Driving Supplier Performance Improvement

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 Consulting

At a glance: The business case for supplier performance management (SPM) programs is clear and organisations place a high value on supplier management. Most organisations have either taken on some formal supplier management initiative over the past few years, 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 for measuring 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: Using established HR techniques and on-line tools to enhance supplier

performance management.

“When you measure and communicate supplier 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)

Driving supplier performance improvement

Many organisations have either already adopted, or plan to implement Supplier Performance Management (SPM) programs to encourage their 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 specific performance measures or scoring guidelines. Many use KPIs and scorecards and also involve other functional managers, but most are still using paper-based methods or spreadsheets to rate suppliers and collate results.

Often results take the form of suppliers only being told how they ranked in their category, rather than being given reports, and they are unaware of specific ratings and where or how they might improve their performance.

But all this is starting to change. In today’s tough market and competitive environment more organisations are realising that SPM programs are more than just a vote, or a popularity contest, they are about communication of performance expectations and regular formal reviews, often two-way, to provide feedback on how suppliers are performing against those expectations.

Similarly, the advent of on-line scorecards and multi-perspective assessment tools, coupled with traditional HR performance management techniques are making the assessment, reporting and action planning to address weaknesses an easy task to manage and drive supplier performance improvement.

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. Research by them confirms the intuitively obvious conclusion that using such programs will produce higher value supplies. They found that companies with SPM programs achieved performance improvement in every category that was studied -

- an average supplier performance improvement of more than 20% across four main KPIs - compared with those that had no SPM program.

They conclude that organisations that use SPM programs outpace their peers in on-time delivery, quality, service, price competitiveness, and other supplier performance areas. Their key recommendations were: Organisations that don’t have formal SPM

programs should investigate the potential benefits of developing them, aiming first at improving key supplier performance in key performance categories.

Supply executives should develop a business case for SPM and sell the program to top-level management.

These enterprises also should develop standard supplier performance metrics, involve key suppliers in the SPM development process, and include key internal stakeholders in the process.

Managing supplier relationships today has gone from identifying and buying goods and services based on negotiated pricing (a transaction focused approach) to the strategic ability of recognising "win-win" opportunities for both buyer and supplier through enhanced supplier management activities. Effective supplier management can ultimately lead to a variety of benefits including increased collaboration, savings to the buyer, and alternative or additional sources of revenue for the suppliers over the long-term.

Considering supplier management challenges faced by organizations in the modern global economy, it is no wonder that almost half the respondents from their Perspectives on Supplier Management in 2011 survey placed a high value on supplier management.


While supplier management has always been a critical aspect in doing business, the tools used by organisations to monitor and manage supplier relationships have evolved tremendously over the past decade. Fuelled by outside factors such as the need for transparency of suppliers for both direct and indirect supply chains, and increased demands for measuring suppliers against specific KPIs, supplier management functions have moved from the "back-office" to the "boardroom."

To illustrate the current adoption of supplier management, the results of their research also shows that most organisations have either taken on some formal supplier management initiative over the past few years (38%), or plan to implement (53%) in the next few years.

Their summary of the Perspectives on Supplier Management in 2011 survey states: “Supplier management is an area that has evolved over the past decade. And as global commerce expands, organisations will increasingly need to focus on supplier relationship management and the functions that are described within it.

Furthermore Pareto's principle "law of the vital few" indicates a reliance on a core of suppliers and sets the stage for getting a more complete view of those suppliers being heavily leveraged within an organisation. Therefore the importance of managing supplier relationships, particularly those that are considered preferred, demonstrates the cause for potential concern over "supplier vulnerability." The potential over-reliance on a few key suppliers makes SPM an even more important factor.

Their conclusion: “Organisations that have not embarked on a supplier management strategy are missing opportunities for identifying cost savings, more importantly, ignoring opportunities for benefiting from the intangible benefits such as positive brand equity and being exposed to unrecognised and unmeasured risks without a SPM solution”.

SPM - Learning’s from HR. Performance management is a technology that has been used by Human Resources professionals for more than forty years for managing behaviour and results.

Six key lessons learned over that time, which have worked in driving performance improvement for employees and have 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 it o If you can demonstrate results, you can

win support”

Engagement is critical. Simply undertaking a one-dimensional, downward assessment using only a scorecard will not engender buy-in. This “schoolmaster” assessment approach is reminiscent of the master /servant relationship, does not encourage discussion and runs the risk of outright rejection. Best practice in HR now sees employee engagement in performance management as being a four-stage process: o Employees set and agree their

individual objectives with their manager; o At mid-year the employee undertakes a

self assessment of performance, scoring achievement of their objectives and other KPIs, with comments on their performance;

o The manager does an independent assessment of the employee’s performance (objectives, KPIs and comments) then compares his assessment with the employees;

o Both meet to review their assessments, with the manager fully prepared to have a discussion about performance improvement, where necessary. At that meeting, they agree on final ratings, any improvement actions. Both parties share the same output reports, with final ratings, comments and any improvement plan.


Supplier engagement is essential for SPM to be successful and the same process can be utilised, particularly the scorecard self-assessment, sharing of detailed reports and results and the review meeting to agree any action plans.

Benchmarking against peers provides both comparison and healthy competition for increased remuneration and promotion.

Similarly, benchmarking supplier performance encourages competition and performance improvement – with or without rewards or punishment (e.g. Supplier of the Year awards). Suppliers should always know how they rate and rank in comparison to their competitors and other suppliers.

Risk management: Organisations regularly assess their exposure to “flight risk” of their critical and senior managers and, through a Talent Management process, build their “bench strength” of trained and ready replacements to 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.

Many SPM assessments also utilise this type of feedback to gain the opinions of supplier customers with their organisation, so they can understand user perspectives at either a geographic or business unit level to complement that of the Procurement or category manager and also compare it with the supplier’s self-assessment.

Two-way reviews: Many organisations also ask their employees to provide feedback on their manager’s performance, separately from a 360° feedback review.

This technique is used in SPM for high-touch, high-value strategic partner relationships where the supplier is particularly dependent on the timely performance of the client, without which their performance will be impacted. In many instances, these SPM assessments are also combined with a 360° feedback to gain the perspective of all parties and stakeholders.

SPM – the process As part of their SPM process, many Companies now undertake formal annual, or quarterly, performance reviews with their suppliers, using KPIs and a formal rating process that generally focuses on improvement in two key areas:

Product and supply chain: identifying the key value added processes in the supply chain and working together with their supplier partners to fulfil their customer’s wishes better, faster and at less cost. This is particularly so with extended supply chains and sourcing from low cost countries.

Business Partner Relationship: looking at the entire business relationship, with appropriate KPIs built around the relationship, support and service:

KPIs need to be client and category specific, with realistic and appropriate rating scales and descriptors that align with achievable expectations and agreed to by suppliers.

The critical steps in a successful SPM program process are: Define specific KPIs and metrics for each

supplier category; Engage suppliers and key stakeholders in the

process; Rate supplier performance:

o Procurement managers and key stakeholders rate performance.

o Suppliers rate their own performance as a self-assessment.

Report o Key stakeholder reports on results, by

supplier; o Supplier reports showing their performance;

Review - Meet with suppliers to identify strengths and prepare action plans to address any areas of underperformance;

Reward - with Supplier of the Year awards and publicity.

Repeat the rating, reporting and review process at regular intervals to monitor progress;

“If you want to have early warnings about possible problems in a relationship and a way to surface issues

and to address them collaboratively, you have to have a mechanism to take the temperature of the relationship,

comparing its effectiveness up against some agreed metrics, and then talking about the results.”

(Source: Vantage Partners)


SPM – the on-line tools The advent of web-based, multi-user software makes the implementation of SPM easy and encourages a collaborative approach to continuous performance improvement in what are complex business relationships, often with multiple touch-points in both organisations, generally spread over many geographic locations.

The Performware™ platform of proven on-line tools incorporates and builds on traditional Performance Management techniques. They allow organisations to review their business partners, agree on action plans to improve performance and to better manage the relationship - for mutual benefit.

The software is designed to objectively measure high value, high touch relationships and raises the bar for more effective supplier reviews. It is non-prescriptive, fully customisable and allows users to determine all content. We can easily replicate any current SPM review format, scoring criteria and process and the tool is intuitive, with user-friendly features that makes efficient use of time for users. Results, including trends, and data analysis are presented on-line in a dashboard and graphics format. This, more disciplined, approach to supplier reviews can also be used as the basis for “Supplier of the Year” type programs and awards.

There are three on-line assessment tools, designed for different uses, each with a KPI importance weighting option and the ability to collect supporting comments, to compliment and explain ratings, to make the feedback more actionable for suppliers:

Performance Manager: For one-on-one assessments, generally by category managers. The supplier self-assessment option provides the opportunity for increased engagement and allows them to compare their self-ratings, as the basis for discussion on the differences in perception, expectations and any improvements required. Both supplier portfolio and individual supplier reports are available by users on-line.

360 Feedback Manager: For multi dimension assessments by key stakeholders, where there are multiple touch points within the client Company, with supplier reports available on-line.

As well as category managers assessing performance, the 360° feedback tool enables functional managers and “front-line” users to be involved in the assessment process – e.g. Operations, Marketing, Production, Finance etc, all with section specific KPIs.

Relationship Optimizer: Two-way assessments, with 360 feedback capability, generally used where there are high touch, high value relationships with multiple stakeholders and dependent relationships. Often used for a “drill-down” review to further investigate poor performance identified by one of the other tools.

Performware™ is also be used to assess professional services providers, e.g. Advertising, PR , Accounting/audit, Legal, Banking; suppliers of goods and services: IT, Communications, Travel, Vehicles, Property and other key expense areas like sponsorship.

The supplier self-assessment option The key lesson from HR performance management is that engagement increases with self-assessment as it provides a comparison perspective and the basis for discussion about performance expectations and improvement.

Supplier self-assessment also enables supporting comments and documents, but also to provide feedback in two areas:

Their activities during the period and the business environment they operated in. This is so that the category manager may better understand the perspective in which they are rating the supplier and take into account any event that may have impacted performance that was outside the control of the supplier.

Feedback from the supplier on their customer’s performance. Often suppliers are dependent on their customer’s policies and actions which may limit performance and this feedback can assist the partner relationship.


Our experience is that there will always be a gap, often quite a significant one, between a supplier’s view of their performance and that of their customer.

The following chart illustrates both the range of ratings between the top and bottom performers (as rated by their customer), but also that suppliers, on average, all think they are almost as good as the top performer. The second chart illustrates that this “perception gap” between their own self-assessment score and that of their customer, can differ enormously by KPI, with the example showing suppliers rating between 22% and 63% higher than their customer.

The questions that category managers needed to address in this instance, during their review meetings with 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.

Reports Feedback to suppliers on their performance is critical and forms the basis of review meetings and action plans. The software provides on-line reports to both the supplier, when the self-assessment option is selected, and to the category managers for individual supplier reports and comparison across their portfolio of suppliers. Detailed, automated, on-line reports mean that analysis and feedback can be timely, with a menu of reports 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.

"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)

“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)

Driving supplier performance improvement Example Portfolio Report: Overall supplier performance summary at KPI group level, as rated by stakeholders.

Summary

“Strategic Partners”, the SPM journey Today organisations do not just want their suppliers to sell them products. They want them to become “business builders”, helping to optimise their revenue and profitability through a deep understanding of their specific business needs, as a “Strategic Partner”.

Organisations must help their key suppliers on the journey from “Vendor” to “Supplier” to “Key Supplier” to that of a “Strategic Partner”. The journey to a strategic partner is not easy, but is worth the effort. It requires paradigm shifts by both parties, particularly in attitudes, requiring openness, trust and information sharing.

SPM is absolutely critical in the “Strategic Partner” journey. With its regular performance monitoring of KPIs it is a vital tool to plot the journey. It helps suppliers to improve their performance and reach their full potential and cement their “Strategic Partner” relationship position.

A well designed SPM program, with supplier engagement and based on regular performance reviews and constructive feedback, will assist organisations and their suppliers to objectively assess performance and drive improvement.

Our experience is that suppliers are keen to participate in, and contribute to the costs of SPM reviews. They see value in the constructive feedback and the ability to access results on-line to identify their weaknesses and put action plans in place for improvement. The result is a Win: Win, with higher levels of engagement, improved performance and a closer and more profitable business partner relationship.

To get access to an example assessment, or to have your SPM review converted to the Performware on-line assessment tool, contact Ron Latham: [email protected] phone +61 2 9959 3815

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Driving Supplier Performance Improvement