Outsourcing is, of course, quite a common practice these days. How many companies have not jumped into outsourcing? I was reading the classic list published by Supply Chain Digest: 40 Risks and Mistakes of Supply Chain Outsourcing and stopped at the first mistake:  Outsourcing undesirable functions versus the ones that provide greatest competitive advantage. This first mistake reminded me of a difficult outsourcing situation that I came across recently. The organization had a problem supplier. This supplier manufactured a key item for this company. However, the supplier constantly delivered late, and and their quality was abysmal. I asked this firm why they were putting up with such poor performance. Had they not asked the supplier to improve? Or tried to help the supplier improve? Why didn’t they find another source? The answer: it’s complicated.

In further questioning, it seemed that the supplier’s management and command and control culture were problemmatic. Associates had no power to change things and no training even to know what to do to improve the quality and delivery. No one really understood concretely and specifically what needed to be done to improve the situation. And with an indifferent management that thought they were managing the bottom line and inadvertently starving manufacturing into anorexia, the situation was bleak. The problem seemed intractable.

My take: start the process of finding a new supplier ASAP. Problem: the supplier is effectively sole source. While technically the supplier is single source and that other suppliers can be found, switching to another source would be a long and costly process.

Now it’s easy, but too late, to opine about how this customer should never have gotten itself into this bind in the first place. Companies need to outsource for the right reasons. Any product or component that is strategic to an organization’s survival, no matter how badly the company does not want to make that product, should not be outsourced unless there are strategic reasons for outsourcing it and there are viable alternative sources. Avoidance instead of strategic outsourcing can lead to unpleasant and unintended consequences. Viable alternatives mean that the switching time and costs are not prohibitive.  However diligent you are, your supplier can start out great and then fall on bad times through mismanagement, a buyout, market conditions or a supply risk black swan event. But it behooves the customer to monitor the supplier closely and not get to the point where supplier poor performance creates a disaster for the customer due to unintended dependence.

-Sherry R. Gordon

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

There’s a new article on the eSourcingwiki, Understanding and Improving Supplier Performance. The wiki paper is also available for download on this page. It’s a good overview of the benefits and process of supplier performance management. If you haven’t read my book yet, this article provides an overview of some of the key concepts in it. In general the eSourcingwiki is an excellent source of information about many facets of sourcing and supplier management.

Also, please stay tuned to the next issue of AME Target, the magazine of the Association for Manufacturing Excellence. Coming out in the September issue is a feature article that I wrote about two companies and their supplier evaluation processes and journeys, “Supplier Performance Management: It’s More than Scorecards.” I’ll add an update to this blog as soon as the issue is published.

-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

I’ve discussed previously how supplier performance metrics work best when they are aligned with and support overall corporate goals and strategies and reasons why they can fail. But the challenge remains of how to tell whether you’ve come up with a good metric.  There are many ways to look at a metric to judge how effective it will be. Here are a few basic questions to ask about a metric:

• Does the metric support the expectations you have of your suppliers’ performance?

Firms need to define and communicate performance expectations for suppliers. Then they should measure supplier performance against these expectations. Thus, the metrics need to provide insight into whether performance expectations are being met. For example, if you expect your suppliers to be responsive when problems arise, how do you measure that? You many need to measure more than just the quantity of corrective actions (CARs) you’ve issued to a supplier. The metric may need to be CAR response time and how many CARs are resolved or closed. Or alternatively, track how quickly suppliers resolve performance issues by tracking when identified and when resolved.

• Is the metric based upon reliable and credible data?

Disputes over inaccurate performance data cost time and money and they can result in distractions and misplaced focus. For example, if you measure suppliers for on-time delivery, is your data accurate? Be sure that items are not sitting on the dock for days before they are received. Or, if you measure product or service quality, having a common understanding of the definition and the calculation of the metric is necessary to avoid a distracting focus on the calculation rather than actual quality.

• Is the metric relevant?

If you track a supplier’s inventory turns, what does that tell you? Do they have internal bottlenecks? Do they use poor inventory management practices? You will never really know from tracking their inventory turns. It is preferable to find metrics that provide more insights.

• Is the metric actionable?

Some firms choose measurements simply because they are readily available.  Metrics calculations can expose problems, but cannot always lead to resolving them because it is unclear why a problem is occurring. For example, knowing a supplier’s quality performance is important. But you may need to track additional metrics to understand other dimensions of quality. Knowing why it is getting worse helps the supplier take action. Often underlying business practices will reveal the root causes of problems.

-Sherry R. Gordon

Last year I read with great interest about the results of the Supplier Relationship Management survey done by State of Flux, a procurement and supply chain consulting firm in the UK. The headlines about the results stated that companies were confusing supplier performance with supplier relationships.  The 2009 survey found that companies were largely monitoring supplier performance and were not getting to the next step — viewing supplier relationships as collaborative. Customer-supplier collaboration is a key business practice for deriving value from SRM. Last year’s survey produced some good insights into SRM adoption, which is still in its early stages or not adopted at all in many companies. And, as one might expect, many in purchasing functions felt poorly-equipped to handle SRM effectively despite its perceived importance and had difficulty demonstrating its benefits to senior management. Tyically supplier performance issues and cost reductions tend get management’s attention. SRM requires the development of close customer-supplier relationships so that considerable value from areas such as innovation, new product development, operational improvements can be derived.

I thought readers of my blog would be interested in participating in the 2010 SRM survey and in getting the results of it.

Here is some information about the 2010 SRM survey from State of Flux and a link to the actual survey:

“State of Flux has launched its 2010 survey on Supplier Relationship Management (SRM) and is reaching out to supply management and purchasing professionals to complete it. Individual responses are kept confidential. We know that SRM remains a hot topic for organisations, and creating the business case for change in this area is often challenging. All of us understand intuitively that SRM is the right thing to do, but it is difficult to put absolute values on the benefits that can be achieved through an SRM improvement programme.

In 2009 State of Flux focused their survey around the 6 steps for SRM success and for the 2010 survey they have extended the survey to not only focus on how organisations approach SRM and their business cases for change, the implementation and overall approach to SRM, but to also allow organisations to benchmark where their programs are in comparison to the leading practices. 

It would be appreciated if you could take 10 to 15 minutes to complete the survey. State of Flux will happily provide the results upon completion of the survey and like last year they are planning to run some cross organisational workshops to discuss further so I’m sure they will be happy to invite you to join those.”

 The link to survey is http://www.stateofflux.co.uk//surveys/srm_survey.aspx

-Sherry R. Gordon 

At the end of the year, and especially at the end of a decade, many top ten lists are popping up. So I’m joining in this list-making with the top ten reasons why firms should implement supplier performance management (SPM).

1. Find out how well suppliers are really performing
2. Improve supplier performance such as quality, responsiveness, customer satisfaction and delivery
3. Reduce the cost and operational impacts of poor supplier performance
4. Derive value from suppliers beyond lower prices, such as collaborative product development and business development opportunities
5. Better understand the supply base and who the most critical and strategic suppliers are
6. Find out current or potentially risky suppliers
7. Uncover and reduce supplier-induced problems (and cost drivers) such as customer complaints, quality problems and warranty returns
8. Gather the information that will help you set criteria for new supplier on-boarding and approved supplier lists
9. Find and disengage with low-performing suppliers
10. Identify specific, value-added supplier performance improvement opportunities

Supplier performance management is more than the quest for the perfect scorecard. It is a business process for measuring, analyzing and monitoring supplier performance and suppliers’ business processes and practices in order to develop productive customer-supplier relationships and to reduce costs, mitigate risk, drive continuous improvement and leverage supplier value. While firms can certainly derive “quick hits” from SPM, it yields the most value and impact when viewed as a premeditated, ongoing business process with multi-function participation and ongoing care, feeding and continuous improvement.

-Sherry R. Gordon