Why Supplier KPIs Often Can’t Capture the Whole Truth

An effective and efficient supplier management process is one of the forces behind an organization’s consistent success.

However, managing relationships with suppliers through a well-defined process is not as simple as having a vendor management work group.

There are multiple workstreams within an organization that need suppliers to meet business demands as efficiently as possible.

It important to obtain the right supplier within the organization. There are various stages related to assessment, such as the supplier risk assessment, supplier performance evaluation, supplier risk assessment, managing the right KPI’s, etc are leveraged to vet a supplier. Most organizations have an over complicated process, or the process is not leveraged effectively.

Therefore, it’s imperative for business to simplify the SPM/SRM process. Simplifying a relatively complex process helps the organization understand the parameters on which the suppliers were evaluated, and its efficiency saves a lot of time and helps improve the process.

Organizations may classify their suppliers into various buckets such as contracted, preferred, approved, registered, non-compliant, deferred, etc. These buckets determine if a supplier is available for business or not, can they be utilized or not.

Therefore, suppliers are like a foundation on which the organization’s partnerships are made and, in some cases, broken.

Most organizations have a defined supplier performance management (SPM)/supplier relationship management (SRM) process that is supposed to yield the best supplier relationships based on the study and performance of a supplier.

It weeds out suppliers not cut out to be a part of the organization. This helps the company bring in new players or increase the scope of existing players.

Setting the right KPIs

Organizations today rely on various factors such as KPIs that are used to measure supplier performances and benchmark their best-performing and under-performing suppliers.

Yet, often, the SPM/SRM process is not a fully implemented solution.

This is because of the following reasons.

First, there are various SPM projects that go out on a mid-year or on a yearly basis, but may not carry the right KPIs that can effectively do a 360-degree supplier performance measurement.

Second, such KPIs are outdated and have been blindly reused over and over. The performance ratings, although qualitative, contain the same scorecard ratings and have no significant differences from past SPM projects.

Third, supplier self-evaluation has seldom been taken seriously.

In short, the SPM/SRM is process-driven and probably needs to be updated to efficiently measure supplier performances.

Asking the right questions

Some of the pitfalls that contribute to a half-implemented solution is that there is no adequate measurement to gauge how long has the supplier been with the organization.

• What is the supplier’s demographic scope?
• What is its contribution to spend?
• What are the number categories it caters to?
• What is its supplier spend percentage per category versus overall spend?
• What is the savings the organization has achieved over the years with the supplier?
• How many of them are based on supplier rebates versus negotiations on contract?

For a successful SPM/SRM, there needs to be an exhaustive benchmarking exercise done on the list of suppliers within the organization.

One would need to consider some of the benchmarking initiatives listed above to group suppliers within a bucket based on above parameters.

A scorecard to benchmark suppliers

SPM/SRM KPIs, when applied to these groups, and when their performance is measured, allow organizations to have score cards that can be compared and analyzed to determine which of the suppliers need extended scope, contract, retainership and which of those need to be on a performance improvement plan.

Another way of determining a prerequisite to an action plan can be a combination of supplier benchmarking methodology combined with a supplier incident management report.

The incident management report is a powerful tool to draw out facts pertaining to the number of incidents that have occurred with a supplier over a period.

Critics will argue that the incidences are bound to happen and are minor and there may not be a need to consider an incident report for an SPM/SRM initiative.

This is true, in some cases.

An action plan for unreliable suppliers

From the organization’s perspective, across the list of categories and subcategories that suppliers cater to, across regional and global demographics the accumulation of supplier incidences big and small can cost an organization on administration costs, time, and resources.

For example, let’s say we have a hypothetical supplier ABC Inc. The supplier has a contract with XYZ Inc for a year. In this year, there have been 15 incidents where the supplier has shipped wrong goods, damaged goods, goods that went to the wrong location and goods that have missing parts or components.

The downstream impact this on the organization can be daunting.

Let’s look at it from a procure-to-pay perspective. The receipt has to be reversed; the invoice has to be blocked; a credit note may have to be issued; the accounting, the receiving, the end user who may have an urgent requirement would need to dish out on the same item from a non-contracted vendor which could cost the company; plants can be shut down. Even if there is an organized inventory control and management system, unforeseen things can happen.

Logistics can take days if not weeks depending on the order and volume.

About these incident reports, these could act as a catalyst to the benchmarking effort needed for executing the SPM/SRM process efficiently.

There also needs to be an action plan for suppliers who are in PIP and did not have a great score card.

The action plan methodology helps the vendor manager assign tasks, sub-tasks and milestones to the supplier and monitor the contingency and improvement the supplier is showing.

If there is a need to close out an action plan, if the supplier is doing well, then another chance and another mid-year or a yearly review of their scorecards will determine their effort and they may or may not fall into the PIP process.

For those not able to close an action plan on a supplier on a PIP gives the organization reasons to consider terminating the contract on whichever grounds applicable.

This way, there is due diligence, documentation and facts and it shows the various methodologies used to retain or remove a supplier from a contract.

Author: Apurva Malewar