Making the Case for Supplier Performance Management (Part 1)

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.

Organizations that look at supplier performance management programs as a means to just reduce the number of current suppliers, as part of broader rationalization initiatives, are missing a larger opportunity. Distilled to its core, SPM should be about forming deeper, partnering relationships with key suppliers to continuously reduce costs and improve performance. As such, proper performance management initiatives should be at the core of a continuous program of identification, substitution and development of the best possible set of suppliers to meeting the ever-changing requirements of the business' operational objectives.

Let's face it: procurement organizations have limited time and resources. In most case, very limited. When done manually, SPM efforts often consume all available time and resources working with current suppliers, let alone identifying the ideal set to work with for a given SKU, line item or service. Done right -- which is rarely the case -- SPM should in fact reduce the time and resources required to analyze the capabilities and performance of existing suppliers so that resources can delve into identifying new market entrants and participants, as well as understand the capabilities and performance characteristics of the overall supply market. In doing so, procurement organizations can more consistently optimize the performance of their supply base.

Just as important, when SPM is done right, it should enable companies to develop specific strategies based on material categories and then analyze suppliers' capabilities and performance per these category-specific strategies (i.e., creating a "best fit" approach). For example, one industrial manufacturer Spend Matters interviewed back in 2007 developed specific supply strategies for each of their categories of materials based on procurement and operations objectives, along with overall market conditions for that category. Instead of sub-optimizing their SPM efforts, they were able to reduce material costs by 18%, reduce quality and delivery defects to near zero and triple their inventory turns. Yes, you read that correctly. I validated it during an onsite visit at the time.

Results like this aren't common -- or easy to achieve. In fact, I'd argue the upfront effort that goes into achieving SPM results is probably on the order of 5-10x the time it takes for a comprehensive, direct materials strategic sourcing effort. Yet the difference is that it's possible to bank 100% of the returns of SPM, versus somewhere between 50-70%, on average, from sourcing efforts. One of the challenges companies often face in a traditional SPM context is that it is difficult to consolidate data from all the relevant back-end systems (e.g., ERP, legacy, etc.) and combine it with qualitative supplier data (e.g., assessments, roadmaps, etc.).

This is complicated enough in an environment with a single instance of an application, but the process becomes even more complicated in a heterogeneous environment with multiple instances and vendors. Traditional approaches also fall short because of their inflexible approach to reports and analysis, which for example, makes it difficult to compare supplier "peers" based on capabilities, performance and costs.

To be continued...

Interest piqued? Curious to learn more about putting SPM programs into action? Download Spend Matters latest Compass research brief in the supplier performance management and scorecarding area:

Beyond Basic Scorecarding -- Supplier Performance and Development Approaches to Drive Competitive Cost and Risk Advantages

- Jason Busch

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