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Supplier Performance Management (SPM) is one of the key foundations of supplier management.
When executed well, SPM provides procurement with a consistent way to measure whether suppliers are actually delivering on their contractual commitments and meeting service level expectations. It also lays the foundation for long-lasting and strategic relationships based on data and mutually agreed targets.
Let’s go through the foundations of SPM including the key definitions, frameworks, and metrics you should know.
What is Supplier Performance Management?
Supplier Performance Management is the strategic approach used to measure, evaluate and improve the performance of suppliers on a consistent basis. Historically it has involved assessing key metrics like on-time delivery, quality, and cost.
In simple terms, SPM is all about making sure you are actually getting what you were promised in negotiations and contracts. On a broader scale, it’s about creating a data-informed way to manage the performance of your suppliers in a consistent way and ensure you have the right suppliers to meet the needs of your business.
By monitoring and managing supplier performance in a data-driven and consistent way, procurement can ensure the company has healthier supplier relationships while driving efficiency and achieving cost savings. In this way, it is a cornerstone of effective operational procurement.
What’s the difference between SRM and SPM?
SPM is tactical and operational in nature. It is primarily concerned with evaluating and improving the performance of suppliers on a day-to-day basis. It involves setting specific performance metrics, such as quality, delivery, cost, and risk.
On the other hand, Supplier Relationship Management (SRM) focuses on building and maintaining strong, collaborative relationships with a select group of key suppliers. SRM has a more strategic and long-term focus than SPM. It involves communication strategies, joint development initiatives, and long-term planning to ensure that both parties benefit from the relationship.
Supplier Performance Management in Three Phases
Each procurement team will have their own framework for SPM. Typically a systematic approach will include at least three key phases:
1. Set Expectations
In this initial phase, clear performance criteria and metrics are established with your suppliers. This involves defining quality standards, delivery timelines, cost parameters, and supplier risk management protocols.
2. Monitor and Evaluate Performance
Once expectations are set, the next phase involves tracking supplier performance against the defined metrics. It is wise to conduct regular assessments and performance reviews using supplier scorecards and spend analytics data. Active performance evaluation helps procurement identify areas for improvement and ensures suppliers are meeting the agreed-upon standards.
3. Feedback and Continuous Improvement
The third phase focuses on providing constructive feedback to suppliers and working collaboratively to address any performance gaps. This may involve joint improvement initiatives, training, or renegotiating terms. The aim is a continuous improvement program focused on supplier capabilities that ultimately strengthens the relationship.
This is just one example of an SPM framework with three phases. Whether your procurement team follows a three- or four phrase approach is less important than following a consistent and documented process for each types of suppliers.
Key Metrics to Measure Supplier Performance
For many procurement professionals, the foundation of supplier performance management involves the golden triangle of measuring time, quality, and cost of procuring a product or service.
- Cost involves evaluating the financial efficiency of a supplier, ensuring competitive pricing and value for money.
- Time focuses on the supplier’s ability to meet delivery schedules, minimizing lead times to maintain smooth operations.
- Quality assesses the supplier’s consistency in meeting product or service standards, crucial for customer satisfaction and reducing defects.
Balancing these factors helps procurement achieve the company’s strategic objectives while maintaining effective and efficient supplier relationships.
A Balanced Scorecard for Supplier Performance Measurement
Supplier Performance Management has evolved greatly over the past decades. Today, many procurement leaders view SPM as a multi-faceted framework where supplier evaluation criteria can be adjusted over time to better suit the needs of business.
Common metrics or key performance indicators (KPIs) for measuring supplier performance can include:
Quality
Defect Rate: This KPI measures the percentage of products or services that fail to meet quality standards. A low defect rate indicates a supplier’s ability to consistently deliver high-quality outputs, reducing the need for rework and returns.
Compliance with Specifications: Ensures that the supplier adheres to agreed-upon technical and quality specifications. This KPI helps maintain product consistency and customer satisfaction.
Delivery
On-Time Delivery Rate: Tracks the percentage of orders delivered in full on or before the scheduled delivery date. High on-time delivery rates are crucial for maintaining smooth operations and meeting customer expectations.
Lead Time: Measures the time taken from order placement to delivery. Shorter lead times enhance agility and responsiveness in the supply chain.
Cost
Cost Variance: Compares actual costs with budgeted or expected costs. This KPI helps identify cost overruns and assess the supplier’s ability to provide cost-effective solutions.
Total Cost of Ownership (TCO): Evaluates the overall cost associated with a supplier, including direct and indirect costs. TCO provides a comprehensive view of the financial impact of the supplier relationship.
Risk
Supplier Risk Score: Assesses potential risks associated with a supplier, such as financial instability or geopolitical issues. This KPI helps in proactively managing and mitigating risks.
Incident Frequency: Tracks the number of supply chain disruptions or issues over a specific period. A lower frequency indicates a more reliable supplier.
Innovation and Responsiveness
Contribution to Innovation: Measures the supplier’s role in contributing to new products, processes, or ideas. This KPI encourages suppliers to collaborate on innovation initiatives.
Responsiveness: Evaluates how quickly and effectively a supplier responds to inquiries, issues, or changes in demand. High responsiveness is essential for maintaining strong supplier relationships.
Sustainability
Sustainability Practices: Assesses the supplier’s commitment to environmental and social responsibility. This KPI reflects the growing importance of sustainability in supplier evaluations.
While the foundation of supplier performance measurement is formed in the golden triangle of cost, time and quality metrics, new aspects like innovation, supply risk and sustainability give a more balanced view for high-performing SPM.
On a broader scale, the systematic evaluation, analysis and optimization of supplier performance forms a key part of supplier lifecycle management.
How to Manage Underperforming Suppliers in a Fair Way
A typical procurement team oversees 3,000 suppliers for each US $1 billion in corporate spend. At this scale, it’s likely that you’ll also need to deal with some underperforming suppliers.
Here are a few ways you can address performance issues with suppliers in a constructive way:
Maintain Open Communications
Initiate transparent discussions with the supplier to clearly outline performance issues. Ensure they understand the specific areas where they are failing to meet expectations and provide them with an opportunity to explain any challenges they face.
Collaborative Problem-Solving
Work together with the supplier to identify the root causes of underperformance. Collaboratively develop an action plan that outlines specific steps for improvement, setting realistic goals and timelines.
Support and Resources
Offer support, such as training or resources, to help the supplier address performance gaps. This demonstrates a commitment to the partnership and encourages improvement.
Regular Feedback
Implement a system for ongoing monitoring of the supplier’s progress against the agreed-upon action plan. Provide regular feedback to acknowledge improvements and address any remaining issues.
Performance Incentives
Consider introducing performance incentives to motivate improvement. Recognize and reward suppliers who make significant progress, reinforcing positive behavior and outcomes.
Clear Consequences
If performance does not improve despite support and collaboration, communicate the potential consequences clearly. This may involve reducing business or seeking alternative suppliers while maintaining fairness and professionalism.
It’s only realistic that supplier performance will vary across a managed category or a business unit. By following these steps, you can manage underperforming suppliers in a balanced and constructive manner, aiming for mutual benefit and long-term success.
Bottom line on Supplier Performance Management
Supplier performance management is one of the cornerstones of operational procurement. Each company will have their own key metrics and frameworks to evaluate supplier performance.
When you’re developing your own views on supplier performance, consider the time and effort needed to build long-lasting relationships with your key suppliers. A consistent SPM framework helps maintain open, constructive relationships and effectively manage underperforming suppliers.
