Making the Case for Supplier Performance Management (Part 2)

Editor's note: this material is based on part on some jointly conducted research with a former vendor in the SPM sector, Apexon. I dredged it up in the process of my latest analysis on the supplier performance management market and after reading it again, thought it useful enough to share in an updated manner on Spend Matters.

Please click here for the first post in this series.

While most organizations begin their supplier rationalization journey by focusing on data gathering, the area where many fail to realize the full potential of their efforts is later in the process when they begin to analyze suppliers' capabilities and performance. Today, many organizations carry out data gathering via basic scorecarding activities. But the challenge that companies then face is how to use the data they have already collected.

More often than not, this information is in the form of Excel spreadsheets that cannot be easily rolled-up and analyzed to generate actionable intelligence. This is because many manufacturers have implemented scorecarding systems before fully considering how they intend to leverage the information. In short, they have not thought through how to deploy SPM as a core component of their overall procurement and inbound supply chain initiatives -- they're doing it as a hobby on the side. Because of this approach and the limits of Excel, they may be able to run reports against the data. But even then, most often this information does not meet the analysis requirements of procurement professionals responsible for supplier development and overall sourcing efforts.

In addition, this level of detail does not provide a global view of all of the suppliers to the multiple plants, divisions and business units while accommodating "localized" metrics and performance weighting factors. Inevitably, the different plants, divisions or business units tend to deploy their own supplier performance management programs to meet their requirements, which results in no central consolidated view of the entire supply base. Traditional techniques typically rely on supplier performance data that is housed at the individual plant or business unit level. But successful SPM approaches reinforce data gathering with robust, aggregate analytics that not only identify the best and worst performing suppliers across the enterprise, but provide actionable intelligence to improve the performance of the overall supply base.

This is critical today, as most large companies are capable of gathering diverse sets of data as part of their rationalization initiatives. Unfortunately, many do not know how to make best use of it once they have it. Companies must use more robust analytics built around procurement, supply management and manufacturing operations metrics to identify, implement, and sustain the maximum level of savings. The same holds for services categories and vendor management offices within IT.

Clearly, there is no "one-size-fits-all" SPM strategy. Instead, companies -- and even users inside an organization -- need a flexible, specialized approach for their individual needs. But many first generation tools limit an organization's ability to examine categories the way they should to create the right supply strategy. For example, manufacturers will typically get the best results from SPM efforts if they can weight performance metrics differently based on their specific strategies for various material categories. In a catalog category such as fasteners, the manufacturer might base its analysis entirely on price. For a category such as motors, quality and delivery are critical since warranty and inventory costs can easily outweigh initial purchase price.

Ultimately, for direct materials SPM, an organization must be able to analyze suppliers based on criteria applicable to that specific material category. This approach goes beyond scorecarding, acknowledging the unique nature of each organization and each category it sources, by enabling true, specialized SPM. Whether it is price, quality, on-time delivery, or lead times -- or a combination of all of these attributes and possibly others -- each organization should invest the time before even considering buying any specialized technology to develop its own set of guidelines and parameters for each individual material category it purchases.

- Jason Busch

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