When setting up a supplier performance management (SPM) process, procurement and supplier managers have often asked me which suppliers they should evaluate. Should they focus primarily on the suppliers with whom they spend the most money? Should they try to measure a large portion of their supply base? There is no quick answer other than this. But keep in mind that by measuring only those suppliers with whom you spend the most money, you may be missing some important opportunities and some potential risks. This process is called supplier segmentation. Segmentation is defined by ISM (Institute for Supply Management) as: “The strategic analysis of each supplier to determine the extent to which the supplier contributes to the core competence and competitive advantage of the buying organization.” In this case, one is segmenting the supply base for performance management — those suppliers who merit supplier evaluation and performance management resources and those who do not need to be measured.

Here are four steps to segmenting your supply base for performance management:

1. Based upon your firm’s strategies, identify the types of supplier relationships that are most important. Yes, amount of spend is important. But other types of suppliers may be important for additional reasons such as, for example, sole source, single source, strategic, small businesses, minority and women-owned businesses, etc.

2. Review your supplier performance expectations, particularly in regard to supporting your company’s goals and objectives and what your function need to accomplish. Identify suppliers who will be important in helping you meet these goals and objectives.

3. Look at high-priority or strategically important categories of suppliers. Suppliers can then be segmented according to the strategic value of the relationship, and the investment of resources can be aligned with that value.

• Suppliers who have exhibited poor performance (even if not yet formally measured) such as late deliveries, poor customer responsiveness, and poor quality? Can or have these suppliers adversely affected your business?
• Suppliers located in politically or geographically unstable areas of the world or who demonstrate other potential risks
• Suppliers with whom improved communications about performance and mutually beneficial improvements would be valuable
• Suppliers who are currently working with your company collaboratively on product development or have the potential to do so
• High-potential suppliers who could be developed to become high performers and add more value to the business
• New suppliers who have not yet established a performance track record

Smaller companies often do not believe that they can do much about evaluating and managing supplier performance. The oft-repeated phrase is, “We can’t because we’re small.” However, I’ve found the reverse is true in many cases: We can because we’re small. Smaller firms have an ability to be agile and move quickly, unimpeded by the size and bureaucracy of larger companies.

Smaller firms who do not pay attention to important suppliers can suffer consequences such as not being able to satisfy their own customers and losing business. Another way to view this challenge is: what are the risks of doing nothing? Most approaches and software solutions in supplier performance management (SPM) are oriented toward larger companies. Smaller firms typically do not have the budget or the bandwidth to implement a comprehensive SPM process. Often small companies buy from supplier firms who are far larger than they are and whose attention seems fruitless to try to get.  What, if anything, can a small firm do?

Here are 5 ways small companies can evaluate and manage supplier performance:

1. Determine who your most important and strategic suppliers are. You want to focus on the vital few, not all suppliers. Focus your efforts on those suppliers who could potentially impact or even cripple your business from a performance failure, such as late deliveries, poor quality, or general lack of responsiveness.
2. Develop relationships with important suppliers, even your larger ones. There is no silver bullet for improving the performance of a much larger supplier firm. However, good relationships with several contacts at a larger firm help open the lines of communication to solve problems and can help you develop internal advocates for your company when problems arise. For more information on this subject, see my previous blog post on this subject.
3. Make it easy for your suppliers to do business with you. Some approaches include making sure that suppliers understand your requirements (exactly what you need and when) and communicating any problems that may impact their ability to do a good job for you (e.g., schedule changes, financial issues, etc.). And if you cause a supplier problem, find out why. Then make the changes necessary in your firm to prevent a recurrence.
4. Track and share supplier performance with suppliers. If you are small and can’t buy a supplier performance management solution, there are alternatives. If your enterprise management system has a supplier scorecard function, use it to track several rudimentary KPIs (Key Performance Indicators). If not, try an inexpensive or free approach such as: Tracking your top 10 suppliers using a spreadsheet.  Or, use a simple supplier performance evaluation template, such the ones available for free at SupplierEvaluations.com or here.
5. Communicate with key suppliers: your goals, your requirements, your performance expectations, performance feedback, and generally about ways to solve mutual problems.

Putting SPM and supplier relationships onto your firm’s agenda is vital to the health of a business of any size. Here’s another recent article on the subject, “Working with Vendors” by Eric P. Bloom.

-Sherry R. Gordon, Author of Supplier Evaluation and Performance Excellence

One of the guiding principles in continuous improvement methodologies such as lean enterprise and total quality management is employee involvement: those who do the work know it best and will be able to make improvements. In other words, management is not close enough to the work to understand them enought to improve work processes. Employee involvement in continuous improvement was at one time a big change from traditional command and control management and the philosophy that management, like a parent, always knows best. While some managers and supervisors find this difficult to implement in practice and cannot restrain themselves from providing the answers, lean and continuous improvement leaders and practitioners continue to espouse this philosophy and find it successful in bringing about improvements in the workplace.

How about using this approach in the area of marketing? or product development? Sound crazy? Well that’s exactly what a company called Crowdcast is doing. Their product works on this very premise: that the people who do the work know best — even the answers to predicting what products and product features customers will buy. An article in MIT’s Technology Review explains how this approach works. Basically, employees within a company play the Crowdcast game, complete with play money, to compete in predicting marketing outcomes. In the case of one company cited in the article, their employees, video game developers and testers, were actually 32 percent more accurate than higher level employees. In fact, the accuracy of predictions was in inverse proportion to a person’s level in the corporate hierarchy. That is, the higher level the person, the less accurate their predictions. So what else is new? many of you would say.

This came as no surprise to me, given my involvement in this area, both as a lean practitioner and a software company founder. When I was running my previous software company Valuedge (a supplier evaluation  software solution acquired by Emptoris), our methodology was based on a very similar premise. In assessing a supplier’s performance, we would provide employees from multiple functions and at both management and non-management levels, a series of detailed questions about their company’s business practices and processes. What we found most interesting was the discrepancies among how management and non-management personnel answered the very same questions. In fact, we had a management vs. non-management report that highlighted those differences. This was one of the more insightful tools we provided. We found that if you asked only management people process and performance-related questions, you often got a much different picture than the lower-level associates would give you. Being lean enterprise experts, we were looking for the insights of the rank-and-file employees, since they were closest to the processes.

Now the firm Crowdcast has turned this approach into a clever and successful prediction methodology. It affirms the validity of the approach.

-Sherry R. Gordon

Over on Spend Matters, Jason Busch just wrote two articles, Calculating the Supplier Performance Management ROI Equation Part 1 and Part 2. These articles, which are based largely on my wiki paper, Improve Supplier Performance: Iasta Supplier Performance Management Wiki Paper, address the issue of the ROI for supplier performance management (SPM), a seemingly illusive issue for many companies that are pursuing an SPM business process and, in particular, the purchase of an SPM software application to support that process. In my experience, many companies implement SPM based on a belief and hope that the ROI will occur as a natural result of the process. If the business process is robust, this is true. However, there is a fatal flaw to this approach. Unless the ROI is diligently tracked and communicated to senior management, it will be like the old adage of whether a tree really falls in the forest if no one is there to hear it fall. Another challenge is that the ROI of SPM is commensurate with the amount of effort that goes into taking action and making improvements based on the performance issues that are exposed in the SPM process. You can’t just create supplier scorecards and hope for the best. As I emphasize in my book, Supplier Evaluation and Performance Excellence, SPM with no action planning, follow-through and execution is a recipe for failure.

But how do you actually begin to calculate the ROI? One approach that I use is an Excel model for estimating the amount of additional revenue a firm would need to make up for the cost of poor quality and delivery performance. Calculating the cost and revenue leakage caused by poor supplier performance really helps put the problem in neon lights. I suggest several other approaches for calculating ROI in a previous post on this blog.  But whatever approach you choose, be disciplined about pursuing it and communicating the results.

-Sherry R. Gordon

Subscribers to the Value Chain Group site may now download Chapter 1 of Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results. This download includes:

• Table of Contents
• Preface
• Acknowledgements
• About the Author
• Chapter One  — Introduction, including why the book was written and the business case for supplier performance management

The book has been praised by its readers as being practical, hands-on, an excellent how-to guide. At least one major international corporation has used the book to implement a new supplier performance management system — without the author’s assistance. The author is, of course, in the business of helping firms improve supplier performance, but has apparently revealed much useful information in this book to help you get started.  Links to reviews in periodicals are here. And you can find reader reviews of the book on Amazon here.

You can try before you buy. Should you decide to buy the book, it is readily available through Amazon, Barnes and Noble, and directly from the publisher, J. Ross Publishing.

After you download the chapter (and/or read the entire book), dear readers, you are welcome to post your comments and questions here.

-Sherry R. Gordon

Recently a supplier quality manager asked me about a dilemma he was having with the way his manufacturing facility was measuring in-process supplier quality. If they found defects in supplier parts during the manufacturing process, each defective item was tallied as part of the total. That is, each defective part counted against the total quality performance rather than each shipment counting as a whole against the total.  If one shipment was bad and had 25 of the same defects in it, all 25 defects counted against the supplier’s quality performance rather than just counting it as one defective shipment and essentially just one defect. The problem is that his staff is evaluated, in part, on the basis of supplier performance. One supplier quality incident can appear much more serious than it actually is, and it negatively impacts both the supplier’s scores and the performance reviews of the supply management staff that is responsible for managing that supplier.

The supplier quality manager felt that each quality defect should be counted in the overall quality performance score, as each defect is a problem, even if a number of parts have the same defect (and in many cases, a minor defect, which is a whole other issue). His staff feels that this approach is unfair, as one defect is typically addressed as one problem, even if it has occurred multiple times within a shipment. Mostly, however, they seem to be unhappy about the larger impact on their own performance reviews.

What should this company do? One approach is to calculate quality performance as they do now, but take the frequency and severity of quality incidents into account in the performance review. If there is one incident with 25 parts, the staff reasons, it’s much better than 25 incidents involving one part. And the one larger-size incident should have less impact on the performance review compared to multiple incidents with fewer parts. This approach is more subjective at review time and depends on the discretion of the manager. Is this subjectivity unfair? What do you think of each approach?

I would love to hear your views on how this company should handle this measurement challenge.

-Sherry R. Gordon

Just as you might go beyond words and try to ready a person’s body language to understand what they mean, the same approach can apply to a customer firm on a supplier site visit. While a quality audit has its rules and rigors, there’s nothing like old-fashioned intuition to uncover what’s really going on. As Norman Black wrote in his article, Supplier Auditing (The 5-minute rule), attitude is everything. Nothing says more about the prospects for a good customer-supplier relationship than the attitude of the supplier, from the associates to the president or owner. It starts, of course, with the leadership. If the company’s leaders do not show a sincere respect for their associates, then the company’s long-term prospects for success are reduced and the chances of their being a good supplier partner are also lessened.

One supplier manager with whom I worked (not the person cited above) also said that he could tell how good a supplier was within the first five minutes of a visit. You can just sense it. We were visiting a supplier that is called, in the vernacular, a “lifestyle company”.  In other words, the company existed mainly to maintain and enhance the lifestyle of the owner. The owner had an obvious disrespect for his associates. The non-native English speakers “couldn’t be that bright” and “you could train monkeys to do their jobs”. He also claimed that his employees never had any ideas to contribute, so it was useless to ask for their input. The supplier visit reminded me of the old Radio Shack slogan, “you’ve got questions, we’ve got answers”. Only in their case it was “You’ve got questions, we’ve got no clue, so we’re going to try to bs you.” The company had tidied up and repainted some areas in honor of the customer’s arrival. But a fresh coat of paint couldn’t hide their reactive, not preventive quality system; their lack of any signs of lean manufacturing, even though they claimed a cell had been put in place by a local college a few years ago. The list goes on.

What really amazed me was their ‘tude — certainly not the attitude of a supplier who cared about being responsive to its customer. We felt particularly unwelcome and uncomfortable. The owner had a pompous attitude, and the associates, including the management team, simply acted reticent and fearful, as they were probably going to get into trouble if the customer found out was was really going on. For an experienced supplier site visit or audit team, this non-responsive attitude shone through like a beacon.

This is not to say that a supplier site visit should be based soley on gut feel. But when your antennae start buzzing and a bad feeling washes over you, you had better take it into account along with the standard questions you are asking at the site visit. They may not be a supplier you really want to deal with. They may end up causing you problems that will take more than a few bucks to correct.

-Sherry R. Gordon

I’ve spent more brain cells than I care to think about on supplier evaluation and supplier scorecards. I’ve made a number of posts about the subject on this blog, which I will list in a future post.  And I’ve been a guest blogger on the subject. As part of its Best of Spend Matters series at the end of 2009, my guest post, “12 Reasons Why Supplier Scorecards Fail” made the the cut. Be my guest and refresh your memory on this subject.

And if you want to learn more about the whole subject of supplier evaluation and haven’t yet read my book, here’s my shameless plug for it: Supplier Evaluation and Performance Excellence (J.Ross, 2008). It’s gotten good reviews from ASQ (American Society for Quality), SupplyManagement.com, AME (Association for Manufacturing Excellence) and is on the ISM Business Book List as recommended reading. Also, there are 5 practitioner reviews of the book on Amazon. It’s available from Amazon, J. Ross Publishing, Supply Chain Management Review, and Barnes and Noble.

-Sherry R. Gordon