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Measuring Supplier Performance

Suppliers play a crucial role in the smooth running of any procurement organization. Most of the time, they deliver the goods to the right place and at the right time. In some cases, however, suppliers slip on their duties and wind up costing organizations both time and money in the process. One way to ensure optimal uptime is through a supplier measurement or “scorecarding” system that keeps tabs on vendor performance.

Supplier measurement programs range from very simple to extremely complex—and everything in between. Regardless of their sophistication levels, all of these approaches incorporate some basic strategies that all procurement departments should keep an eye on. Here are six that you’ll want to use when developing systems for tracking supplier performance:

  1. Ask yourself the tough questions. When developing a scorecarding system for vendors, business metrics consultant Connor Jordan, author of Things to Consider When Building a Supplier Scorecard, says purchasing agents should ask themselves the following questions: Am I measuring the right performance categories? Am I establishing consistent and actionable measures? Am I working with my suppliers/vendors to jointly develop measures? Does my supplier/vendor management program include scorecard reviews? Are my supplier/vendor measures aligned to support the corporate strategy? Am I comparing supplier/vendor performance to determine the most effective relationships? “Many organizations develop scorecards to measure the performance of their own company,” Jordan adds, “but struggle to build effective scorecards that measure the performance of their supplier and vendor relationships.”

  2. Kick it off with a few building blocks. If you are developing a scorecarding system from scratch, start with a few basic measures like ship quantity versus order quantity (does the whole order ship at one time, or not?); lead time (quoted versus actual); order accuracy (did you get the right items?); and delivery time (did the vendor meet the promised shipping windows?). Once these basic performance metrics are in place you can build out your supplier scorecarding system further to include more metrics, such as how many corrective actions you had to take, how many items were returned, how many customer complaints were filed on specific products, and so forth.

  3. Develop a list of “must haves” for new vendors. Figure out what’s most important to your organization. Is it on-time delivery? Vendor capability? Track record? Number of industry certifications held? All of the above? Having a laundry list of “must haves” in front of you before you place that initial order will help set the stage for a successful buying experience across multiple vendors. Remember that the range of metrics that can be incorporated into a scorecarding system is vast. You can whittle down the list by focusing only on those that actually matter to your company. As you develop your list of “must haves,” think about key internal business goals and look closely at how solid supplier performance can support those goals over time.

  4. Divvy up suppliers into three different groups. Because the 80/20 rule usually applies in purchasing (80% of products come from 20% of the supply base), you’ll want to put the most effort on the vendors that are helping to drive your organization. Using a simple “A, B, C” ranking, look at where your biggest spend goes on an annual basis and label those vendors as “As.” By dividing suppliers into three categories (critical, secondary, and non-critical, for example) you’ll be able to spend more time assessing the performance of your critical suppliers.

  5. Share information and insights with your vendors. Scorecarding shouldn’t be an internal process that’s kept close to the vest. According to the Institute for Supply Management report KPIs: Measuring Indirect Material Suppliers and Service Providers, results should be shared with the supplier on a pre-determined schedule. When sharing the scorecard results, give the supplier an opportunity to dispute scores and to provide comments or feedback regarding the results. You may even want to consider implementing two-way feedback, where the supplier not only responds to the scorecard, but also rates your organization.

  6. Don’t over-complicate the process. With all of the technology and data that’s at our fingertips today, it’s all too easy to over-complicate processes that should be fairly straightforward. When developing key supplier measurements, focus only on those that truly matter to the organization. The ISM advises companies to minimize the number of factors used and create a program that’s easy to explain and administer. The more straightforward and transparent the measures are, the easier it will be for suppliers to understand and comply with them.

While there are certain supplier performance metrics that apply across all organizations, the scorecarding process itself is highly customized to the company that’s using it. Keep this in mind as you develop your own method of tracking supplier performance, addressing issues, terminating contracts, and finding new vendors that meet and exceed organizational standards.