Supplier Performance Assessment – A “Good to Have” or a “Must Have” Process?

Spend Matters welcomes this guest post from Meghana Rajamane of GEP.

Once you have a competent supplier on board is the job of procurement done?

Most companies today are tending toward complex supply chain ecosystems with an increased dependence on key supplier relationships to satisfy and delight their customers. Given this environment, it is imperative for an enterprise to be able to assess supplier performance.

A supplier evaluation process is a must today for maintaining compliance, increasing competitiveness, identifying inefficiencies and driving improvement measures that impact the process. For instance, if a marketing agency receives feedback that the marketing material for events like Tradeshows can be reused, then the action item as a result of the feedback can provide cost savings for procurement. Also inconsistencies in services provided across business units and ambiguity in pricing components are easily identified through an assessment. Simply put, “What you cannot measure cannot be managed effectively”.

A well-structured performance evaluation has three primary stages to it:

  1. Identifying suppliers to be evaluated

First and foremost, it is important to identify the right set of suppliers to be assessed. Assuming a normal distribution of contract value, there should be a relatively high concentration of contract value with few suppliers (80/20 rule). These suppliers are easily the best pick. Apart from contract value, the other strong indicators to help identify strategic suppliers are those that have a high profit impact and/or associated with high supply risk or criticality. Risk could be due to external factors such as market profile, supplier’s financial performance or internal factors such as enterprise manufacturing processes, sales, etc.

  1. Implementing the evaluation process

Prior to choosing an evaluation approach, it is critical to ensure alignment of the supplier’s objective with the organization’s vision. For instance if the organization is actively following a quality management program, the strategic supplier needs to be onboard as well.

A comprehensive evaluation process needs to incorporate qualitative and quantitative components customized to the category requirements. These are then tied into a scorecard. The evaluation process should periodically assess the operational capability, supplier’s processes and practices, market profile and risk factors.

Typically a questionnaire is the best approach for capturing qualitative data points. One needs to ensure that the questionnaire is not vague, lengthy or ambiguous and the information captured from the questions needs to lead to actionable measures. Also it is essential to capture feedback from multiple stakeholders across all touch-points, including the day-to-day operational manager, procurement, finance, etc., to create a holistic view of supplier performance. KPI’s or other quantitative measures identified need to be highly category specific to provide an accurate picture of the supplier domain. Keep in mind that there are costs associated in capturing and maintaining these metrics and can tend to become considerable overhead costs if not chosen wisely.

  1. Learning from the evaluation process and continuous improvement

One of the biggest challenges for procurement across industry domains has been implementing a well-defined evaluation process. It would involve extracting and linking various disparate systems and information sources to produce results that are easily auditable as well. This usually requires a cross-functional team including IT, finance and business among others. Performance assessment should be set out in documentation to ensure suppliers are aligned on both the measures and the methodology.

An interesting find through this assessment process has been the ability to capture periodic feedback on the work culture of the supplier workforce. If the supplier teams lack an aptitude toward continuous improvement, or is not aptly staffed to meet the organization’s requirements, they tend to evolve into a supplier risk for the organization. This is especially critical in strategic supplier relationships and an effective assessment process should be able to capture these subtle business requirements as well.

Lastly, a large number of corporations today have successfully tied in the performance assessment process to the compensation structure of the supplier. In these scenarios a supplier is not only at risk in losing a part of the compensation in case of poor performance, but also stands to gain additional bonus over and above normal compensation in case of exemplary performance. This risk/reward methodology not only ensures that the supplier is actively involved in the process, but also ensures co-investment from the supplier in cultivating a successful relationship with the organization.

For more interesting thinking on procurement, visit the GEP Knowledge Bank.

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