How to measure and manage supplier performance?

Suppliers constitute an important part of business operations for any buyer organisation. The performance of the suppliers directly impacts the supply chain of the buyer’s business, affecting their business performance and overall profitability.

What is supplier performance?

To achieve high levels of efficiency across the business, the performances of all parties involved must be measured. Supplier performance refers to measuring suppliers’ performance and efficiency levels based on certain relevant metrics.

They are normally measured by professionals in charge of procurement and sourcing. A document known as the supplier scorecard displays the performance of the suppliers against the relevant metrics. This document is made available to both parties involved to uphold transparency.

The metrics of the scorecard differ with each company. Still, the common metrics include:

• Delivery time.
• Quality of the materials supplied.
• Costs involved.
• The suppliers’ responsiveness.
• The quality of customer service.

What is supplier performance management?

Supplier performance management is not focused only on the pricing of goods. Various factors are to be considered, which is what makes it challenging. The factors include cost, inventory, and the quality of the products supplied.

There are instances where the prices may be as per the agreed-upon terms, but the goods being supplied are of inferior quality & of different prices. Another possible problem could be a regular delay in supplying goods, thus causing the business to lose customers due to understocking issues.

For supplier performance management to succeed, in-depth analyses are essential so that these risks can be curtailed, reduced or eliminated.

Key metrics for measuring supplier performance

• Price-centric metrics

When you talk about value for money, the first thing that crosses your mind is the price of goods. In this case, negotiating the price of the goods sourced from the suppliers is very important. The buyer can ascertain whether the supplier is willing to stay within his price requirements through casual and formal negotiations.

To measure the impact of the negotiations on the pricing of the goods to be supplied, the calculations can be done on an absolute basis. For instance, if the quoted price is Rs. 200 per unit and the buyer negotiates successfully to bring the price down to Rs. 180 per unit, that equals a saving of Rs. 20 per unit, which, when spoken of in large, voluminous orders, will be a considerable amount saved.

• Cost-centric metrics

A watchful eye must always be kept on money leaving the business, i.e. the costs associated with outflows. This includes the purchase cost, cost associated with storage, transportation, packaging, delivery, etc. Budgeting of the business can be positively impacted by reducing spending on suppliers & trying to find the right optimal cost for every overhead. A simple way of looking at it would be the comparison of the historic cost baseline of the goods versus the current cost. 

For example, assume that the historical cost amounts to Rs. 300 and the current cost amounts to Rs. 270. The difference between the two is Rs. 30, which represents savings today. It is then divided by the historic cost to find out the cost increase percentage. Therefore, dividing 30 by 300 yields 10%.

• Quality-centric metrics

When we talk of quality-based metrics, the focus is mainly on whether the supplier has lived up to his promises in terms of the performance of the agreed-upon contract. Quality measurement will be done mainly in terms of the number of defects, spillage, breakage, and inferior quality of the parts of goods. Automating this part of the process at the stage where the goods are received from the supplier, so the data regarding the same is recorded promptly.

Further, the focus on value-added services must also be measured with regard to their quality. The quality of service provided to the customers with regard to regular and timely maintenance checks, servicing of the machines and appliances in case of electronics, and other after-sale services are also to be considered.

All these metrics must be keyed into the contract with the suppliers to hold them to the performance of their promises with regard to the quality they assure at the negotiation stages.