Supplier Assessment and Performance Measurement

OBJECTIVES
Participants attending the program will:
• Benefit from hearing the practices and experiences of others.
• Cover the many steps in a proper supplier evaluation.
• Gain insights into supplier segmentation.
• Develop performance weightings.
• Learn how to use performance results for improvement.
• Explore various rating systems.
• Discuss methods of collection and reporting data.
• Be presented with assessment forms.
• Understand how to prepare scorecards.
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Supplier Assessment and Performance
Measurement
Supplier evaluation/Assesment is a term used
in business and refers to the process of evaluating and
approving potential suppliers by quantitative
assessment. The purpose of supplier evaluation is to
ensure a portfolio of best in class suppliers is available
for use. Supplier evaluation is also a process applied to
current suppliers in order to measure and monitor their
performance for the purposes of reducing costs,
mitigating risk and driving continuous improvement.

Process
• Supplier evaluation is a continual process
within purchasing departments and forms part of the pre-
qualification step within the purchasing process although in
many organizations it includes the participation and input of
other departments and stakeholders.
• Most experts or firms experienced in collecting supplier
evaluation information prefer doing so using five-step
processes for determining which to approve. Their processes
often take the form of either a questionnaire or interview,
sometimes even a site visit, and includes appraisals of various
aspects of the supplier's business including capacity,
financials, quality assurance, organizational structure and
processes and performance.

Benefits and Drawbacks
There are various benefits associated with an effective
supplier evaluation process such as mitigation against poor
supplier performance or performance failures. The benefits
typically include sourcing from suppliers that provide high
standards of product and service levels whilst offering
sufficient capacity and business stability. Supplier
evaluation can help customers and suppliers identify and
remove hidden cost drivers in the supply chain. The process
of evaluating performance can motivate suppliers to
improve their performance.

Associated challenges with supplier evaluation
include resource and cost commitments in establishing
and maintaining a robust and effective system,
challenges with specifying and gathering meaningful
and relevant information, data integrity, scorecards that
do not get at the root causes of supplier problems, and
subjective or inconsistent scoring which may result in
inaccurate assessment.

Tools
Some of the challenges associated with supplier
evaluation may be mitigated by the use of appropriate
tools. For simple projects a spreadsheet can be used.
But as evaluations become more complex or more
frequent data management and data integrity issues
become significant. Web Electronic RFP / Tendering
systems are often used for initial selection projects.
Some products provide functionality for combining
both initial selection and ongoing evaluation and
benchmarking

Measure Performance

"We want to change the competitive
landscape by being not just better than our
competitors, but by taking quality to a
whole new level.”
– Jack Welch
Performance measures should aim at the long-
term and should be forward-thinking initiative
designed to fundamentally change the way
corporations do business. It is not a post-
mortem of what happened but a step towards
how we do better in the future.

Why measure performance?
Objectives for for-profit organizations:
– Measure changes to stakeholders wealth; put in
simple terms, the value of a firm.
– Reward an employee for contributing to increase
in firm value
Issue: How would a firm measure an individual’s
contribution to value creation and what purpose
does it serve?

The value concept
(Results control)
• The performance measurement concept indicates
that employees can increase the value of the firm
by
– Increasing the size of a firm’s future cash flows,
– By accelerating the receipt of those cash flows, or
– By making them more certain or less risky.
If you are a CEO or CFO, how would you
increase the cash flows?

Measure the right things
• An ideal performance management system is one
that energizes the people in an organization to focus
effort on
• Improving things that really matter –
• One that gives people the information and freedom
that they need to realize
• Their potential within their own roles and that aligns
their contribution with the success of the enterprise.

Then, why do performance
measures fail?
• Root cause: complexity - details, details, details
• Staff who collect data get frustrated.
• Follow: What has to be done" (WHTBD).

Measure What Matters
• Easy to say but difficult to do.
• Find out what is valued both by customers and
stakeholders
• Examples: process: new product
• development, measure: time to market.
• process: customer service, measure: customer
retention.
process: treasury management, measure: cost of
service vs. value created.

Keep it simple
Performance Measures must be
• simple to operate
• simple to understand
• simple to action
Ex: If a sales person spends too much time on call
reporting, they have less time for making calls.

Let us now examine how real world firms
measure performance and we will, later, find
out whether these measures conform to the
concepts we just discussed.
Most organization measure performance
using accounting measures – Net profits, gross
margin, ROA, ROE, etc.

Why do organizations choose accounting data
as measures of performance?
• Accounting profits and returns can be measured
on a timely basis relatively precisely and
objectively.
• Because they are timely, precise, and objective,
employees would react positively.
• The short term measures keep employees on
check.

Why accounting measures of performance
are not adequate?
• Accounting measures are lagged indicators.
• Dependent on the choice of measurement
method.

Accounting can create management myopia
• Accounting is short term earnings or returns.
• Why focusing on the short term is inappropriate?
• Why would this short-term focus affect long-term
relationships?

Competitive Bidding Process

Definition - What does Competitive Bid
Process mean?
A competitive bid process is mostly used in the procurement
of goods and services. The process entails submitting a sealed
envelope detailing the price and terms of an offer. The recipient
of the offer then selects the competitive bidder that has
delivered the lowest price or best terms. While not practiced
regularly, a competitive bid process can be done with a company
sale whereby the investment banker would skip the traditional
M&A process, and immediately solicit letters of intent (LOI) be
delivered confidentially from all potential buyers by a certain
date.

Explains Competitive Bid Process
Companies undertaking a competitive bid process
usually command valuation premiums over their peers.
They typically operate in an industry where they have
developed a significant competitive advantage and
operate as a price leader. Buyers seldom like to get
involved in a competitive bid process, unless the target
company clearly provides post-transaction advantages
that can be readily quantified and pose little risk to be
realized.

Total Quality Management
Introduction
TQM is the way of managing for the future, and is far
wider in its application than just assuring product or
service quality – it is a way of managing people and
business processes to ensure complete customer
satisfaction at every stage, internally and externally.
TQM, combined with effective leadership, results in an
organization doing the right things right, ﬁrst time.

The core of TQM is the customer-supplier interfaces,
both externally and internally, and at each interface lie
a number of processes. This core must be surrounded
by commitment to quality, communication of the
quality message, and recognition of the need to change
the culture of the organization to create total quality.
These are the foundations of TQM, and they are
supported by the key management functions of people,
processes and systems in the organization.

What is quality?
A frequently used deﬁnition of quality is “Delighting
the customer by fully meeting their needs and
expectations”.
These may include performance, appearance,
availability, delivery, reliability, maintainability, cost
effectiveness and price. It is, therefore, imperative that
the organization knows what these needs and
expectations are. In addition, having identiﬁed them,
the organization must understand them, and measure
its own ability to meet them.

Suppliers (internal and external)
Who are my internal suppliers?
• What are my true needs and expectations?
• How do I communicate my needs and expectations to my
suppliers?
• Do my suppliers have the capability to measure and meet
these needs and expectations?
• How do I inform them of changes in my needs and
expectations?
As well as being fully aware of customers’ needs and
expectations, each person must respect the needs and
expectations of their suppliers. The ideal situation is an open
partnership style relationship, where both parties share and
beneﬁt.

The building blocks of TQM: processes, people,
management systems and performance
measurement
Everything we do is a Process, which is the
transformation of a set of inputs, which can include
action, methods and operations, into the desired
outputs, which satisfy the customers’ needs and
expectations.
In each area or function within an organization there
will be many processes taking place, and each can be
analyzed by an examination of the inputs and outputs
to determine the action necessary to improve quality.

In every organization there are some very large
processes, which are groups of smaller processes,
called key or core business processes. These must be
carried out well if an organization is to achieve its
mission and objectives.
The section on Processes discusses processes and
how to improve them, and Implementation covers how
to priorities and select the right process for
improvement.

Developing the Qualification Process
Qualification Process:
Method by which entities, goods, and materials are
examined to ascertain if they meet the required
specifications (qualifying criteria) to be identified
as qualified.

INTRODUCTION
The primary purpose of the New Qualification Process
(NQP) is to ensure that the organization is able to
develop and gain approval for high quality
qualifications. The process aims to ensure that new
qualifications are developed and marketed effectively
and efficiently making the best use of resources
including staff time and therefore ensuring that the
product will provide maximum benefit for learners and
centers.

There are four stages in the process:
• Scoping proposals for qualification development
• Internal Approval
• Qualification Development
• Submission and post-accreditation activity.
Within each stage there are a number of key steps
which are explained in this document. This document
should be read in conjunction with the accompanying
flow chart – Appendix 5.

The process aims to ensure that any decisions taken
about the development of new qualifications are clear,
transparent and based on accurate and reliable market
research and business cases including conclusive
evidence about the product and the potential market
for it. Most new developments will also meet the
specific priorities as set out in the Key Priorities Action
Plan (KPAP).

The responsibility for developing the specific
qualification submission for regulatory body
approval, assessments and support materials,
qualification guide, marketing information and any
briefings for staff will be allocated as part of the
process but ultimately responsibility lies with the
Director of Business Development.

ABC Analysis

The ABC analysis is a business term used to define
an inventory categorization technique often used in materials
management. It is also known as Selective Inventory Control.
Policies based on ABC analysis:
• A ITEMS: very tight control and accurate records.
• B ITEMS: less tightly controlled and good records.
• C ITEMS: simplest controls possible and minimal records.
• The ABC analysis provides a mechanism for identifying items
that will have a significant impact on overall inventory cost,
while also providing a mechanism for identifying different
categories of stock that will require different management
and controls.

The ABC analysis suggests that inventories of an organization
are not of equal value. Thus, the inventory is grouped into three
categories (A, B, and C) in order of their estimated importance.
• 'A' items are very important for an organization. Because of
the high value of these ‘A’ items, frequent value analysis is
required. In addition to that, an organization needs to choose
an appropriate order pattern (e.g. ‘Just- in- time’) to avoid
excess capacity.
• 'B' items are important, but of course less important than ‘A’
items and more important than ‘C’ items. Therefore ‘B’ items
are intergroup items.
• 'C' items are marginally important.

ABC Analysis Categories
There are no fixed threshold for each class, different proportion can be applied
based on objective and criteria. ABC Analysis is similar to the Pareto principle in that
the 'A' items will typically account for a large proportion of the overall value but a
small percentage of number of items.
Example of ABC class are
• ‘A’ items – 20% of the items accounts for 70% of the annual consumption value of
the items.
• ‘B’ items - 30% of the items accounts for 25% of the annual consumption value of
the items.
• ‘C’ items - 50% of the items accounts for 5% of the annual consumption value of
the items.
Another recommended breakdown of ABC classes:
– "A" approximately 10% of items or 66.6% of value
– "B" approximately 20% of items or 23.3% of value
– "C" approximately 70% of items or 10.1% of value

Example of the Application of Weighed
Operation based on ABC class

Conducting Risk Assessment
Risk assessment is the determination
of quantitative or qualitative value of risk related to a
concrete situation and a recognized threat (also called
hazard). Quantitative risk assessment requires
calculations of two components of risk (R):, the
magnitude of the potential loss (L), and the
probability (p) that the loss will occur. Acceptable risk is
a risk that is understood and tolerated usually because
the cost or difficulty of implementing an effective
countermeasure for the associated vulnerability
exceeds the expectation of loss.

Conducting Risk Assessment
Regardless of the size or scope of the issues to be
assessed, or the length of time available, the process of
assessing risk involves the same basic key steps:
• identifying
• categorizing/rating
• managing and
• reviewing risk.
Each of the key steps is outlined below with guidance on
how you can address this within your own organization,
linking to additional supporting tools where appropriate.

1. Identify the risk.
Refer back to the definition of risk and ask yourself, "Where
is there uncertainty surrounding events or outcomes that could
impact on our operational performance, ability to achieve our
aims and objectives or our ability to meet the expectations of
stakeholders?"
Examples:
• Do you face a risk of fire in your premises?
• Are you at risk of losing key staff members?
• Is there a risk of internal fraud or theft?
• Is there a risk of serious damage to the organization's
reputation (e.g. child abuse allegations within a playgroup
project)?
• Is there a risk that funding streams could be terminated?

2. Categories/rate the risk
You now need to work out which of these risks you really
need to worry about. You can do this by categorizing each risk
according to:
– likelihood (ie whether or not it is reasonable to expect an event
or outcome to happen);and
– impact (ie even if something did happen what would be the
impact on the organization and its work?)
There are many different ways of categorizing risks - they can
be given a numerical value (e.g. ranging from 1-5 according to
seriousness in each category) or they can simply be rated as
High, Medium or Low risks.

3. Managing the risks
Having identified and categorized the risks, you now need to
work out what you can do about the most significant of these
risks. For each, you should consider four options:
• a) Avoid the risk
Should you avoid the risk altogether by not entering into the
activity or providing the service? (e.g. youth group decides not to
engage in water sports on its residentials)
• b) Control the risk
Can you manage the activity so that the risk will be less likely
to occur and less damaging if it does occur? This is the most
common approach. Risks can be controlled through application
of good practice, clear policies and procedures, staff training,
clear record keeping, regular reporting etc.

• c) Finance the risk
Should you simply accept that the risk is likely to occur and provide
resources to meet the liabilities when they happen?
(e.g. an organization with a high number of female staff faces a risk of being
unable to meet it's obligations with regard to maternity pay. They therefore
set aside a fund annually for this purpose which they can dip into when
necessary.)
• d) Transfer the risk
Can you have a third party perform the risky activity or transfer the
consequences of the risk to another person or organization? This can be
through insurance, indemnity, exemption from liability or by contracting
another organization to carry out the activity.
(e.g. In the past, some Health Trusts cooked meals in hospital kitchens which
were then delivered by volunteers. However due to the risks of food
poisoning if meals are not served at the correct temperature, they now
contract out this service, ensuring that a 3rd party is entirely responsible for
the process.)

• 4. Review the levels of Risk
At the end of this process you need to go back and
review how these risks should be categorized. Given
the measures that you have put in place to eliminate or
mitigate (reduce) these risks, do they still constitute
major risks?

Example of reviewed risk:
Risk: Organization working with disabled persons
identifies risk of losing current premises.
Category:
• High likelihood (local council has provided for
minimum rent for 5 years, but current lease is up and
council is under pressure to generate rental income).
• High impact (not aware of other premises with
suitable access available locally, currently lacks
resources to pay full rent).

Risk management:
• Organization implements the following actions:
• Enters into dialogue with Council to establish facts of situation
• Researches and identifies alternative premises locally
• Launches a fundraising appeal to raise money to enable them to
afford to pay for their accommodation, whether with the Council
or elsewhere
• Raise the profile of their situation in the media to gain public
support.
Reviewed risk category:
• Medium likelihood (still a risk that they could lose the current
premises, but this has been reduced through mitigating actions).
• Low impact (have now got alternative options which means that
the organization is cushioned from negative impact if the risk
does occur).

What next?
Risk assessment should become an integral part of how
you manage the organization, its resources and its
activities. It is now the Management Committee's
responsibility to confirm that they are happy with this
assessment of the risks faced by the organization and are
willing to accept the level of risk that remains.
The risk assessment should then feed into your overall
and ongoing strategy for managing risk and should become
an integral part of how you manage the organization, its
resources and its activities.

ISO 9000 Quality Standards

ISO 9000 is a series of standards, developed and
published by the International Organization for
Standardization (ISO), that define, establish, and
maintain an effective quality assurance system for
manufacturing and service industries. The standards
are available through national standards bodies. ISO
9000 deals with the fundamentals of quality
management systems, including the eight management
principles upon which the family of standards is
based. ISO 9001 deals with the requirements that
organizations wishing to meet the standard must fulfill.

Third-party certification bodies provide
independent confirmation that organizations meet
the requirements of ISO 9001. Over a million
organizations worldwide are independently
certified, making ISO 9001 one of the most widely
used management tools in the world today. Despite
widespread use, the ISO certification process has
been criticized as being wasteful and not being
useful for all organizations.

Reasons For Use
The global adoption of ISO 9001 may be attributable to a
number of factors. A number of major purchasers require their
suppliers to hold ISO 9001 certification. In addition to several
stakeholders' benefits, a number of studies have identified
significant financial benefits for organizations certified to ISO
9001, with a 2011 survey from the British Assessment Bureau
showing 44% of their certified clients had won new
business. Corbett et al. showed that certified organizations
achieved superior return on assets compared to otherwise
similar organizations without certification. Heras et al. found
similarly superior performance and demonstrated that this was
statistically significant and not a function of organization size

The Supplier Evaluation Forms
Check the attachment

Supplier Performance

INTRODUCTION
• Good performance of suppliers is vital to the efficiency and
success of the public procurement sector and contributes
to the best value of money spent by any organization.
• Supplier performance is one of the supply chain
performance measures that involve cost, quality, time and
customer satisfaction. In order to assess supplier
performance there should be a systematic way of
measuring performance which establishes what to
measure, methods and systems to collect information and
use of measurement data.

Introduction Cont..
• Unfortunately many organizations in the public
sector have not instituted formal procedures for
measuring supplier performance as result no records
to support their views on supplier performance.
• This paper has attempted to view best practices of
measuring supplier performance and the practical
experiences of the public sector on supplier
performance basing on various reports, authors
experience in public procurement and publications
in Tanzania

Introduction Cont..
• The author has tried to limit the scope of discussion by
focusing on suppliers for goods and service providers
for non consultant services. Public sector in this
context refers to Procuring entities in Tanzania

GENERAL ASPECTS OF SUPPLIER PERFORMANCE
• Once a supplier is selected the focus shifts from evaluation
to the continuous measurement of supplier performance.
• To improve performance and manage costs, quality and
delivery time an organization must be able not only to
select the right supplier, but also to monitor and manage
performance of supplier over time.
• Measuring supplier performance is among the ways of
measuring supply chain performance.
• Some measures asses supply base, others assess the
purchasing department, while still others may be used to
monitor the interfaces between purchasing and other
internal functions.

• The most effective performance systems will asses
performance across the entire length of the firms
supply chain, from suppliers through internal process
to customers.
• Major categories of Supply chain performance
measurement are illustrated in the figure bellow:-

Figure 1: Categories of performance
measurement
SUPPLY CHAIN PERFORMANCE MEASURES
COST QUALITY
TIME
SUPPLIER
PERFORMANCE
CUSTOMER
SATISFACTION

• The most important factors used to measure supplier
performance are quality, delivery and price. Other
factors include quality management, partnering,
Customer services, vendor co-operation and problem
resolution ability.
• Some of these factors are quantitative and some
qualitative.

• Measuring supplier performance is an important tool
that is very useful to improve supplier performance,
improve supplier communication, and recognize
exceptional performance and identify suppliers with
developmental needs.

Supplier performance measurement
• Supplier Performance Measurement is the process of
measuring, analyzing and managing supplier
performance for the purpose of reducing costs,
mitigating risks and driving continuous
improvements in value and operations.
• A supplier in this context refers to a party that
supplies goods or services, and may be distinguished
from a contractor or sub-contractor/manufacturer
who commonly adds specialized input to deliverables
also called vender.

• Supplier performance measurement includes the
methods and systems to collect and provide
information to measure, rate, or rank supplier
performance on a continuous basis. Measurement of
supplier performance should be done on each
delivery and routine reporting of supplier
performance usually occurs monthly or quarterly
• Buyers are advised to meet with suppliers at least
once per annum to review performance results.
However a buyer should never delay reporting a
supplier’s poor performance, particularly when it
affects day-to-day operations.

• What to measure?
• The most important factors that should be used to
measure supplier performance fall into two main
categories namely Quantitative (objective) and
Qualitative (subjective). Most of the objective,
quantitative variables lie within the following three
parameters:-
 Delivery Performance
• Orders or material request sent to a supplier have a
quantity and material due date commitment.
• Quantity, Lead-time requirements and due date
compliance help define a suppliers delivery
performance.

• Measuring supplier on time delivery can take
different ways and some of the important factors to
consider are:-
Should all orders be measured?
Should on time delivery be based on shipment date
or receipt date?
What window should be used, (Allowable time of
tolerance -days or Hours?)
What calculation method should be used?

 Quality Performance
• Quality Performance is critical component to any supplier
measurement system.
• There are a number of ways to measure supplier’s quality
performance;
• some of those are number of deviation (substitutes,
similarity) request, accuracy of paperwork, field
campaigns and suppliers cost of quality inspection data
and warranty data are used for measuring supplier
performance.
• The inspection measures are based on the number of
rejects versus lines/Quantity inspected. e.g If 100 items
are inspected and 4 are rejected the reject rate is 4%

Supplier cost reduction/supplier value performance
• Buyers often rely on suppliers for cost – reduction
assistance.
• A buyer looks at a total acquisition cost not just
price. Total acquisition cost considers all costs,
freight, handling, quality and administrative.
• cost reductions such as cycle time reduction,
inventory reduction, Electronic data interchange
(EDI) transactions are to be considered.

• One common method is to track a suppliers real cost
after adjustment for inflation.
• Another way is to compare a suppliers cost against
other suppliers within the same industry.
• Buyers can also use a number of qualitative factors to
assess supplier performance.

• Possible Qualitative service factors include the
following:-
Factor Description
 Problem resolution ability Supplier attentiveness to problem solution
 Technical ability Suppliers manufacturing ability compared with other
industry supplier
 On going progress reporting Suppliers on going report of existing problems or
recognizing and communicating a potential problem
 Correction action response Suppliers solutions and timely response to request for
corrective actions including suppliers response to
engineering change request
 Suppliers cost reduction ideas Suppliers willingness to help a buyer find ways to reduce
purchase cost
 Supplier new product
support
Supplier ability to help a buying firm reduce new product
development cycle time or to help with product design.
 Buyer /seller compatibility Subjective rating concerning how well a buying firm and
supplier work together.

Type of Supplier Measurement Techniques
• Organizations may use one of three supplier
measurement techniques or systems.
• These systems differ in their ease of use, level of
decision subjectivity required resources to use the
system and implementation costs.
• These three systems are categorical system, weighted
point system and cost based system.

Categorical system
• This system requires the assignment of rating to each
selected performance category.
• Examples of possible ratings include excellent, good,
fair or poor. Internal users often provide input when
determining the rating.
• Receiving personnel may provide input about
suppliers’ delivery performance while quality
personnel provide input about quality performance.

Weighted Point system
• A weighted-Point system weighs and quantifies
scores across different performance categories.
• This approach to supplier measurement usually
features higher reliability and moderate
implementation costs.
Cost-based system
• This approach qualifies the total cost of doing
business with a supplier.
• The lowest purchase price is not always the lowest
total cost for an item or service.

• Other non performance cost elements include late
deliveries, returns to supplier, scrap labour costs,
rework costs etc.

Measurement of Service Providers Performance
• Service delivery is distinguished from supplies
delivery and the approach of control and
performance measurement is quite different.
• The scope of service industry is broad and diversified.
The author focuses on non- consultant services such
as cleaning, security, catering, security etc, which are
common to public bodies.
• Services of that nature are characterized by:-
Simultaneity
Perishability
Heterogenity and
Intangibility

• Simultaneity- production and consumption of many
services are simultaneous.
• For example;catering services;serving meals is
accompanied with the manner in which it is
served,language used etc.
• Most services,therefore can not be
counted,measured,inspected,tested or verified.
• Perishability-If service cannot be stored they are
perishable.
• This perisharibility removes the aspect of future
verification/testing (eg.cleaning)

• Heterogeneity-Many services have high labor
content.
• Consequently the standard of service may vary, the
service outputs are heterogeneous.
• This places particular pressure on the measurement
and control systems to try to ensure consistent
quality from the same employee from day to day and
to get comparability of performance between
employees (service providers)
• Intangibility-Most service outputs unlike supplies are
intangible and some mix of tangible goods and
intangible services.

• Identifying what to measure from the mix of tangible
goods and intangible services makes the process of
measuring performance difficult.
• Despite the complexity of measuring performance of
services providers as compared to suppliers the
common approach of measuring services providers of
that nature is by setting Service Level Agreement/
Standards under which actual performance should be
benchmarked.

LEGAL ASPECTS ON SUPPLIERS’ PERFORMANCE
• The Public Procurement (Goods, works, Non-
Consultant Services and Disposal of Public Assets by
Tender) Regulations, 2005, requires the Accounting
officer to appoint a goods inspection and acceptance
committee whose duties shall be to ascertain that
delivered goods are of required quality and quantity
as stipulated in the contract document.
• The condition of contract, however, explains in detail
how the inspection shall be conducted and it
provides for rejection of the supplied goods in case
they fall short of the requirements.

• The conditions of contract further captures important
information with regard to timely and safe delivery of
goods failure of which shall attract liquidated
damages from the supplier or forfeiture of
performance bond, timely payment by the PEs and
resolution of disputes.
• It also provides for warranty on the delivered goods.

PUBLIC SECTOR EXPERIENCE ON SUPPLIERS’
PERFORMANCE
• Public sector is part of the National economy
concerned with providing basic government services.
• In this context the public sector comprises of
Procuring entities which are MDAs,LGAs, parastatal
organizations, anybody corporate or statutory body
or authority established for the purpose of the
Government, and according to PPRA records the
number of registered PEs is about 380.

• On the other hand supplier has been defined by the
PPA No.21 of 2004 as a company, corporation,
organization, partnership or individual person
supplying goods or services, hiring equipment or
providing transport services and who is according to
the contract a potential party to a procurement
contract with the procuring entity.
• A supplier in this context refers to a part that supplies
goods and services and may be distinguished from a
contractor or subcontractor /manufacturer who
commonly adds specialized inputs to deliverables also
called vendor.

Supplier performance follow-up
• One important aspect of supplier performance is to
comply with terms and conditions as stipulated in the
contract.
• Follow up on the state of what has been bought has
been delivered, to ensure that the procuring entity is
satisfied.
• The extent of the follow-up may vary depending on
the contract value or the commodity involved.
• Responsible procuring entity staff should establish
any expected delivery follow-up requirements at the
time the contract is being set up.

• In many cases problems arise during implementation
because mitigating measures were not taken into
account during the preparation of the bidding
documents and contract.
• It is normally required to deal with report of
unsatisfactory delivery immediately.
• Decision must be made on a supplier who has not
delivered goods of the expected quality or who has
not delivered on time on whether it should be
considered as in contract default and what steps
should be taken.

• Supplier performance follow-up is also responsible
for dealing with suppliers whose goods, during the
warranty period, become defective or fail to meet
contract requirements as a result of faulty
manufacture, material or workmanship.
• The scope of the public sector is large and diversified,
thus becoming difficult to assess all performance
factors. The most common factors used to assess
supplier performance are:-
Quality performance
• Experience from the public sector has shown the
following on quality performance;

Lack of knowledge on technical specifications
• Although renderers agree to comply with technical
specifications at a tendering stage and signing the
contract, upon Supply of technical goods such as IT
equipment and other accessories of sophisticated
nature most of deliveries do not conform to the
specifications, as result the whole consignment or
part of it is rejected causing unnecessary delays and
add costs to the operations of the organization.

Poor Performance of the service providers
• Most of the service providers have no capacity to
provide services as per contracts, for instance
collection of solid wastes (SW) in cities and
Municipality is critical problem as a result the
amount of solid wastes in big cities and municipalities
threatens the public health.
• This was revealed in the report of the Controller and
auditor general for the year ending 30th, June 2009 on
big cities and Municipal councils of Tanzania.

• The performance Audit revealed that most of the
community based organizations (CBOs) which are
procured abandon their work after a short time or for
those who keep on working are under performing.
• Most of them, small or newly established companies
have limited financial resources or they consist of
small groups of people with no or little experience in
the field.

Delivery performance
Goods Procured and paid for but not delivered
• The law provides that where receipts of goods is
delayed or seems likely to be delayed beyond the
time for delivery stated in the contract, the procuring
entity shall seek reports and explanations from the
suppliers or their agents and may institute liquidated
damages/changes as may be provided (PRR, 122 (2)
Goods, non-consultant services and disposal of public
assets by tender).
• It is revealed in practice that some suppliers have
been paid but no delivery has been made.

Supplier cost reduction performance
• Most of suppliers for routine items are SMEs whose
capital base is small to run the business. Lack of initial
capital for procurement usually compels suppliers to
request advance payment to facilitate procurement
of supplies, make partial deliveries or fail to deliver
Other factors affecting supplier performance
Limitation on product information
• Many SMEs have limited access to information as
regard to new products and supply market trends as
such no update information or advice can be
provided

Language Barrier
• English language used in tendering process and other
procurement transactions hinder common
understanding on some important issues during
contract implementation.
• A critical scenario is when the goods are supplied
from countries whose languages are not common e.g
Chinese, Japanese etc. This poses a challenge in
communication between the two parties

CONCLUSION
• Public sector views on supplier performance are not
supported by statistics, the author is of opinion that
supplier performance should be measured
systematically and use records for improvement
• Since SMEs form big part of the public sector supplier
base, It is therefore important to develop capacity
building strategy to improve their performance.
• The experiences on supplier performance highlighted
may not be exhaustive .It is however the expectation
of the author that delegates of this conference may
have more to share from their own experience.

Collecting, Rating and Reporting

Collecting the Data
Depends on the services of the company.
Need some information about the company.

Rating Methods - Basic Points
• Add link
Contractor
SupplierPerformanceEvaluationReport.pdf

Establishing Performance Based
Service Contracts

PERFORMANCE BASED CONTRACTING
PBC – First, a procurement METHOD… then a resulting TYPE of
contract
How is it a procurement METHOD?
• All aspects of the procurement are geared toward the PURPOSE of
the contract, not the HOW the contract will be performed.
– Encourages supplier to bring new approaches at a reasonable price by
giving suppliers latitude in determining HOW to achieve contract
purpose and providing incentives for suppliers to achieve purpose
cheaper, faster.
– PBC looks to the supplier to best organize resources to achieve
contract purpose.
– Not described as a procurement method in the VPPA.
– Requires clear, specific, objective contract requirements and
measurable outcomes.

PBC? What is it? Why?
• DEFINITION: Method of contracting where Customer defines the results it is seeking,
rather than the process by which those results are attained. Also included are the
standards against which contractor performance will be measured, and positive
and/or negative incentives.
• BENEFITS:
– ® Better prices and performance;
– ® The customer is released from having to develop detailed specifications and
define the process;
– ® The contractor has more flexibility on how to achieve the desired results;
– ® Less day-to-day surveillance is required; and
– ® Contractors are motivated to be innovative and to save money (we must
evaluate cost vs. benefit!).
• What’s So New About This? NOTHING, in the commercial world. They long ago
realized they do not have the expertise to tell their suppliers how to do the work.).
• The burden is on the contractor to accomplish the required results. He measures his
own performance by developing and implementing a Quality Assurance (QA) plan,
plus the customer measures his performance against standards established in the
contract.

Key attributes of PBC:
– Outcome oriented
– Clearly defined objectives
– Clearly defined timeframes
– Performance incentives
– Performance monitoring
PBC Objectives:
– Maximize performance – supplier delivers based on best practices and
customer’s desired outcome.
– Maximize competition and innovation – encourage innovation using performance
requirements.
– Minimize burdensome reporting and reduce use of contract provisions that tie
supplier’s hands.
– Shift risk to suppliers so they are responsible for achieving contract objectives
through their own best practices and processes.
– Achieve cost savings through performance requirements.

• Elements of a PBC
– SOW or other document describing requirements and customer expectations in
terms of measurable outcomes rather than by means of prescriptive methods.
– Measurable Performance Standards – written definition of what is
considered acceptable performance to determine whether contract outcomes
are met.
– Quality Control Plan (QCP) – written document describing how supplier’s
performance will be monitored and measured against contractually established
performance standards.
– Incentives –
• Written procedures addressing how met and unmet contractual
performance standards will be resolved, escalated, remediated and/or
remunerated.
• Incentives may be linked to price or fee adjustments.
• Incentives can be used, where appropriate, to encourage performance that
will exceed the established performance standards.

• In a PBC, the contract MUST include:
• Everything buying or covered by the contract;
• Volume assumptions for services (particularly if there are large variable costs
involved.)
• Reliability, availability and performance (RAP) requirements, methods of dealing with
operational issues (escalation, help desk, hot line and severity levels) and conditions
of use or change of use conditions/restrictions.
• Dates/deadlines where specific deliverables are due at initial switch on, ramp up,
ramp down or upgrade of service; e.g. year end, implementation dates, legislation
changes.
• Method of delivery (paper/fax/hand, means/source or object code.)
• Time after which deliverables must be consumed or tested and still supported
(obsolescence limits).
• Documentation/manual and standards.
• Definition of what is considered a service failure and what is considered an
“enhancement” to the service.

Critical Success Factors in designing a PBC:
• Define agency baseline and what level of performance is expected.
• Include provisions for flexibility and incentives
• Craft a performance based contract or SOW that:
– Includes mechanisms for measurement, reporting, monitoring and supplier feedback
– Defines a system for revisions and reconciling deviations in expected performance
– Considers a transition period – use “hold harmless” clause during period.
– Monitors performance with regular reporting requirements
– Can be adjusted when needed.
• Identify factors that might impact performance
• Devise corrective action plan for performance deviations
• Benchmark and compare.
• Revise performance targets to continue to achieve progress.
• Provide comparative performance data for suppliers – create a “race to the top”
culture.
• Communicate and reward success.

Make SMART Performance Measures/Incentives Part of the Contract:
• Specific
• Measurable
• Accountable
• Results oriented
• Time-bound
Before Contract: - AQL
Customer must determine acceptable quality level (AQL) so that the supplier can be
measured and evaluated against this pre-established level during the contract.
AQL establishes minimum allowable variation or error rate from the standard.
AQL must be reasonable and determinable.
*During negotiations, customer may allow supplier opportunity to propose different
target levels of standards of service along with the appropriate price adjustment.

PBC Performance Measures Should Measure What’s Important:
• TCO – Total Cost of Ownership
• Quality of Goods/Services
• Proposed technical performance
• Financial stability
• Cost of Training
• Qualifications of Individuals employed/utilized by supplier
• Risk Assessment
• Availability and cost of technical support
• Cost/Price

Performance Incentives
• Cost-based - Relate profit/fee to results achieved by the
supplier in relation to identified cost-based targets.
• Award fee - Allows suppliers to earn a portion (if not all) of an
award fee pool established at start of an evaluation period.
• Share-in-savings - Supplier pays for developing an end item
and is compensated from the savings it generates. Established
baseline of costs is extremely important.
• Share-in-revenue - Generates additional revenue
enhancements; compensation based on sharing formula.
• Balanced scorecard -Used when performance is less tangible,
i.e., quality of lead personnel or communication and resolution
of issues.
• Non-performance Incentives - Specified procedures for
reductions in payment when services are not performed or do
not meet contract requirements.

Payment Strategies
A payment strategy is not limited to incentive or award fees, but may
include payments tied to performance and acceptance. For
instance, a payment incentive schedule may include 100%
payment for on-time deliveries that are validated to exceed or
conform to performance requirements; while delinquent deliveries
or those with diminished performance may have payment
reductions based on calculated increments or percentages tied to
% of service levels not being met.

Non-$ Incentives
Non-Monetary
• Revised schedule
• Reduced oversight
• Positive performance evaluation
• Automatic extension of contract term or option exercise
• More frequent payments
• Lengthened contract term (award term contracting) or purchase of extra
items (award purchase)
• Publish article(s) in agency newsletter or speak at agency seminars
• Letters of appreciation to individual employees may translate to bonuses
• Use trade space for licensing, access to agency officials, etc.

PBCs and SLAs
Service level agreements (SLAs) are contracts which specify in measurable
terms the services to be provided, the standards to be attained in the
execution of those services and the consequences that occur in the event
the standards are not met.
SLAs often include:
• Percent of time services should be available
• Number of users to be supported
• Performance benchmarks
• Schedule for advanced notification of system changes, upgrades, downtime
• Response time
• Usage statistics

Service Level Agreements
In developing and negotiating a successful SLA, the following should be considered
and included:
• Definition of the agency’s business goals, requirements and scope of services
being procured.
• A detailed service description, duration of services, installation timetable,
payment terms, ts and cs and legal issues (i.e. warranties, indemnities and
limitations of liability.)
• A repeatable process, with solid and accurate metrics’ capture and analysis, to
measure the supplier’s progress and monitor performance.
• A documented reporting process that includes type, amount, format and a
schedule of information to be reported by the service provider and procedures
for how customer will oversee the agreement and ensure performance
measures are met.
• Agreed upon procedures for non-performance in case of unforeseen
circumstances.
• Detailed service expectations, performance levels, positive and negative
incentive structure, escalation procedures and legal ramifications; i.e., breach
and default.
• An executed contract that binds the agency and the service provider; the SLA
will be a part of the contract.

EXAMPLE – PBC- Software Development
Desired Outcomes Required Service Performance Standard Monitoring Method Incentives/Disincentives
for meeting/not meeting
Performance Standards
What do we want to
accomplish with this
contract?
What task must
be accomplished
to give desired
result?
What should the
standards for
completeness,
reliability, accuracy,
timelines, quality
and/or cost be?
How will we
determine that
success has been
achieved?
What carrot/stick will
best reward good
performance or punish
poor performance?
Enterprise Architecture
standards will be met,
along with functional
requirements.
All functional
requirements shall be
met; software
delivered shall
comply with
enterprise
architecture
standards including
security
All architectural
requirements shall be met.
Functional requirements
shall be prioritized to allow
for not more than 1%
deviation for each
requirement.
Review test
results/analyses to
ensure required
functionality provided.
Obtain and analyze
user feedback.
Full payment for 100%
compliance. Payment less
than 100% may be made for
less than full compliance if
less than full functionality is
accepted.
User guides and
documentation are
accurate, complete
Documentation shall
meet agency
requirements for
accuracy,
completeness and
ease of use
95% of documentation
provided meets the stated
standards.
Review documentation
with IV&V to ensure
functions and
operations properly
documented.
For each % > 95, supplier shall
receive an extension of the
software support agreement
for an additional 3 month
period.

Example – cont’d
Desired Outcomes Required Service Performance Standard Monitoring Method Incentives/Disincentives
for meeting/not meeting
Performance Standards
Interfaces with all system
components and full
functional to user.
Software full
compatible with
existing LAN and
software suite.
100% compliance required
for customer satisfaction,
performance and utility.
Review system admin.
Logs, noting service
interruptions, conduct
IV&V, tests using
commercial
performance tests.
Full payment made for 100%
compliance. Additional fees
may be awarded if supplier
successfully reengineers
interfaces and improves
baseline performance.
Software can perform
requisite functions,
delivered in accordance
with the stated schedule,
including shorter-term
milestones.
Delivery dates in
contract are met or
exceeded.
Stated delivery date shall be
met unless new completion
date agreed to.
100% inspection For each week ahead of
schedule the documentation is
delivered, contractor shall
receive additional fee of .5%.
No additional fee paid for non-
conforming deliverables.
All users shall receive
training appropriate for
their intended use of the
new software.
Data in existing files
shall be transferred
to the new system
with minimal loss of
productivity and data.
95% of data transferred to
new system suffers no
conversion errors and is
usable when new systems
are made available.
Review user
complaints, trouble
tracking, noting errors
due to data
conversion, improper
software function,
programming
problems.
+/- .5% of total monthly price
for each variance of +/- .5%
variance from standard.

• Practical Example about the company same as
• EXAMPLE – PBC- Software Development

“How to Measure It, Communicate
It and Improve it”

“Great Suppliers are managed not found.”
- Debra Powell-Schaeffer 1996

Meet Dan
Dan is a Sr. Buyer. Recently his department, ACME, experienced a change in
management. A new Director has come on board and one of her first questions was related
to Supplier Performance. In a nutshell, she wanted to know what ACME was doing to
measure it, communicate it and improve it. Some recent high profile, missed deliveries
have only added fuel to an already hot fire.
Dan’s Boss assigns him the task of creating an effective Supplier Performance Plan.
Dan decides that the first thing to do is to
create a Supplier Scorecard. After all he
thinks to himself…I can’t fix a problem until I
know how bad it is…
What would be the primary metrics that Dan
should report on his Supplier Scorecard?

Creating a Supplier Scorecard
Here are the Key Metrics which Dan used:
• I. Quality Performance (35% of total score)
• Supplier Quality on a PPM Basis
• Certified Ship to Stock % (of all parts supplied by Supplier)
• II. Delivery (25% of total score)
• On Time Delivery Performance per Measurement Period
• III. Pricing (10% of total score)
• IV. Cost Reductions (10% of total score)
• V. Service (20% of total score)
• Communication
• Capabilities
• Reliability (honors commitments)
• Inside Sales Support
• Outside Sales Support
• Engineering Support
• Quality Support
• VI. Continuous Improvement (additional points possible)
• Certifications
• Measurable Improvement over previous Scorecard
• Participation in Six Sigma or LEAN Events

Dan’s Scorecard
Dan creates his scorecard
and begins reviewing
supplier performance data
to fill out his first scorecard.
SUPPLIER NAME
I. Quality Score for Quarter <80 81-85 86-90 91-95 95-98 100
0 1 2 3 4 5
Current Score
Total Points for Quality 0 0 0 0 0 0 0
II. Delivery Score for Quarter <80 81-85 86-90 91-95 95-98 100
0 1 2 3 4 5
Current Score
III. & IV. Price Support Score for Quarter
0 1 2 3 4 5
Current Score
V. Service Score for Quarter
0 1 2 3 4 5
Current Score
0
ACME PURCHASING REPRESENTATIVE 0DATE Current QTR SCORE
CURRENT QTR. NOTES
Supplier's Price Support in relation to Industry and Competitors
(0 = Very Poor, 5 = Best in Class)
Supplier's Service Support in relation to Industry and Competitors
VI. Extra Credit
Supplier's may receive 1, 2, 3, 4, or 5 Extra Points for Certifications,
Outstanding Performance in the Quarter, Improvement Over Previous Quarter,
Etc. at Purchasing's Discretion.
ACME Office Supplies Division
711 N. Elm
St. Louis, MO 63119

Dan’s First Scorecard
Dan first scorecard goes
out to Abby Works.
Abby Works is a long-time
supplier with some recent
quality issues that affected
their quality score this
quarter.
A final score of 73 is not
very good…
SUPPLIER NAME
ABBY Works 2011 2nd QTR
I. Quality Score for Quarter <80 81-85 86-90 91-95 95-98 100
0 1 2 3 4 5
Current Score 3
II. Delivery Score for Quarter <80 81-85 86-90 91-95 95-98 100
0 1 2 3 4 5
Current Score 4
III. & IV. Price Support Score for Quarter
0 1 2 3 4 5
Current Score 3
V. Service Score for Quarter
0 1 2 3 4 5
Current Score 5
0
ACME PURCHASING REPRESENTATIVE 73
Janice Hall
July 5th,
2011
VI. Extra Credit
Supplier's may receive 1, 2, 3, 4, or 5 Extra Points for Certifications,
Outstanding Performance in the Quarter, Improvement Over Previous Quarter,
Etc. at Purchasing's Discretion.
CURRENT QTR. NOTES
Qualit rejects on leaf springs up 25% this quarter.
Supplier's Price Support in relation to Industry and Competitors
Supplier's Service Support in relation to Industry and Competitors
DATE Current QTR SCORE
ACME Office Supplies Division
711 N. Elm
St. Louis, MO 63119

What’s Next
After reviewing scorecards, with his boss, Dan realized that ACME really
has some significant supplier performance issues. In fact, almost none of
ACME’s top suppliers scored above an 85. ON-Time Delivery and Quality
Scores were simply not high enough for the majority of their suppliers.
Clearly ACME’s expectations for performance were not being adequately
communicated…
What should Dan do?

Communicating Supplier Performance
Dan decides to call one of his ISM
colleagues to see what he should
do to effectively communicate
Supplier Performance.
His friend recommends that Dan that establish a routine schedule for
providing scorecards to the participating Suppliers and following that up
with quarterly face to face reviews.

Dan’s Plan
Dan decides that he needs to establish a routine Supplier Performance
Process in order to ensure that his Suppliers are actively engaged in
meeting ACME’s expectations for Supplier Performance.
ACME Supplier Performance Process
• Purchasing will provide Supplier On-Time Delivery Data at the end
of each month.
• Quality will provide PPM data at the end of each month.
• This data would be summed each quarter and provided to the
respective suppliers in a Quarterly Scorecard, which Purchasing
will submit.
• Individual Buyers will also be responsible for managing the
subjective elements of the scorecard for their specific Suppliers.
• Any Supplier with a score below 85 would be required to attend a
face to face meeting at ACME to create an improvement plan to
improve the scores in whichever area was deficient. And this
improvement or lack thereof would be documented in the
Supplier’s next Quarterly Scorecard.
What else might Dan consider?

Improving Performance
What actions should Dan consider?
At this point, Dan has effectively measured
and communicated ACME’s critical Supplier
Performance Metrics…but a quick check of
his email shows some critical missed
deliveries and ongoing quality problems.
Simply documenting and communicating
requirements was not necessarily go to
ensure compliance…frustrated Dan wondered
what tools or actions he could take that would
ensure Supplier’s were meeting the required
performance metrics.

Some Tools for Success…
• Dan decided that he needed some key tools to utilize in order to foster continued
Supplier Performance Improvement.
– 1. Working together with ACME’s other departments, Dan creates a Supplier
Partnership Manual which clearly documents all the required performance
activities and metrics for servicing ACME.
– 2. Dan creates a Supplier Continuous Improvement Progress (CIMP) form,
which is provided quarterly to suppliers in addition to their Scorecard. This
CIMP records all deficient performance metrics and documents on a
quarterly basis the Supplier’s actions to improve, correct or eliminate the
root cause of their deficiencies. It is a living document that is referred to
throughout the year and at all face to face meetings to ensure Supplier
Performance Improvement.
– 3. Value Analysis Study – Dan decides to conduct and utilize Value Analysis
Studies of key components purchased from his key Suppliers to determine
areas for cost, quality and performance improvements with ideas generated
by these same Suppliers.

Supplier Partnership Manual
ACME’s Supplier Partnership Manual contains the following:
• Quality Requirements
• Delivery Performance Requirements
• An Explanation and Example of the Supplier Scorecard Process
• Cost Reduction Expectations
• Process Improvement Expectations
• Communication Requirements
• Accounting Requirements
• Credit Application Information
• Billing and Shipping Addresses for all Locations
• Key Contact Information for all Locations
• Shipping and Packaging Requirements
• Transportation Routing Instructions/Bulletins
• Intellectual Property Protection/Non-Disclosure Agreement Requirements

Supplier Continuous Improvement Progress (CIMP)
page 1

Supplier Continuous Improvement Progress (CIMP) page 2

Value Analysis Study
Part# and Description: Buyer:
Current Manufacturer: Date Submitted:
Manufacturer Part#:
Estimated Annual Usage:
Class Code:
Buyer Code:
QUESTIONS YES NO RECOMMENDATIONS
Could Costs be reduced by relaxing Tolerances?
Could Costs be reduced by relaxing Finishes?
Could Costs be reduced by relaxing Testing?
Could Costs be reduced by material changes?
Could Costs be reduced by volumes purchased?
Could Costs be reduced by different mfg. Processes?
Can the part be simplified?
Is there a similar part in form, fit, and function that is
more cost effective?
Are any of the current specifications creating additional
cost burden?
Other Suggestions?
Supplier: Date:
Address:
Signature: Title:
SUPPLIER CHECKLIST FORVALUE ANALYSIS STUDY

What did Dan learn?
Over the course of the next year, Dan was able to
accurately measure Supplier Performance and
communicate it to his respective Suppliers. Managing
improved performance proved to be more difficult, but he
discovered that maintaining a continuous improvement
process with each Supplier generated huge benefits in
terms of improved Supplier Performance, much to the
satisfaction of Dan’s Boss and to Dan’s relief…

Benefits from Measuring and Analyzing

• Supplier Performance Management is the process
of measuring, analyzing, and managing supplier
performance for the purposes of reducing costs,
mitigating risk, and driving continuous
improvements in value and operations.
• Many companies that have implemented supplier
performance management programs have been
able to significantly improve the efficiency and
effectiveness of their supply chain. Key benefits
these companies have realized include:

• Identify and address weak links, as well as
reward strong performers in the supply chain
using the Key Performance Indicators (KPIs) to
help ensure a well functioning and competitive
supply chain.
• Reduce supply risk by gaining visibility into
metrics that serve as an early warning system for
potential supply interruption, quality issues, or
price fluctuations.

• Develop a scorecard on how well a supplier is doing
against its contract terms and, as a result, get a
mechanism to implement contract compliance.
• Increase organization-wide alignment on key
operational objectives, because, in the process by
setting KPS for measuring a supplier they are able to
identify the business objective that is most important
when evaluating that supplier among such things as:

• a) reducing component costs, b) improving
component quality, c) increasing component
delivery flexibility, d) accelerating volume ramp-
ups, etc.
• Build a strong foundation for implementing
continuous improvement programs to identify
future cost savings, improve quality, increase
flexibility, improve delivery metrics, etc.

• For example, our customers use KPI’s to
benchmark a supplier against its peers to
compare their cost, on-time delivery, quality,
support and responsiveness to issues, and then
use the information to set future process
improvement goals for the supplier.
• Gain a mechanism to evaluate the capabilities of
a supplier, which can serve as an input into future
sourcing decisions.

• For example, if a company is looking to expand
their supply base in anticipation of higher
demand, they can use this information to select a
supplier that has the best record for both delivery
flexibility, as well as an ability to scale rapidly.

Framework for successful supplier
performance management initiative
Step 1: Identify metrics, thresholds and targets:
• The first step is to capture key performance
metrics in the supplier’s contracts. This validates
key terms and measures to help ensure contract
compliance are visible.

• Secondly, gather input from key relationship
managers to understand their supplier
performance objectives and use the information
to establish metrics and validate that they are
aligned with overall strategy.
• These metrics and targets should be shared with
suppliers and mutually agreed to, so both the
company and suppliers can create the right
performance management program.

• Step 2: Collect data through various
mechanisms:
• On a consistent and frequent basis, the company
should collect information to calculate current
values on an agreed upon set of metrics,
thresholds and targets. Various methods that can
be used to gather this data include supplier
assessment surveys, information from Enterprise
Resource Planning (ERP) systems, homegrown
operational systems, instant supplier feedback,
etc.

• Step 3: View and analyze aggregated
information:
• Once data is collected, it should be aggregated to
report on performance versus plan. While
spreadsheets and other tools can be used for
analysis, supplier performance management
systems significantly improve the ability to
analyze the information. For example KPI’s allow
companies to monitor the progress of their
suppliers helping ensure they get early warnings
if suppliers are under-performing.

• KPI scores can be compared with contract terms
to help ensure contract compliance. Scorecards
further aggregate this information and provide
companies the ability to view supplier
performance at a moment in time or monitor
trends over a certain period. They allow the
purchasing organization to compare the
performance of a supplier to those of their peers.

• Alerts let companies know when their suppliers
are operating outside pre-established tolerances.
Color-coded status buttons quickly flag potential
areas for the company to focus on.

• Step 4: Identify gaps, prioritize and
communicate:
• Scorecards, trend reports and alerts help identify
gaps between target and actual performance for
virtually every supplier. The purchasing
organization should use this information to
review the impact of performance gaps on their
business in order to prioritize them and then
communicate the priorities of the gaps that need
to be addressed with the supplier and ask for a
remediation plan.

• The use of collaborative supplier portals that
provides this information to suppliers, along with
the ability to set priorities helps ensure that
nothing falls between the cracks and both parties
are on the same page with respect to what is
working well and what needs improvement.

• Step 5: Implement continuous tracking:
• Supplier performance management is not a one
time process. Performance should be tracked on
an ongoing basis - both to help ensure that
previously identified gaps were remediated and
also to keep the focus on continuous
benchmarking and improvement.

• A supplier performance management initiative
needs to be sustainable since it provides a core
foundation for measuring, analyzing and
improving supplier performance. Hence it must
be implemented using a technology platform, so
it is repeatable and consistent, scalable to
support growth, and transportable to other
geographic regions in which the company
operates.

• History teaches us that an organization will
generally only enjoy limited benefits from such an
initiative if it is implemented using spreadsheets
and manual methods and not using enabling
technology.

• A supplier performance management initiative
provides a critical foundation for improving
operational performance, reducing supplier risk,
reducing component costs and improving supply
chain efficiency. It is not about completing a one-
time review with suppliers. To be successful, it must
be sustained on an ongoing basis using enabling
technology – and ideally implemented globally. With
these elements in place, a company’s supplier
performance management initiative can significantly
improve operational performance and competitive
advantage.

• Many Companies are seeking to establish excellent,
long-term working relationships with suppliers
• through mutual performance expectations and
measures, performance feedback, and
• performance improvement plans to ensure
continuous progress. Agilent uses TQRDCE supplier
• expectations and performance feedback, where T, Q,
R, D, C and E represent Technology,

• Quality, Responsiveness, Delivery, Cost, and
Environmental and Social Responsibilities.
• Supplier performance expectations are applicable
to supplier relationships throughout the
• worldwide supply chain.
• The success of this program is shared with our
suppliers who specifically contribute to our
• commitment to excellence. Successful supplier
performance in the areas of TQRDCE offers
• rewards of repeat business, increased sales and
profitable growth.

T: Technology
• Agilent Technologies delivers best in class
products and new technologies to our customers
in
• breakthrough time. We expect our suppliers to be
on-going technological leaders with technology
• a core competency in their respective fields of
design and manufacturing. Suppliers are expected
• to support Agilent with their products throughout
the lifecycle of Agilent Technologies’products.

• Support for Agilent product changes is expected
through participation in collaborative engineering
• to enable timely introductions; to support
continuous technology, quality and cost
improvements;
• and to support worldwide product regulation
requirements.

Q: Quality
• Quality Policy must be exist to earn customer
loyalty by providing products and
• services of the highest quality and greatest value.
To achieve this commitment to our customers,
• The companies expects that all materials are fit
for use, and defect free for electrical, mechanical,
cosmetic reasons, …etc.

• The companies expect notification from suppliers
for all discontinuances, obsolescence's, and
material or process changes that affect form, fit
or function, with sufficient notice to allow Agilent
to make a thorough evaluation.
• Quality and reliability are expected to be
achieved through superior design, process
control and continuous process improvements, in
accordance with Agilent Technologies’ Supplier
Quality System Requirements.

R: Responsiveness
• Companies can achieve growth through well-
implemented new product introductions.
• The companies’ success is contingent upon
delivering new products in breakthrough time
and ahead of our competition, while also
exceeding customer expectations for all product
delivery.

• Companies better to be dependent upon rapid
turn-around time of prototypes from suppliers to
support new product introductions.
• Suppliers are expected to be responsive and
flexible when responding to swings in demand,
and design and manufacturing changes. Suppliers
must provide excellent and timely
communication, service, and issue resolution.

D: Delivery
• Companies better to focused on shortening the
overall product delivery cycle time from customer
order to product delivery. Agilent expects
supplier deliveries to be 100% on-time, and in
alignment with the requirements of the delivery
model (PO, SMI, SOI, DTL & JIT) used by their
associated
• Agilent business. Lead times must be short by
industry standards, reliable and decreasing over
• time.

C: Cost
• Normally, companies are focused on achieving
Total Cost Leadership. The expect to drive
continuous improvement in cost reductions. Their
suppliers must be accountable for offering
effective low cost alternatives aimed at providing
both supply chain flexibility and best value on a
total cost basis.

E: Environmental and Social
Responsibility
• Many companies are aimed to recognize their
obligation to be an economic, intellectual and
social asset in each nation and community in
which they do business. Companies must conduct
its operations in such a manner that respects
basic international principles relating to labor
standards, and protects the environmental
quality of these countries and communities.

• The suppliers are an integral part of this effort;
therefore, suppliers are expected to adhere to
environmental and social responsibility principles
that are similar to those valued at their
companies

Sharing the Information
• Data sharing may be a requirement contained in the
distributorship agreement. This clause, for example,
is excerpted from a distributor’s agreement:
• Information Collection. Upon Supplier’s request,
Distributor shall provide Supplier with information
regarding the Supplier’s Product sales, service and
inventory levels, information about the other
activities of Distributor under this Agreement, and
information about Distributor’s market with respect
to Supplier’s Products and other similar products.

• There can be risks to a wholesaler-distributor
who shares its sales data with a supplier,
especially where the data sought includes sales of
other suppliers’ products. These risks are best
addressed by the parties at the outset with a
clearly-worded written data sharing agreement,
covering the following key issues.

• Ownership of the Data – The agreement should
specify who owns the data the wholesaler-
distributor is providing to the supplier. For
example, the agreement could state that the data
remains the property of the wholesaler-
distributor and the supplier has a license to use
the data as specified in the license agreement
while the agreement is in effect. The license can
be non-exclusive, non-transferable and subject to
termination as specified in the agreement.

• Whose Data Will Be Shared – Will the data-
sharing with a supplier be limited to sales of the
supplier’s products or will it include the
wholesaler-distributor’s sales of similar products?
• Level of Detail – What level of detail will the
shared data be provided to the supplier? The
data can be aggregated as a total for the
wholesaler-distributor’s assigned territory or
Primary Area of Responsibility, or refined to the
specific customer/location level, or by county, ZIP
code, etc.

• License Fee – Will the supplier pay a license fee to
the wholesaler-distributor for the right to use the
data? A license fee, even a nominal amount, will
provide the legal consideration necessary to make
the agreement enforceable.
• Use of Data – What are the authorized uses a
supplier may make of the data? The agreement will
typically prohibit the supplier from sharing or
transferring the data to another party, including any
competing wholesaler-distributors. A nondisclosure
provision in the agreement applicable to the supplier
is also prudent.

• Warranty – The agreement should address what
warranty, if any, the wholesaler-distributor makes
with respect to the accuracy and completeness of
the data provided to the supplier. A warranty
disclaimer and liability limitation language in the
agreement should be considered.

• Term and Termination – The term of the license
needs to be specified as well as the conditions
allowing a party to terminate the agreement. The
supplier’s post-termination obligations (e.g.,
return of all copies of the data, removal of the
data from the supplier’s database, etc.) should be
spelled out in the agreement.

• Data sharing has definite benefits for the supplier
and its wholesaler-distributor who is willing to
share point-of-sales data. As with any mutually
beneficial relationship (i.e., a contract), both
parties will be better served by reaching a clear
written understanding of the arrangement at its
outset.

Supplier Management and
Supplier Development

Preliminaries
• The goal of supplier management and supplier development
is a world-class supplier base
• Supplier management involves
– Supplier Performance Measurement
– Supply Base Optimization
– Buyers accepting some responsibility for supplier
performance
• Supplier management is a pre-requisite to Supplier
development

Preliminaries
• Supplier development is defined as a buyer firm infusing
– Suggestions and ideas, and/or
– Human resources, and/or
– Training, and/or
– Financial capital, and/or
– Technology
into a supplier to
– Improve his capabilities
– Improve his performance
In order to meet the buyer firm’s short-term and long-term
supply needs

Supplier Evaluation (Ch 7) in comparison to
Supplier Performance Measurement (Ch 8)
• Supplier Evaluation is an event to
– Pre-qualify suppliers
– To award contracts
– To pursue improvement opportunities
• Supplier Performance Measurement is a
continuing process

Measurement
• Cost reductions
• Quality performance
• Delivery performance
• Contract Deficiency Notices (CDNs)
Quantitative Variables

Measurement
• ETDBW
• Responsiveness
• Problem resolution ability
• New Product Development Support
• Technical ability
• Commitment to R&D
• Trust levels
Qualitative Variables

Measurement
• Regular reports to the commodity buyer
• Buyers meet with suppliers
• Carrots and Sticks
Reporting and using the information

Supplier Management Techniques
• Categorical system
• Weighted point system
• Cost Index

Categorical System
Performance Category
Score
E G F P
1. Meets Delivery Requirements
2. Customer focused
3. Fair pricing
4. Problem resolution capabilities
5. An innovative supplier
6. Communication and trust levels







Weighted Point System
A weighted average of scores
across a number of categories

Cost Index: Quantifies total cost of
doing business with a supplier
PricePurchaseTotal
CostsanceNonperformPricePurchaseTotal
SPI 

The Supplier Performance Index:
Nonperformance costs are generally per incident standard costs for late
delivery, order shipped incomplete, quality problems and are based
upon such things as rework costs, a line shutdown, lost customer sale,
inspection and return costs, etc.

2.1SPI $15,000
$3000$15,000
 
The Supplier Performance Index example:

2.1SPI $15,000
$3000$15,000
 
02.1SPI $150,000
$3000$150,000
 

PricePurchaseTotal
XCostsanceNonperformPricePurchaseTotal Q
SPI


The Supplier Performance Index with the
Q adjustment:
Where Q is
suppliersallformaterialoflotaofPriceAverage
supplierfor thismaterialforlotaofPriceAverage

Cost Index: Let’s adjust with the Q assuming
$150,000 is the average price of a lot from all
suppliers
2.1SPI $15,000
$3000$15,000
 
02.1SPI $150,000
$3000$150,000
 

Cost Index: Let’s adjust with the Q =
$15,000/$150,000 = .10
02.1SPI $15,000
.10X$3000$15,000
 
02.1SPI $150,000
$3000$150,000
 

Supply Base Optimization
• Rationalizing versus Optimizing
• Implementation: First phase is to eliminate
marginal and perhaps very low volume suppliers
• “Optimization” is a continuous process

Advantages of an optimized
Supply Base
• Reduced cost
• Having a World-Class Supply Base
–Suppliers that generate fewer problems
–Buyers re-direct their time to value-adding
activities
–Access to suppliers’ engineering, design and
other capabilities

Risks of a Reduced Supplier Base
• Absence of competition may generate
complacency and price increases
• Risk of supply disruption

Formal Approaches to Supply Base
Reduction
• The Pareto Rule (20/80)
• “Improve or Else”
• Triage Approach
• Competency Stair Case Approach
Stair Case Example
Step 1. Internal Information and Management
Processes
Step 2. Quality Standards
Step 3. Production Capabilities
Step 4. Logistics Performance

Supplier development is defined as a buyer firm infusing
– Suggestions and ideas, and/or
– Human resources, and/or
– Training, and/or
– Financial capital, and/or
– Technology
Into a supplier to
– Improve his capabilities
– Improve his performance
In order to meet the buyer firm’s short-term and long-term
supply needs

Step 1. Identify candidates for supplier
development
– Is the supplier essential? Or
– Does this supplier meet minimum
requirements and show great potential?
AND
– Is this product or service a source or potential
source for competitive advantage?

Step 2. Form a CFT
Step 3. Meet with supplier’s top management
– Discuss your supplier development plan
– Seek a commitment on Kaizen
– Sense if “alignment” and trust develop

Step 3. Meet with supplier’s top management
(continued)
– Talk about resource commitments, roles of
each party and potential rewards
– Develop agreement on specific measures that
will indicate success

Why Supplier Development?
• Suppliers’ capabilities are not high enough to
meet current requirements or future
expectations
– Switching costs may be high
– Supplier has great potential
• Joint efforts may accelerate supplier
improvement
• Mutual benefits

Example of Supplier Development
Results
Criteria
Before Supplier
Development
After Supplier
Development
Incoming defects 11.65 % 5.45 %
% on-time delivery 79.85 % 91.02 %
Cycle time
(from order placement to
receipt, inclusively)
35.74 days 23.44 days
% orders received complete 85.47 % 93.33 %

The Major Obstacles to Supplier
Development
• Too overwhelming
– Solution: Dichotomize, standardize, rationalize
• Lack of senior executive support
– Solution: Demonstrate the potential gains
• Issues of trust
– Solution: Nondisclosure agreements, exclusivity
agreements, ombudsmen
• Supplier doesn’t have the vision of the concept
– Solution: Supplier Evaluation Reports, incentives, training
sessions, designating Supplier Champions

The End

Supplier Assessment and Performance Measurement

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Supplier Assessment and Performance Measurement