Value Chain » KPI

Too Many KPIs: Rightsizing the Supplier Scorecard

Sherry Gordon — Tue, 08 Dec 2009 22:27:28 +0000

You’ve heard of supplier rationalization and “rightsizing” the supply base. What about too many KPIs on the supplier scorecard? I’ve mentioned the problem of measuring too many KPIs in previous posts. In 11 Reasons Why Supplier Scorecards Fail, I list measuring too many KPIs as a reason for failure. In Supplier Scorecard Metrics: Easy vs Meaningful, I discuss how KPIs can proliferate on scorecards just because they are available, not because they are particularly meaningful. What could be the downside of too many KPIs? Isn’t the more KPIs the merrier? I know of a manager who had 80 KPIs on her scorecard. She found that it was impractical to manage that many metrics. The scorecard looked impressive. But the company found it impossible to get actual results with this huge list of metrics.

What are some ways to reduce the number of KPIs on a supplier scorecard to the most meaningful? How do you decide which KPIs to get rid of? Here are four approaches.

1. Look at each metric and test the extent to which it relates to your firm’s goals, objectives and strategies. If the metric is not directly related, it should not be on the scorecard. Supplier metrics need to support your overall objectives and help you achieve your goals. Otherwise, they are taking up resources and space.

2. How realistic and achievable is the item being measured on the scorecard? Is it something that is likely to be achieved in your company? For example, if you are measuring supplier contract compliance, but have no solid means of determining compliance (or at least one that doesn’t require armies of people), then the metric needs to be rethought. Stretch goals are great. But until the business processes and resources are in place to achieve these goals, the metric isn’t ready to be on the scorecard.

3. What is the cost/benefit of the KPI vs the resources required to create the KPI? The effort to obtain the data should be commensurate with a KPI’s usefulness and ability to be actionable. If a KPI is more trouble than it’s worth, it falls into the category of “data for the sake of data” and should be eliminated.

4. How actionable is a KPI? If you look at it and cannot think of ways you can connect it to supplier performance improvement or to the improvement of the customer-supplier relationship, then it may no longer belong on your supplier scorecard.

When it comes to KPIs, sometimes less is more.

-Sherry R. Gordon

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What KPIs Should You Use to Measure Supplier Risk?

Sherry Gordon — Thu, 11 Jun 2009 15:08:27 +0000

With supplier bankruptcies a daily occurrence, to say that the topic of supplier risk has become hot is an understatement. The challenge is what to do about it. Someone recently asked me whether there are any KPIs you can use to measure supplier risk. There are, but developing those KPIs is a business process that goes beyond just thinking them up and slapping them onto a scorecard. Because of high concerns about supplier risk, some have begun to use the term KRIs (key risk indicators) instead of KPIs (key performance indicators).

The first thing you need to do is to define what supplier risk means to you and your company. What risks are you concerned about? Which categories of your suppliers have the potential to create risk? An article in Supply Management, “Beyond Low Prices,” advises doing some thinking around what some of your key supply risks are and get risk management plans and contingency plans in place. This can be as simple as brainstorming the likely risks with others in your firm (including those outside of procurement or finance), the probability of the risks occurring and then focusing on those that you have identified as having a higher probability of occurrence.

A small number of risk-related KPIs can be identified to supplement most firms’ cost-related KPIs, according to a recent report published by Oliver Wyman, Capturing the Upside of Purchasing – Related Risks. According to the report, many companies start out with more qualitative risks and progress to more quantitative risks as the management of risk becomes more cross-functional and shared throughout the firm and identification of, collaboration and communication with key suppliers increases.

So what KPIs might a firm use to get at supplier risk? Here are a few examples:

Operational risks: the percentage of single-source suppliers for whom contingency plans are in place; quality metrics to uncover the risks of poor quality; supplier cycle time and on-time delivery
Control effectiveness: controls that have been bypassed, such as dollars spent on non-approved suppliers or spend under/not under management.
Cost related – supplier and commodity price increases; cash flow at risk from supplier problems
IT/data risk: percent of suppliers using encrypted data transfer

As can be seen by some of these examples, these supplier risks are not under the purview of just one function in the customer firms. And at the end of the day, when all heads turn to procurement about the subject of supplier risk, procurement must work to elevate the conversation of risk to the executive level to include other functions and avoid the mission-impossible position of taking on the entire burden.

-Sherry Gordon

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Scorecard Statistics — do you get what you measure?

Sherry Gordon — Fri, 02 Jan 2009 16:04:18 +0000

As the saying goes, statistics can be made to prove anything – even the truth.

Or, everything is vague to a degree you do not realize till you have tried to make it precise (Bertrand Russell).

The customer sends the supplier its monthly scorecard. Wait, the calculations seem completely wrong. We did better than that. So the supplier team spends several days preparing its own calculations to disprove the scores on the report card. Then several individuals from management spend a day or two at the customer disputing the numbers and generally taking a beating. The customer makes threats and the supplier makes excuses and promises. Nothing changes. Repeat this cycle next month.

Does any of this sound familiar? What’s wrong with this picture? Could be a number of things.

The customer scorecard lacks credibility and is open to dispute

The supplier doesn’t understand how the scorecard is derived

The supplier has not agreed to the basis for the scorecard calculation

What is the result? The result is certainly not improved supplier performance. The result is waste: wasted time on both sides talking about scorecard mechanics and not about how to improve performance. In fact, the supplier knows that its performance is lacking. And the customer is tearing out its hair because this key supplier appears incorrigible. But the way the scorecard and the supplier evaluation process are set up, the focus is on the scorecard itself rather than on performance.

Or, as a supplier, did you ever look at your scorecard and wonder if your customer was just making up the numbers on it, as there was no way to tell how they were derived? Hopefully a simple explanation would suffice, but maybe there was some art rather than just science involved.

Bullet-proof scorecard data can be difficult to develop. Nothing is perfect. However, the data should be clean and valid and the calculations transparent to the supplier. If the scorecard calculations are more smoke and mirrors than defensible, then perhaps the KPIs should be changed, rethought, or eliminated. Otherwise, the effect will be wasted time and resources and ultimately no results.

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Borrowing Supplier Scorecard Metrics

Sherry Gordon — Wed, 17 Dec 2008 18:23:58 +0000

In the benchmarking world, one of the axioms is to “steal shamelessly” from other companies, meaning: don’t be afraid to borrow ideas from others (not steal proprietary information). When it comes to supplier performance metrics, one of the first questions firms ask is: What metrics do others use? The idea is the borrow supplier metrics from others.

While this approach may give you some ideas, it won’t guarantee that you’ll end up measuring what’s important to you. Metrics should be built upon supplier performance expectations that support your company’s goals and strategies. You should be asking why you need a particular metrics and what are you going to do with the information once you have it. Metrics borrowed from others have several potential downsides:

The data on which these metrics are based may not be available
They may not relate to your supplier performance management goals.
They may not be actionable

Rather than benchmark the KPIs in the supplier scorecards of others, you should benchmark their supplier performance management business process. The real best practice around metrics or KPIs (key performance indicators) is the robustness of the performance management business process and the results you get, not which individual metrics you collect.

That being said, if you want some ideas, not recommendations, for supplier performance metrics, here are a few sources:

J.Ross Publishing (publisher) has WAV (Web Added Value) information available (registration required). You can sign up to get some supplier scorecard and metrics examples there that are associated with my book.
Elsmar Cove, a quality discussion forum, has numerous examples of supplier scorecards (registration required).
Balanced Scorecard – a brief article in Wikipedia that gives examples of metrics (or go to the Balanced Scorecard Institute website).

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Supplier Scorecard Metrics — Easy vs. Meaningful

Sherry Gordon — Wed, 10 Dec 2008 15:32:38 +0000

In my last post, I listed 11 reasons why supplier scorecards fail.

I’d like to write about the first reason – measuring what is easily measured instead of measuring what is meaningful or important. This assumes that you already know what is important for your company to measure, but that’s a future topic.

Let’s look at a typical situation. A company wants to measure customer satisfaction (either internal or external) regarding its transportation service. The only information or KPI (key performance indicator) that is currently collected is whether a delivery truck arrives on time. Other elements, such as courtesy and helpfulness of the driver, condition of the goods, corrective actions taken when service failures occur, whether the service met expectations, etc. are not collected. Because of the additional resources required to gather more information, the company bases customer satisfaction largely on one dimension that fails to give sufficiently useful or actionable information.

Or take the example of measuring supplier quality. Companies may measure incoming supplier quality because they have customarily collected the information, but not measure or track in-process supplier quality rejects because of the further investigation needed to determine if the quality problem is the supplier’s fault or the firm’s own fault. If supplier quality is measured only on the one dimension, then the picture of it is likely to be inaccurate. These types of incomplete data make it difficult for the customer or supplier to take any meaningful action to correct problems because they only know part of the picture.

Measuring what is easily measured also applies to categories. A good example is office supplies. It is easy to get data from office supply vendors, as they track their own performance and readily share the information in detail. Because it is so easy to get this information, some companies spend a disproportionate amount of time with office supply vendors. Office supplies are very visible, but not strategic. However, many, if not most, strategic suppliers do not provide such detailed analysis, and more time and resources may be required to gather the most valuable supplier performance information. The risk of pursuing “low-hanging fruit” metrics is focusing too much attention in the wrong areas.

Another aspect of easily collected metrics is that they tend to be lagging rather than leading indicators; that is, that they tell you about what has happened in the past but are not predictive of future performance. While lagging indicators are important, a good supplier scorecard should also contain leading indicators.

One of the big challenges of creating supplier scorecards is finding and/or creating sources of metrics that are meaningful to your business. While it is never wrong to start with a few measurements or KPIs and build the supplier scorecard from there, you should try to choose meaningful, not half-baked or ambiguous metrics just because those metrics can be easily collected.

To learn more about how to succeed with scorecards, my book, Supplier Evaluation and Performance Excellence is a good resource. It is the first book totally focused on how to evaluate suppliers.

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11 Reasons Why Supplier Scorecards Fail

Sherry Gordon — Mon, 08 Dec 2008 15:14:55 +0000

Scorecards have become the Holy Grail of supplier performance management. I find that most companies have some kind of supplier scorecards. And if not, they are in the process of developing them or want to develop them. Expectations for results are high. However, very few firms are satisfied with either their scorecards or the results that they are getting from the scorecards. When asked if the scorecards are providing results and whether supplier performance has improved, very few respond positively. While the supplier scorecard practices that I see are not comprehensive, the challenges of scorecards that firms are facing appear to be fairly common.

Why is developing an effective supplier scorecard such a challenge? Here are 11 reasons why supplier scorecards fail:

1. Metrics or KPIs (key performance indicators) are not meaningful since they measure what is easily measured rather than what is important to the business.

2. Some firms try to measure too many KPIs or too many suppliers to be effective

3. Metrics are borrowed from other companies and are not sufficiently meaningful to the borrowing firm.

4. Metrics do not support or are not aligned with a firm’s business goals.

5. Scorecards lack credibility and thus are subject to doubt and dispute.

6. Scorecards require too much data cleansing and manipulation to produce.

7. Internal stakeholders don’t provide input on a timely basis or not at all.

8. Scorecard results are not regularly shared with suppliers.

9. Suppliers are unclear of customer performance expectations

10. There is little or no action or follow through that results from the scorecards. (i.e., suppliers do not see recognition, rewards, corrective actions, or disengagement as a result of their performance)

11. Scorecards do not get to the root causes of problems, making it difficult to take corrective actions.

In future posts, I will discuss some of these reasons for failure and what you can do to improve your chances of supplier scorecard success.

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