of metrics. Many procurement teams create KPIs without organizational alignment or stakeholder engagement, because they feel they’re in a powerful position to drive supplier compliance. In reality, these metrics and relationships eventually fail.
When developing key metrics, they should be mutual for buyer and supplier, have a cause and effect relationship, targets should be set by priority and integrate with strategic long-term agreements. Measurements in world-class companies are linked to value optimization: is the company achieving a value shift with the supplier and is new value being created?
It is likely that metrics will fail if they are not a collaboration between your stakeholders and the supplier. They will also fail if they are a wish-list of criteria that is difficult to achieve. If your business is not a learning culture, desiring to continuously improve, metrics will just be numbers.
Do your supplier metrics improve the product, supply chain and company?