Driving Supplier Performance Improvement

Driving Supplier Performance Improvement:
Using established HR techniques and on-line tools to enhance supplier
performance management.

Although supplier performance management can be complex and time consuming,
when done well and suppliers are engaged, the rewards can be substantial
By: Ron Latham, Managing Director, Latham 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

Many organisations have either already adopted, - an average supplier performance improvement
or plan to implement Supplier Performance of more than 20% across four main KPIs -
Management (SPM) programs to encourage their compared with those that had no SPM program.
supplier partners to strive for excellence in
delivery of supply, quality and price, partner
relationships and service and support.

The methodology used for SPM varies. Some ask
their procurement/category managers to “vote” for
their Supplier of the Year – often without any They conclude that organisations that use SPM
programs outpace their peers in on-time delivery,
specific performance measures or scoring
guidelines. Many use KPIs and scorecards and quality, service, price competitiveness, and other
supplier performance areas. Their key
also involve other functional managers, but most
are still using paper-based methods or recommendations were:
spreadsheets to rate suppliers and collate results.  Organisations that don’t have formal SPM
programs should investigate the potential
Often results take the form of suppliers only being benefits of developing them, aiming first at
told how they ranked in their category, rather than improving key supplier performance in key
being given reports, and they are unaware of performance categories.
specific ratings and where or how they might  Supply executives should develop a business
improve their performance. case for SPM and sell the program to top-
level management.
But all this is starting to change. In today’s tough  These enterprises also should develop
market and competitive environment more standard supplier performance metrics,
organisations are realising that SPM programs are involve key suppliers in the SPM
more than just a vote, or a popularity contest, they development process, and include key
are about communication of performance internal stakeholders in the process.
expectations and regular formal reviews, often
two-way, to provide feedback on how suppliers are Managing supplier relationships today has gone
performing against those expectations. from identifying and buying goods and services
based on negotiated pricing (a transaction
Similarly, the advent of on-line scorecards and focused approach) to the strategic ability of
multi-perspective assessment tools, coupled with recognising "win-win" opportunities for both buyer
traditional HR performance management and supplier through enhanced supplier
techniques are making the assessment, reporting management activities. Effective supplier
and action planning to address weaknesses an management can ultimately lead to a variety of
easy task to manage and drive supplier benefits including increased collaboration,
performance improvement. savings to the buyer, and alternative or additional
sources of revenue for the suppliers over the
“When you measure and communicate supplier
long-term.
performance regularly, suppliers improve their cost,
quality and responsiveness. Done in an automated,
systematic way, performance improves
dramatically, in some cases by over 50%.”
(Source: Aberdeen Group)

SPM – The business case
The authoritative Boston-based research
company, the Aberdeen Group, defines SPM as
the process of measuring, analysing, and
managing supplier performance to improve
quality, reduce costs, mitigate supply risk, and
drive continuous improvement in supply value.
Considering supplier management challenges
Research by them confirms the intuitively obvious faced by organizations in the modern global
conclusion that using such programs will produce economy, it is no wonder that almost half the
higher value supplies. They found that companies respondents from their Perspectives on Supplier
with SPM programs achieved performance Management in 2011 survey placed a high value
improvement in every category that was studied - on supplier management.


While supplier management has always been a SPM - Learning’s from HR.
critical aspect in doing business, the tools used by Performance management is a technology that
organisations to monitor and manage supplier has been used by Human Resources
relationships have evolved tremendously over the professionals for more than forty years for
past decade. Fuelled by outside factors such as managing behaviour and results.
the need for transparency of suppliers for both
direct and indirect supply chains, and increased Six key lessons learned over that time, which
demands for measuring suppliers against specific have worked in driving performance
KPIs, supplier management functions have moved improvement for employees and have
from the "back-office" to the "boardroom." application in SPM include:
 Evaluating performance is important
because:
o What gets measured gets done
o If you don’t measure results, you can’t
tell success from failure
o If you can’t see success, you can’t
reward it
o If you can’t reward success, you’re
probably rewarding failure
o If you can’t see success, you can’t learn
from it
o If you can’t recognise failure, you can’t
correct it
To illustrate the current adoption of supplier o If you can demonstrate results, you can
management, the results of their research also win support”
shows that most organisations have either taken
on some formal supplier management initiative  Engagement is critical. Simply
over the past few years (38%), or plan to undertaking a one-dimensional, downward
implement (53%) in the next few years. assessment using only a scorecard will not
engender buy-in. This “schoolmaster”
Their summary of the Perspectives on Supplier assessment approach is reminiscent of the
Management in 2011 survey states: “Supplier master /servant relationship, does not
management is an area that has evolved over the encourage discussion and runs the risk of
past decade. And as global commerce expands, outright rejection. Best practice in HR now
organisations will increasingly need to focus on sees employee engagement in
supplier relationship management and the performance management as being a four-
functions that are described within it. stage process:
o Employees set and agree their
Furthermore Pareto's principle "law of the vital individual objectives with their manager;
few" indicates a reliance on a core of suppliers o At mid-year the employee undertakes a
and sets the stage for getting a more complete self assessment of performance,
view of those suppliers being heavily leveraged scoring achievement of their objectives
within an organisation. Therefore the importance and other KPIs, with comments on their
of managing supplier relationships, particularly performance;
those that are considered preferred, demonstrates o The manager does an independent
the cause for potential concern over "supplier assessment of the employee’s
vulnerability." The potential over-reliance on a few performance (objectives, KPIs and
key suppliers makes SPM an even more important comments) then compares his
factor. assessment with the employees;
o Both meet to review their assessments,
Their conclusion: “Organisations that have not with the manager fully prepared to have
embarked on a supplier management strategy are a discussion about performance
missing opportunities for identifying cost savings, improvement, where necessary. At that
more importantly, ignoring opportunities for meeting, they agree on final ratings, any
benefiting from the intangible benefits such as improvement actions. Both parties
positive brand equity and being exposed to share the same output reports, with final
unrecognised and unmeasured risks without a ratings, comments and any
SPM solution”. improvement plan.


Supplier engagement is essential for SPM to SPM – the process
be successful and the same process can be As part of their SPM process, many Companies
utilised, particularly the scorecard self- now undertake formal annual, or quarterly,
assessment, sharing of detailed reports and performance reviews with their suppliers, using
results and the review meeting to agree any KPIs and a formal rating process that generally
action plans. focuses on improvement in two key areas:

 Benchmarking against peers provides both  Product and supply chain: identifying the
comparison and healthy competition for key value added processes in the supply chain
increased remuneration and promotion. and working together with their supplier
partners to fulfil their customer’s wishes better,
Similarly, benchmarking supplier performance faster and at less cost. This is particularly so
encourages competition and performance with extended supply chains and sourcing
improvement – with or without rewards or from low cost countries.
punishment (e.g. Supplier of the Year awards).  Business Partner Relationship: looking at
Suppliers should always know how they rate the entire business relationship, with
and rank in comparison to their competitors appropriate KPIs built around the relationship,
and other suppliers. support and service:
 Risk management: Organisations regularly
assess their exposure to “flight risk” of their KPIs need to be client and category specific, with
critical and senior managers and, through a realistic and appropriate rating scales and
Talent Management process, build their “bench descriptors that align with achievable expectations
strength” of trained and ready replacements to and agreed to by suppliers.
take over at short notice.
Procurement professionals should always
undertake risk assessment analyses on their
mission critical suppliers and ensure they are
already engaged with potential alternate
suppliers so they can always maintain
continuous supply.

 360° Feedback: Is a multi-dimensional
assessment tool used by HR to assess the
competency and behaviours of their key
managers and to get ratings and comments
from various stakeholder groups, e.g. peers,
direct reports, customers etc. The critical steps in a successful SPM program
process are:
Many SPM assessments also utilise this type  Define specific KPIs and metrics for each
of feedback to gain the opinions of supplier supplier category;
customers with their organisation, so they can
 Engage suppliers and key stakeholders in the
understand user perspectives at either a
process;
geographic or business unit level to
 Rate supplier performance:
complement that of the Procurement or
o Procurement managers and key
category manager and also compare it with the
stakeholders rate performance.
supplier’s self-assessment.
o Suppliers rate their own performance as a
 Two-way reviews: Many organisations also self-assessment.
ask their employees to provide feedback on  Report
their manager’s performance, separately from o Key stakeholder reports on results, by
a 360° feedback review. supplier;
o Supplier reports showing their performance;
This technique is used in SPM for high-touch,
high-value strategic partner relationships
 Review - Meet with suppliers to identify
strengths and prepare action plans to address
where the supplier is particularly dependent on
any areas of underperformance;
the timely performance of the client, without
which their performance will be impacted. In  Reward - with Supplier of the Year awards
many instances, these SPM assessments are and publicity.
also combined with a 360° feedback to gain  Repeat the rating, reporting and review
the perspective of all parties and stakeholders. process at regular intervals to monitor
progress;


SPM – the on-line tools As well as category managers assessing
The advent of web-based, multi-user software performance, the 360° feedback tool enables
makes the implementation of SPM easy and functional managers and “front-line” users to
encourages a collaborative approach to be involved in the assessment process – e.g.
continuous performance improvement in what are Operations, Marketing, Production, Finance
complex business relationships, often with etc, all with section specific KPIs.
multiple touch-points in both organisations,  Relationship Optimizer: Two-way
generally spread over many geographic locations. assessments, with 360 feedback capability,
“If you want to have early warnings about possible generally used where there are high touch,
problems in a relationship and a way to surface issues high value relationships with multiple
and to address them collaboratively, you have to have a stakeholders and dependent relationships.
mechanism to take the temperature of the relationship, Often used for a “drill-down” review to further
comparing its effectiveness up against some agreed investigate poor performance identified by one
metrics, and then talking about the results.” of the other tools.
(Source: Vantage Partners)
Performware™ is also be used to assess
The Performware™ platform of proven on-line professional services providers, e.g. Advertising,
tools incorporates and builds on traditional PR , Accounting/audit, Legal, Banking; suppliers
Performance Management techniques. They allow of goods and services: IT, Communications,
organisations to review their business partners, Travel, Vehicles, Property and other key expense
agree on action plans to improve performance areas like sponsorship.
and to better manage the relationship - for mutual
benefit.
The supplier self-assessment option
The software is designed to objectively measure The key lesson from HR performance
high value, high touch relationships and raises the management is that engagement increases with
bar for more effective supplier reviews. It is non- self-assessment as it provides a comparison
prescriptive, fully customisable and allows users perspective and the basis for discussion about
to determine all content. We can easily replicate performance expectations and improvement.
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:
Supplier self-assessment also enables supporting
 Performance Manager: For one-on-one comments and documents, but also to provide
assessments, generally by category managers. feedback in two areas:
The supplier self-assessment option provides
the opportunity for increased engagement and  Their activities during the period and the
allows them to compare their self-ratings, as business environment they operated in. This is
the basis for discussion on the differences in so that the category manager may better
perception, expectations and any understand the perspective in which they are
improvements required. Both supplier portfolio rating the supplier and take into account any
and individual supplier reports are available by event that may have impacted performance
users on-line. that was outside the control of the supplier.

 360 Feedback Manager: For multi dimension  Feedback from the supplier on their
assessments by key stakeholders, where there customer’s performance. Often suppliers are
are multiple touch points within the client dependent on their customer’s policies and
Company, with supplier reports available on- actions which may limit performance and this
line. feedback can assist the partner relationship.


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.


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

“The purpose of investing in a
relationship with a supplier is to
improve their performance in
fulfilling the needs of the buying
organization, thereby improving
the buying organization’s
performance and creating
mutual benefit.”
(Source: Chartered Institute of
Purchasing & Supply)

Summary

“Strategic Partners”, the SPM 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 Our experience is that suppliers are keen to
suppliers to improve their performance and reach participate in, and contribute to the costs of
their full potential and cement their “Strategic SPM reviews. They see value in the
Partner” relationship position. constructive feedback and the ability to access
results on-line to identify their weaknesses and
A well designed SPM program, with supplier put action plans in place for improvement. The
engagement and based on regular result is a Win: Win, with higher levels of
performance reviews and constructive engagement, improved performance and a
feedback, will assist organisations and their closer and more profitable business partner
suppliers to objectively assess performance relationship.
and drive improvement.

To get access to an example assessment, or to have your SPM review converted to the Performware
on-line assessment tool, contact Ron Latham: ron@lathamconsulting.com.au phone +61 2 9959 3815

"The greatest change in the way business is being conducted
may be the accelerating growth of relationships based not on
ownership, but on partnership” (Peter Drucker)

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