Communication between buyers and suppliers is critical to ensuring high-functioning and transparent relationships. A Supplier Performance Scorecard is a convenient tool allowing suppliers and buyers to regularly monitor their relationships through metrics.
By establishing a scorecard, the supplier and the customer have a consistent means to measure and evaluate the supplier’s performance. This facilitates documenting and collaborating on areas for improvement and helps customers continually monitor which suppliers to keep or replace.
Metrics = Key Performance Indicators
Since a scorecard is primarily a list of metrics to monitor, which should be included?
Metrics may be thought of as Key Performance Indicators, also known as KPIs. Regular review of the KPIs can help buyers decide whether results indicate necessary action.
Every customer defines their own baseline and requirements, and metrics – or KPIs – generally fall into these categories:
- Supplier responsiveness
- Price variance
- On-time delivery
Once the set of metrics is understood, data collection must also be defined.
Responsiveness covers a range of activities:
- Acknowledgment of orders.
- Responses to questions.
- Responses to change requests.
The customer may set expectations of receiving a response to various inquiries within a given timeframe, and there may even be contractual obligations for response time. In addition, when suppliers and customers are in different time zones, there may be expectations around same-day responses to requests coming in after the close of business.
Responsiveness is vital to maintain a successful supply chain. There will always be situations involving purchase order changes. When suppliers are slow to respond – or fail to respond – to change requests, risk is introduced into the process. Transparency in reviewing, discussing, and approving change requests in a timely manner is one effective method of dealing with supply chain risk management.
Customers and suppliers need to have a clear, documented understanding of what defines the standard of quality and when exceptions to the standard would be allowed.
When a single item is delivered, quality can be measured with that item. What about orders of multiple items? In this case, the evaluation may hinge on the percentage of parts that meet the quality standard or definition of perfection. Quality metrics of a shipment may include:
- Inspection Failure Rate
- Beyond AQL (Acceptable Quality Limits) Percentage
- Overall Defect Rate
- Critical/Major/Minor Defect Rate
- “Right First Time” Rate
Price variance is a key factor in budget preparation. When suppliers provide a price estimate, customers count on accuracy to avoid surprises later.
Price variance is calculated as the actual unit cost of a purchased item minus its standard cost, multiplied by the number of actual units purchased.
While some minor price variances may be acceptable due to unforeseen circumstances, a significant price variance shows that supplier issues need to be addressed by management because they are exceeding or not meeting the expected costs.
At first glance, one may think this is just a matter of whether items arrive as promised. Customers must specify whether they expect receipt on a specific date or would be content to receive items within a date range.
Pragmatically speaking, it’s safe to assume that occasionally suppliers will be unable to achieve their delivery commitment. Reasons could be a delay in the supply chain feeding their operation, inclement weather affecting delivery, or some other issue. In that case, the metric may center around communication when on-time delivery can’t be achieved.
Another factor impacting this metric is whether change orders were introduced after the delivery timeframe commitment was made. In that case, re-negotiated delivery enters into the discussion.
In addition, complicated orders may involve multiple deliveries arriving at different times. What minimum level of performance defines on-time delivery here? Does the entire order need to arrive to qualify as “on time,” or will the first arrival define performance? Given the variability in interpretation, “on-time delivery” needs to be clarified and documented when creating KPIs.
Improving supplier performance is a collaborative process
Thurman Co. is uniquely positioned to assist organizations in various aspects of Supplier Management, including developing Supplier Performance Scorecard systems and conducting supplier assessments.
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