Driving Supplier Performance Improvement: Using established HR techniques and on-line tools to enhance supplier performance management. Although supplier performance management can be complex and time consuming, when done well and suppliers are engaged, the rewards can be substantial By: Ron Latham, Managing Director, Latham ConsultingAt a glance:The business case for supplier performance management (SPM) programs is clear and organisationsplace a high value on supplier management.Most organisations have either taken on some formal supplier management initiative over the past fewyears, or plan to implement them in the next few years.Fuelled by outside factors such as the need for transparency of suppliers and increased demands formeasuring suppliers against specific KPIs, supplier management functions have moved from the "back-office" to the "boardroom."The importance of managing supplier relationships, particularly those that are considered preferred,demonstrates the cause for potential concern over "supplier vulnerability."Key lessons learned from HR performance management that have a direct application to SPM are: Evaluating performance is the basis for improvement Supplier engagement is critical with the self-assessment comparison the basis for discussion and improvement plans Benchmarking encourages healthy competition Supplier feedback on customer performance enhances the relationship HR on-line assessment tools are easily adapted to ensure a collaborative approach and sharing of reports.
Driving supplier performance improvement Many organisations have either already adopted, - an average supplier performance improvement or plan to implement Supplier Performance of more than 20% across four main KPIs - Management (SPM) programs to encourage their compared with those that had no SPM program. supplier partners to strive for excellence in delivery of supply, quality and price, partner relationships and service and support. The methodology used for SPM varies. Some ask their procurement/category managers to “vote” for their Supplier of the Year – often without any They conclude that organisations that use SPM programs outpace their peers in on-time delivery, specific performance measures or scoring guidelines. Many use KPIs and scorecards and quality, service, price competitiveness, and other supplier performance areas. Their key also involve other functional managers, but most are still using paper-based methods or recommendations were: spreadsheets to rate suppliers and collate results. Organisations that don’t have formal SPM programs should investigate the potential Often results take the form of suppliers only being benefits of developing them, aiming first at told how they ranked in their category, rather than improving key supplier performance in key being given reports, and they are unaware of performance categories. specific ratings and where or how they might Supply executives should develop a business improve their performance. case for SPM and sell the program to top- level management. But all this is starting to change. In today’s tough These enterprises also should develop market and competitive environment more standard supplier performance metrics, organisations are realising that SPM programs are involve key suppliers in the SPM more than just a vote, or a popularity contest, they development process, and include key are about communication of performance internal stakeholders in the process. expectations and regular formal reviews, often two-way, to provide feedback on how suppliers are Managing supplier relationships today has gone performing against those expectations. from identifying and buying goods and services based on negotiated pricing (a transaction Similarly, the advent of on-line scorecards and focused approach) to the strategic ability of multi-perspective assessment tools, coupled with recognising "win-win" opportunities for both buyer traditional HR performance management and supplier through enhanced supplier techniques are making the assessment, reporting management activities. Effective supplier and action planning to address weaknesses an management can ultimately lead to a variety of easy task to manage and drive supplier benefits including increased collaboration, performance improvement. savings to the buyer, and alternative or additional sources of revenue for the suppliers over the “When you measure and communicate supplier long-term. performance regularly, suppliers improve their cost, quality and responsiveness. Done in an automated, systematic way, performance improves dramatically, in some cases by over 50%.” (Source: Aberdeen Group) SPM – The business case The authoritative Boston-based research company, the Aberdeen Group, defines SPM as the process of measuring, analysing, and managing supplier performance to improve quality, reduce costs, mitigate supply risk, and drive continuous improvement in supply value. Considering supplier management challenges Research by them confirms the intuitively obvious faced by organizations in the modern global conclusion that using such programs will produce economy, it is no wonder that almost half the higher value supplies. They found that companies respondents from their Perspectives on Supplier with SPM programs achieved performance Management in 2011 survey placed a high value improvement in every category that was studied - on supplier management.
Driving supplier performance improvementWhile supplier management has always been a SPM - Learning’s from HR.critical aspect in doing business, the tools used by Performance management is a technology thatorganisations to monitor and manage supplier has been used by Human Resourcesrelationships have evolved tremendously over the professionals for more than forty years forpast decade. Fuelled by outside factors such as managing behaviour and results.the need for transparency of suppliers for bothdirect and indirect supply chains, and increased Six key lessons learned over that time, whichdemands for measuring suppliers against specific have worked in driving performanceKPIs, supplier management functions have moved improvement for employees and havefrom the "back-office" to the "boardroom." application in SPM include: Evaluating performance is important because: o What gets measured gets done o If you don’t measure results, you can’t tell success from failure o If you can’t see success, you can’t reward it o If you can’t reward success, you’re probably rewarding failure o If you can’t see success, you can’t learn from it o If you can’t recognise failure, you can’t correct itTo illustrate the current adoption of supplier o If you can demonstrate results, you canmanagement, the results of their research also win support”shows that most organisations have either takenon some formal supplier management initiative Engagement is critical. Simplyover the past few years (38%), or plan to undertaking a one-dimensional, downwardimplement (53%) in the next few years. assessment using only a scorecard will not engender buy-in. This “schoolmaster”Their summary of the Perspectives on Supplier assessment approach is reminiscent of theManagement in 2011 survey states: “Supplier master /servant relationship, does notmanagement is an area that has evolved over the encourage discussion and runs the risk ofpast decade. And as global commerce expands, outright rejection. Best practice in HR noworganisations will increasingly need to focus on sees employee engagement insupplier relationship management and the performance management as being a four-functions that are described within it. stage process: o Employees set and agree theirFurthermore Paretos principle "law of the vital individual objectives with their manager;few" indicates a reliance on a core of suppliers o At mid-year the employee undertakes aand sets the stage for getting a more complete self assessment of performance,view of those suppliers being heavily leveraged scoring achievement of their objectiveswithin an organisation. Therefore the importance and other KPIs, with comments on theirof managing supplier relationships, particularly performance;those that are considered preferred, demonstrates o The manager does an independentthe cause for potential concern over "supplier assessment of the employee’svulnerability." The potential over-reliance on a few performance (objectives, KPIs andkey suppliers makes SPM an even more important comments) then compares hisfactor. assessment with the employees; o Both meet to review their assessments,Their conclusion: “Organisations that have not with the manager fully prepared to haveembarked on a supplier management strategy are a discussion about performancemissing opportunities for identifying cost savings, improvement, where necessary. At thatmore importantly, ignoring opportunities for meeting, they agree on final ratings, anybenefiting from the intangible benefits such as improvement actions. Both partiespositive brand equity and being exposed to share the same output reports, with finalunrecognised and unmeasured risks without a ratings, comments and anySPM solution”. improvement plan.
Driving supplier performance improvement Supplier engagement is essential for SPM to SPM – the process be successful and the same process can be As part of their SPM process, many Companies utilised, particularly the scorecard self- now undertake formal annual, or quarterly, assessment, sharing of detailed reports and performance reviews with their suppliers, using results and the review meeting to agree any KPIs and a formal rating process that generally action plans. focuses on improvement in two key areas: Benchmarking against peers provides both Product and supply chain: identifying the comparison and healthy competition for key value added processes in the supply chain increased remuneration and promotion. and working together with their supplier partners to fulfil their customer’s wishes better, Similarly, benchmarking supplier performance faster and at less cost. This is particularly so encourages competition and performance with extended supply chains and sourcing improvement – with or without rewards or from low cost countries. punishment (e.g. Supplier of the Year awards). Business Partner Relationship: looking at Suppliers should always know how they rate the entire business relationship, with and rank in comparison to their competitors appropriate KPIs built around the relationship, and other suppliers. support and service: Risk management: Organisations regularly assess their exposure to “flight risk” of their KPIs need to be client and category specific, with critical and senior managers and, through a realistic and appropriate rating scales and Talent Management process, build their “bench descriptors that align with achievable expectations strength” of trained and ready replacements to and agreed to by suppliers. take over at short notice. Procurement professionals should always undertake risk assessment analyses on their mission critical suppliers and ensure they are already engaged with potential alternate suppliers so they can always maintain continuous supply. 360° Feedback: Is a multi-dimensional assessment tool used by HR to assess the competency and behaviours of their key managers and to get ratings and comments from various stakeholder groups, e.g. peers, direct reports, customers etc. The critical steps in a successful SPM program process are: Many SPM assessments also utilise this type Define specific KPIs and metrics for each of feedback to gain the opinions of supplier supplier category; customers with their organisation, so they can Engage suppliers and key stakeholders in the understand user perspectives at either a process; geographic or business unit level to Rate supplier performance: complement that of the Procurement or o Procurement managers and key category manager and also compare it with the stakeholders rate performance. supplier’s self-assessment. o Suppliers rate their own performance as a Two-way reviews: Many organisations also self-assessment. ask their employees to provide feedback on Report their manager’s performance, separately from o Key stakeholder reports on results, by a 360° feedback review. supplier; o Supplier reports showing their performance; This technique is used in SPM for high-touch, high-value strategic partner relationships Review - Meet with suppliers to identify strengths and prepare action plans to address where the supplier is particularly dependent on any areas of underperformance; the timely performance of the client, without which their performance will be impacted. In Reward - with Supplier of the Year awards many instances, these SPM assessments are and publicity. also combined with a 360° feedback to gain Repeat the rating, reporting and review the perspective of all parties and stakeholders. process at regular intervals to monitor progress;
Driving supplier performance improvementSPM – the on-line tools As well as category managers assessingThe advent of web-based, multi-user software performance, the 360° feedback tool enablesmakes the implementation of SPM easy and functional managers and “front-line” users toencourages a collaborative approach to be involved in the assessment process – e.g.continuous performance improvement in what are Operations, Marketing, Production, Financecomplex business relationships, often with etc, all with section specific KPIs.multiple touch-points in both organisations, Relationship Optimizer: Two-waygenerally spread over many geographic locations. assessments, with 360 feedback capability, “If you want to have early warnings about possible generally used where there are high touch, problems in a relationship and a way to surface issues high value relationships with multiple and to address them collaboratively, you have to have a stakeholders and dependent relationships. mechanism to take the temperature of the relationship, Often used for a “drill-down” review to further comparing its effectiveness up against some agreed investigate poor performance identified by one metrics, and then talking about the results.” of the other tools. (Source: Vantage Partners) Performware™ is also be used to assessThe Performware™ platform of proven on-line professional services providers, e.g. Advertising,tools incorporates and builds on traditional PR , Accounting/audit, Legal, Banking; suppliersPerformance Management techniques. They allow of goods and services: IT, Communications,organisations to review their business partners, Travel, Vehicles, Property and other key expenseagree on action plans to improve performance areas like sponsorship.and to better manage the relationship - for mutualbenefit. The supplier self-assessment optionThe software is designed to objectively measure The key lesson from HR performancehigh value, high touch relationships and raises the management is that engagement increases withbar for more effective supplier reviews. It is non- self-assessment as it provides a comparisonprescriptive, fully customisable and allows users perspective and the basis for discussion aboutto determine all content. We can easily replicate performance expectations and improvement.any current SPM review format, scoring criteriaand process and the tool is intuitive, with user-friendly features that makes efficient use of timefor users. Results, including trends, and dataanalysis are presented on-line in a dashboard andgraphics format. This, more disciplined, approachto supplier reviews can also be used as the basisfor “Supplier of the Year” type programs andawards.There are three on-line assessment tools,designed for different uses, each with a KPIimportance weighting option and the ability tocollect supporting comments, to compliment andexplain ratings, to make the feedback moreactionable for suppliers: Supplier self-assessment also enables supporting Performance Manager: For one-on-one comments and documents, but also to provide assessments, generally by category managers. feedback in two areas: The supplier self-assessment option provides the opportunity for increased engagement and Their activities during the period and the allows them to compare their self-ratings, as business environment they operated in. This is the basis for discussion on the differences in so that the category manager may better perception, expectations and any understand the perspective in which they are improvements required. Both supplier portfolio rating the supplier and take into account any and individual supplier reports are available by event that may have impacted performance users on-line. that was outside the control of the supplier. 360 Feedback Manager: For multi dimension Feedback from the supplier on their assessments by key stakeholders, where there customer’s performance. Often suppliers are are multiple touch points within the client dependent on their customer’s policies and Company, with supplier reports available on- actions which may limit performance and this line. feedback can assist the partner relationship.
Driving supplier performance improvementOur experience is that there will always be a gap, often quite a significant one, between a supplier’s viewof their performance and that of their customer.The following chart illustrates both the range of ratings between the top and bottom performers (as ratedby their customer), but also that suppliers, on average, all think they are almost as good as the topperformer. The second chart illustrates that this “perception gap” between their own self-assessmentscore and that of their customer, can differ enormously by KPI, with the example showing suppliersrating between 22% and 63% higher than their customer.The questions that category managers needed to address in this instance, during their review meetingswith suppliers, were whether: they were “hard markers” with high expectations, or their suppliers were unrealistic/over optimistic in their self-ratings, or their suppliers really did think they were performing well, and/or their expectations had not been communicated to or understood by their suppliers.ReportsFeedback to suppliers on their performance is critical and forms the basis of review meetings and actionplans. The software provides on-line reports to both the supplier, when the self-assessment option isselected, and to the category managers for individual supplier reports and comparison across theirportfolio of suppliers.Detailed, automated, on-line reports mean that analysis and feedback can be timely, with a menu ofreports in dashboard and graphics formats covering: Supplier portfolio reports – By category, by KPI, rankings, ratings, trends; Individual supplier reports – Ratings, comments, benchmarking - comparison with the average and top quintile ratings by category provides continuous improvement targets; On-line supplier reports – Suppliers can have on-line access to their own reports, which allows for more detailed analysis (e.g. by State) to identify areas of strength/weakness and prepare appropriate action plans.Example Supplier Report: Overall performance summary at KPI group level, as rated by stakeholders.
Driving supplier performance improvement Example Portfolio Report: Overall supplier performance summary at KPI group level, as rated by stakeholders. “The purpose of investing in a relationship with a supplier is to improve their performance in fulfilling the needs of the buying organization, thereby improving the buying organization’s performance and creating mutual benefit.” (Source: Chartered Institute of Purchasing & Supply)Summary“Strategic Partners”, the SPM journeyToday organisations do not just want theirsuppliers to sell them products. They want them tobecome “business builders”, helping to optimisetheir revenue and profitability through a deepunderstanding of their specific business needs, asa “Strategic Partner”.Organisations must help their key suppliers on thejourney from “Vendor” to “Supplier” to “KeySupplier” to that of a “Strategic Partner”. Thejourney to a strategic partner is not easy, but isworth the effort. It requires paradigm shifts by bothparties, particularly in attitudes, requiringopenness, trust and information sharing.SPM is absolutely critical in the “Strategic Partner”journey. With its regular performance monitoringof KPIs it is a vital tool to plot the journey. It helps Our experience is that suppliers are keen tosuppliers to improve their performance and reach participate in, and contribute to the costs oftheir full potential and cement their “Strategic SPM reviews. They see value in thePartner” relationship position. constructive feedback and the ability to access results on-line to identify their weaknesses andA well designed SPM program, with supplier put action plans in place for improvement. Theengagement and based on regular result is a Win: Win, with higher levels ofperformance reviews and constructive engagement, improved performance and afeedback, will assist organisations and their closer and more profitable business partnersuppliers to objectively assess performance relationship.and drive improvement.To get access to an example assessment, or to have your SPM review converted to the Performwareon-line assessment tool, contact Ron Latham: firstname.lastname@example.org phone +61 2 9959 3815 "The greatest change in the way business is being conducted may be the accelerating growth of relationships based not on ownership, but on partnership” (Peter Drucker)