Supply managers and buyers have always had the challenge not just of finding suppliers but finding suppliers who are both high-performing and “best value”. Numerous supplier evaluation and supplier performance management software solutions are now available, where ten years ago very few options existed. Most options that I’m aware of are either SaaS (software as a service) or licensed software solutions that are typically targeted at medium to large-size companies. The choices for software solutions for evaluating suppliers have certainly increased since the days when I was in the supplier evaluation software business. In fact, the whole supplier information and supplier performance management solutions market has heated up as companies are becoming more concerned about the impact of supply risk and supplier performance issues.  For a further description of this market, you can read an analysis that appeared on the Spend Matters blog.

However, some challenges still remain: finding good offshore suppliers and providing small to medium-size businesses with affordable, yet effective supplier evaluation options.  While there are options for finding offshore suppliers or suppliers from developing countries, there are none that I’m aware of that give buyers a good, cost-effective way to know how good these sources really are. 

I thought I would alert readers to a new site for finding and evaluating suppliers – SupplierEvaluations.com. It is based upon a social networking, B2B approach where a community of buyers and supply managers, using an evaluation template and process provided by the site, evaluates suppliers and shares the evaluations with other members of the community. Supplierevaluations.com expects to be operational by mid-September. Users can sign up now to participate when the site goes live.

Many people struggle with getting senior management support for supplier performance management initiatives. And, according to the editor-in-chief of Supply Chain Digest in his July 2^nd editorial, many people don’t even know what senior management support means.  Most know that you’re supposed to need it or you might not get very far with implementing supply chain management or procurement initiatives. If management is not convinced that, for example, supplier evaluation is more than just goodness and “the right thing to do”, then they may not give you resources to make it happen.

So how do you go about getting that support? The approach may vary, depending on the level of awareness about the importance of supply management and overall support for it. But one approach that usually gets senior management attention is financial — cost savings and avoidance as well as  revenue enhancement. Here are a few ideas for presenting the business case, which, by the way, are described in more detail in my book, Supplier Evaluation and Performance Excellence:

• Quantify the elements of the cost of poor supplier quality and performance failure in your organization.
• Read research reports (for example, such as those from Aberdeen Group and Accenture) that describe and quantify the benefits, cost savings, value add, and ROI of evaluating, building relationships with and developing suppliers and use the findings to bolster your arguments
• Examine some of your big internal problems, such as, for example, customer complaints and quality rejects, and analyze what part of those costs is caused by supplier issues and the value or cost savings from fixing them.
• Identify one or two supplier problems that you are currently aware of and calculate the cost savings to both your firm and to the supplier from fixing the problem
• Demonstrate the risks to the company of not understanding and improving supplier performance or of not knowing whether the company has the right suppliers such as increased risk, increased costs, and potential impacts on customers.

To get support, make the business case as real and quantified as possible. Show not only cost savings and risk avoidance, but also the value that high-performing suppliers can add.

In a recent poll conducted by Supply Management, more than half of buyers (55%) have experienced problems introducing suppliers to e-procurement systems. But the other 45% did not. What was the difference? How the new technology was communicated to suppliers. While some buyers used carrots and others used sticks, which typically worked if nothing else did, communications about the change seemed to help reduce the FUD factor (fear, uncertainty, doubt).

While the results of this poll seem like a no-brainer, it amazes me how many customer firms neglect the communications piece both inside and outside the enterprise. Companies often do not make a concerted effort to communicate about new systems, policies and procedures either to employees or to suppliers or other stakeholders. For example, one supplier manager lamented to me that their suppliers were resisting a new evaluation program. As he explained the new program to me, I learned that they had sprung it on suppliers unexpectedly, with no explanation or advance warning. No wonder the suppliers were wary and uncooperative. They had no idea of what this system meant, why it was being implemented, how they were being rated, and whether they were in danger of losing business. In another example, a company developed a supplier evaluation, but had not told its suppliers or even other internal purchasing people. The several people who had worked on it were contacting suppliers one by one to schedule evaluations. It simply hadn’t occurred to them they needed a more visible, closed-loop process. Clearly this new evaluation had been created and deployed in a vacuum and had very little chance of success.

While these stories may seem stranger than fiction, I’ve found that they are fairly typical. I have various theories about why internal and external communication in some companies can be poor. Usually, it starts with senior management. If they set a tone of open and honest communications with employees, emphasize the importance of it, and model it themselves, then communications become ingrained in company culture and its ways of doing business. If the culture is one of secrecy, withholding information as a way of preserving power, and treating employees with mistrust, then it is likely that this culture may manifest itself in an overall lack of communications, within the company and with suppliers.

Many people are looking for advice about how to create supplier scorecards specifically and how to measure supplier performance generally. 

Listen as Sherry Gordon is interviewed about measuring supplier performance by Sandra Gauvin, Editor of Current Quality newsletter.

In this in-depth interview, you will learn:

• Why you should measure supplier performance
• How to figure out what to measure and how to develop KPIs
• Examples of commonly measured areas
• Why you need to use leading indicators, not just lagging indicators (with examples)
• Why supplier risk has become so critical and ways address it
• How to segment your supply base in order to decide which suppliers to measure
• Common sources and types of supplier information (e.g. scorecards, audits), along with the pros and cons

We’re sure that you’ll enjoy this informative and lively discussion. (This is streaming audio and requires no download. Running time is 67 minutes).

Subscribe to the podcast on my website.

We would really like to hear your feedback about the interview as well as your suggestions about other topics for future podcasts.

Recently I wrote about suppliers who charge their customers to conduct an on-site audit. The desire to charge stems from the fact that site visits are time-consuming and resource-intense for suppliers. Many suppliers have to host multiple site visits and particularly the smaller suppliers, find them disruptive to their business. A solution has been suggested many times: common supplier certification.

Wouldn’t it be much easier if there was one common certification or supplier evaluation tool or approach that could become the standard? That way, suppliers would just need one site visit to be certified to supply all customers. What a great idea. It’s a great idea that has been attempted time and time again, but with little success. Back in the nineties when I was running the New England Suppliers Institute, an organization of customers and suppliers focused on improving business relationships, the idea surfaced. We found that we weren’t the first to think of it. For example, there was already a common certification that Minnesota Technology had developed. Maybe we could expand the use of it beyond Minnesota?

Then we ran into the roadblocks. The larger customer firms already had their own supplier audits and certifications that they were reluctant to part with. Each company felt that it had its own unique requirements that could not be addressed in a common tool. The bureaucracy at each company made adoption of a common tool very challenging. Even though individuals at many companies loved the idea in theory, in practice, it was impossible to implement. And it was not for a lack of trying to sell the concept. Sadly, one size did not fit all. In fact, within the very same company there were disagreements over certification and audit tools, let alone among companies in the same industry and among different industries. Large companies have diverse types of suppliers from many categories. What standards could possibly cover all suppliers from all categories and all industries? Certainly there are ISO 9001, AS 9003, cGMP and other certifications. But no one can agree that auditing to those standards would be sufficient. They were considered just a starting point, but not guarantee of quality or adequate supplier performance for a particular customer firm.

Trying to get firms to adopt common supplier certification is a noble, but fruitless undertaking. Various organizations have tried to make it a reality. No wonder some organizations want to charge customers for audits. Every so often, I hear about the concept again, like someone just discovered night baseball for the first time. And I think: good luck.

Companies embark on supplier scorecards for many good business reasons. They are concerned about supply risk, supplier quality, supplier responsiveness. They know that they should be measuring, understanding and improving supplier performance and mitigating risks. It’s the right thing to do. But as I’ve mentioned before, companies are often focused on the metrics themselves – the mechanics of obtaining and deploying the metrics on the scorecard. The gathering of metrics and data for supplier scorecards can be challenging and requires a lot of attention and care. Also, with the ever-increasing array of supplier performance management (SPM) software solutions available, it is easy to get caught up in the mechanics of data organizing and collection. Answering questions such as: Which KPIs should we use? Should they be the same across categories? Where will the data come from? How will we get internal users to give us feedback on suppliers? These are all very important questions and need to be addressed.

However, as they focus on the supplier scorecards and gathering the data, many companies neglect something important: creating the supplier evaluation process itself. Firms need to develop a supplier evaluation process, end-to-end, with identified goals, objectives, strategies, participants, roles and responsibilities, etc. in which the supplier scorecard is developed, deployed, acted upon and continuously improved.

The supplier scorecard is the tool that helps measure progress and indicates what problems need to be solved. The scorecard is not the end result. A tool is not a process. The scorecard tool can’t succeed on its own without a process. Companies need to keep in mind that supplier evaluation is a process, not a supplier scorecard.

I was recently interviewed by business columnist Jamie Herzlich over at Newsday for an article she recently wrote, “Small Business: Choosing the Right Supplier.” (May 14, 2009)  Many businesses are struggling with the challenge of how to choose the right suppliers. According to Ms. Herzlich, many business owners are unaware of what to look for in a supplier beyond just getting the lowest price. To summarize the key points in the article, businesses are advised to:

1. Look at total cost instead of choosing the supplier with the lowest price, as it is important to balance other important elements such as quality, delivery, and service.

 2. First determine your business’ requirements. This will help you figure out whether a supplier can meet your requirements. If your company has to meet stringent customer standards, then so will your suppliers in order for your company to be successful.

 3. Consider making a site visit to a supplier to see their facility firsthand, meet their management, and help increase your knowledge of and comfort level with the supplier.

 4. In some cases, using a distributor may be a good option for small companies, particularly those who want to buy in smaller quantities than buying directly from manufacturers will permit. This will help keep one’s inventories lower.

 5. Keep the lines of communications open and develop good relationships with suppliers to help work through changes and problems as they occur.

A colleague of mine, Sandra Gauvin, an expert in the quality field and writer of the Current Quality blog and newsletter, recently brought to my attention a new disturbing trend in supplier evaluation: suppliers who charge their customers to for the privilege of conducting an on-site audit. In this scenario, a customer contacts a supplier requesting an audit. The customer receives a reply something to the effect of:

“You can purchase our audit report.  The audit was conducted by Acme Audit Company (an independent consulting firm).  The report costs 4.000€ and the advantage is that you can receive it soon.   Or you can conduct an on-site audit of our facility but you will have to pay an audit fee of 10.000€ per day.  However, we have no available audit slots in 2009. 

We don’t have the availabilities yet for 2010, but we can place you on our waiting list. We would then propose an audit date, when we receive these availabilities.”

So if you’re the customer, what do you do? You’re between the proverbial rock and a hard place. There are consortia that negotiate with suppliers regarding audits and can prevail upon suppliers not to charge if enough members of the consortia use a particular supplier. An example of this is Rx-360, an international pharmaceutical supply chain consortium. Otherwise, depending on your industry and whether you have any leverage over the supplier, you may need to buy the independent audit report.

This particular situation is occurring in the pharmaceutical and biotech industry because of the requirement to conduct on-site audits of suppliers for compliance to FDA standards and GMP practices. Some suppliers, even small companies, have to host 50 or more customer site visits a year, despite their already maintaining ISO 9001:2000 or AS9100B registration. From the supplier’s point of view, such visits are costly and time-consuming. So why not charge? Suppliers would rather spend the time improving their processes than hosting customer audits. Some suppliers feel that some customers may not be auditing for valid reasons, but just to “check the boxes” or to get to spend a day out of the office. Charging can be a means of vetting out only the most serious customers.

Is charging customers for audits likely to spread beyond this industry? Also, what does charging customers for audits say about the customer-supplier relationship?  The value of audits that customers have to pay to conduct? For those industries where on-site audits are required, this is a means of capitalizing on that requirement and allowing the supplier to recoup its expenses for multiple site visits. Switching to other qualified suppliers is not so easy in pharma and biotech, given the rigorous industry standards. If companies are looking to develop mutually beneficial relationships with their suppliers, what does charging for an audit do to that relationship? I am interested to know if charging for audits conforms with  the ISM Principles and Standards of Ethical Supply Management Conduct.

Does requiring a payment for a customer audit constitute an attempt to influence the outcome of the audit or the outcome of relationship with the supplier? That is, if you have to pay to play, are you going to forgo auditing altogether, letting the supplier off the hook? Or will you be inclined toward a positive audit outcome because of the need to pay to learn the information to work with a supplier? Would paying over $13,000 to audit a supplier have any influence on your findings? Or how about the ethics of independent consultants charging you to view the supplier’s audit or else getting no audit information at all?

I’d be interested to hear readers’ reactions to this trend.

Back to Sherry’s website.

My previous post about why supplier scorecards fail generated a lot of interest. So today I’m going to write about one of the biggest reasons for failed supplier scorecards: There is little or no action or follow through that results from the scorecards.  Supply managers get so focused on the idea of having a supplier scorecard and on the content and the mechanics of the scorecard that they lose sight of just why they are developing a scorecard in the first place. By that I mean that they don’t focus on the business outcomes of having the scorecards. Scorecards for the sake of scorecards are another way of collecting data for the sake of data. You can tell the boss that yes, we’re measuring our suppliers’ performance now. Check. But so what? Have the scorecards produced any results?

 What kinds of actions can and should result from a supplier scorecard system? Here are a few examples of possible actions:

• Provide performance feedback to suppliers
• Identify supplier continuous improvement opportunities
• Develop corrective actions
• Help suppliers develop a better understanding of and compliance with your performance expectations
• Rationalize current supply base
• Disengage with low performers and risky suppliers
• Recognize high performers
• Give more business to high performers
• Work on development projects with suppliers
• Create preferred or certification program
• Set criteria for new supplier on-boarding
• Establish criteria for an approved supplier list

Supplier scorecards need to show results or lose their reason for being. Suppliers should be improving their performance and your company’s as well in the process. And if suppliers are not improving, you’ve got some evidence as to why not and some information on potential improvements to pursue. The scorecards should be providing the information you need to identify and disengage poor performers and of course give your higher performers the recognition and potentially the extra business they deserve. The scorecards should facilitate measurable supplier performance improvements, be a positive business driver, and add value to the company. Otherwise, they can become an empty, bureaucratic exercise. Senior management will lose interest and will not see any reason to provide the resources required to deploy them.

The failures at Peanut Corporation of America are tragedy in every way. This supplier failed to meet both regulatory and customer requirements. Its customers failed either to uncover or report the failures, and people died as a result. Now a healthy, everyday product is suspect, and faith in the U.S. food processing industry has been shaken by tainted product. Food contamination isn’t just a Chinese problem any more. According to Lora Cecere, an analyst at AMR Research and a food supply chain expert, food safety has ranked low in the U.S. as a supply risk concern (12th out of 15 in AMR surveys). However, in China it is ranked second. The peanut scare has been a wakeup call and confidence buster about U.S. food safety.

This situation illustrates an order-of-magnitude regulatory failure, compounded by lack of state inspection resources and lack of oversight. It also illustrates a worst-case scenario of supplier risk and abdication of responsibilities.

Why did this failure occur? In quality terms, the food industry relies more on inspection than prevention (and even inspections don’t always occur or are poorly done). And it is well known that quality inspection is far more expensive and far less reliable an approach than problem prevention. Preventive versus reactive is basic when it comes to quality.

While inspection is important in the food industry, preventive actions need to be institutionalized and enforced to avoid food contamination in the first place. Inspection, in fact, should focus on assessing preventive measures in the area of quality and safety. Do we want to know how many contaminated batches of food are found? Or worse, do we want the food industry to leave quality control in the hands (or stomachs) of the customer? Or would do we want verification that that all food safety rules and cleanliness standards are in fact followed to prevent contamination?

And when supplier evaluations and inspections are outsourced to third parties, how do customer firms assess those third parties and ensure that they are not, in fact, just the foxes guarding the chickens? The complexities of the supply chain no longer allow a reliance on good intentions or lackadaisical supply chain management practices downsized in the name of cost. Since second and third-tier suppliers, often invisible or barely visible to the customer, can adversely impact our food supply, understanding their operations and performance becomes essential. Food contamination falls into the category of supply risks that can be prevented (preferably) or mitigated. They are not an unavoidable natural disaster. Not only should companies consider these risks in their sourcing strategies, but they should also have robust supplier assessment systems, including regular site visits to higher risk suppliers, to prevent the occurrence of such failures. The costs of food contamination in illnesses and deaths, lawsuits, brand damage, consumer confidence – and even company bankruptcies and job loss – are far higher than the basic sourcing and supplier management activities needed to prevent them.