Supply chain efficiencies are one of the most effective ways to save money while growing and protecting your own business. When you can rely on your supplier to deliver the supplies you need in a timely and cost-effective manner, you are in a far better position to meet your own customer commitments.
But how do you really know how effectively your supplier is performing?
Well, the root of any and all production and manufacturing efficiencies is normally good data, so we will be showing you how to implement standardized metrics to monitor your supply chain operation, how to interpret those metrics, and how to use them to implement a more efficient supply chain.
What are Supplier Performance Metrics?
Supplier Performance Metrics are essentially another form of Key Performance Indicators (KPIs). Most companies use KPIs in certain departments, such as sales, marketing, and accounting, but they can just as easily be applied to your relationship with your supply chain partners.
A common method of doing this is called the Supplier Scorecard, which is also occasionally known as a vendor scorecard.
The best implementation of the Supplier Scorecard is one that is totally transparent and that works both ways. In this manner, the scorecard can be used to highlight both issues you are having with the supplier and issues they are having with you.
If the Supplier Scorecard only goes one way, then you run the risk of ignoring issues caused by your own procedures that are having an impact on your supplier’s ability to deliver in a timely and efficient manner.
What are the top 4 Supplier Performance Metrics?
When it comes to the performance metrics on the Supplier Scorecard, each industry and each individual business will have its own priorities. However, there are some common gradable metrics that can be used to form a baseline from which a more nuanced scorecard can be created, including:
1. Lead time
Lead time represents the time between an order being received and order completion, and can generally be split into two categories, supplier lead time and vendor lead time.
Supplier lead time starts when the order is confirmed and ends with delivery and Vendor lead time starts when the availability of an item is confirmed and ends with delivery, both are usually measured in days.
Obviously, the shorter the lead time, the better, but lead time is also caught up in other metrics you could potentially include on your scorecard, including:
Purchase order (PO) cycle time – The purchase order cycle time represents the amount of time elapsed between the raising of a purchase order and the time when it is transmitted to a vendor or supplier. Comparing the purchase order cycle time to the lead time can highlight any potential delays at your end that can lengthen the overall lead time.
Vendor availability – While vendor price is often the most commonly measured metric, vendor availability is just as important. There’s no point in negotiating the best possible price on a certain item if it’s never in stock at your chosen vendor.
Acknowledgment rate – Another key part of a holistic overview of your supply chain, the Acknowledgment rate measures how quickly a supplier or vendor confirms receipt of an order. The faster orders and changes to orders are accepted the less risk there is of parts or products being created or shipped that are no longer fit for purpose. Reducing this kind of wastage is one of the key aims of implementing supplier performance metrics.
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The quality of products delivered is obviously a critical metric when it comes to supply chain relationships. The odd defective or damaged product can be forgiven, a consistent stream of defective products is going to put your business at risk.
While quality can be graded on a pass/fail basis, there are other more granular metrics you can put in place if you want a more nuanced view such as:
- Compliance rate – Compliance rate measures the contractual and policy compliance of your suppliers and vendors against the structures put in place by your purchase contracts. Low compliance rates are often an indicator of poor service on the part of the supplier, but they could also be a sign of a poorly written and unclear contract.
One potential solution to this is to implement penalties that are imposed when a supplier is unable or unwilling to comply with the terms and conditions, related to product quality, that are set out in your contract.
- Supplier defect rate – Breaking down the quality metric into a supplier defect rate and the type of defect can give you a better idea of the overall trustworthiness of the supplier and whether they are able to meet certain targets, but not others.
Responsiveness measures the speed at which suppliers respond to your communications. This is a crucial measure of how efficiently your supply chain operates, as it impacts not only the initial order but also any changes in the order that may be required after it is initially sent.
While responsiveness standards obviously need to be realistic and take into account factors such as time zones and distances, even small delays in response times from your suppliers could add up to significant cumulative delay times for you.
4. Cost reduction
Cost reduction covers a number of factors such as PO accuracy, lead times, number of defects, compliance rate, and other metrics we’ve already covered.
Since cost reductions through efficiency are usually the aim of any series of supply chain metrics, cost reduction can be seen as the overall indicator as to whether monitoring and addressing the other KPIs is having the desired effect.
Essentially, if all other desirable metrics are in green, and you are able to also reduce costs through the use of actionable feedback generated by supplier performance metrics, then it is a clear indication that the system works.
Why Measure Supplier Performance Metrics?
As with any set of metrics, monitoring your suppliers using the supplier scorecard allows you to isolate and improve parts of the supply chain that are underperforming.
As an example, one supplier might have an excellent response rate, but will consistently deliver a certain percentage of faulty items. A vendor might have excellent prices, but insufficient to consistently fulfill the orders you need.
At the same time, a well-implemented and transparent system can also highlight issues with your own procedures. For example, if your purchase order cycle time is overly long, this can increase your overall lead times, without any fault on your supplier’s part.
The basic aim of measuring supplier performance metrics is to generate the data you need to increase the efficiency of your supply chain and, therefore, save money.
Best Practices to Evaluate Supplier Performance
As we’ve already mentioned, the exact metrics you use to chart supplier performance will depend on your specific business and the same applies to the steps you use to evaluate your supplier’s performance.
However, as with the metrics suggested above, there are some best practices you can use to get started, including:
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1. Align your goals
If you have specific supply chain improvements in mind, they need to be communicated clearly to your suppliers.
2. Choose your evaluation metrics and collect data
The data generated by monitoring these metrics is used to review and understand a supplier’s readiness and ability to comply with your needs. For example, many companies we talk to use gut feeling to evaluate their supplier performance or collect data by only using supplier assessment forms.
That’s why it is important to include performance data collection as part of the company workflow. Automated ratings that feed supplier performance information into the company systems can go a long way. You can use a tool like Jiga, or just make sure you have a well-defined process in place that’s easy to follow.
3. Design a robust and transparent assessment system
The method used for evaluating supplier performance should be relevant to the industry and broadly based on accepted best practices.
4. Provide actionable feedback
Once an evaluation has been completed, it is critical that actionable feedback is provided to all parties involved. The data on its own is of no particular use if it isn’t used to generate improvements.
5. Showcase the results
When supplier performance evaluation has led to improvements in supply chain performance, these results should be showcased to close the loop and prove the beneficial impact of the assessment.
Open communication and honest assessment
Any supply chain works at its best when all parts of the supply chain are able to take a holistic view of the process and provide honest feedback on the results, backed up by data.
The data generated by measuring your supplier’s performance through the use of a supplier performance scorecard is the foundation that can be used to create the kind of actionable feedback that, in turn, saves money through greater efficiencies.