Supply chain risk is a major concern. An increasing array of new software solutions and offerings from consulting firms continue to become available to address supplier and supply chain risks. The large number of tweets on Twitter about supply chain risk on a daily basis point to a widespread, global problem weighing on many firms’ minds — and bottom lines. From the vantage point of my involvement on ISM’s Supply Chain Risk Management Group’s Board, I have seen the interest in this topic mushroom. We have gone from a Risk Track at the ISM (Institute for Supply Management) International Conference, now in its third year, to organizing a full-blown conference on supply chain risk (Buying the Umbrella Before It Rains on July 26-27 in Chicago).

But what if you are just starting out in this area and are not yet up to speed on the tools and techniques for management supply chain risk and do not yet have a risk process or risk organization in your company? Where can you begin? You might watch for any of these potential signs that one of your suppliers may be struggling:

• There is evidence of high employee turnover or especially senior leadership turnover
• Quality and/or delivery performance have been declining
• Management is uncooperative about addressing problems that are impacting the customer
• Requests for cash payments or picking up a check
• Complaints of non-payment from sub-tier suppliers
• Poorly maintained facility and equipment

Supplier performance is a leading indicator for risk. Developing closer relationships with key suppliers and understanding their performance are good ways to spot and avoid supplier problems before they adversely impact a customer’s business.

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

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

Supply management, procurement and quality professionals are increasingly aware that they should be measuring their suppliers’ performance and working with important suppliers on performance improvement. In their enthusiasm for going forward with these initiatives, some people make some errors that can impede or stall progress. Here are a few mistakes people making when trying to justify a supplier performance management program:

• SPM enthusiasts assume that senior management and other functions understand SPM as well as they do. So they may neglect to explain what it is and what it will do for the company. Enthusiasm is important, but it is no substitute for a good explanation of SPM.  While managers in other functions may have heard about it, not all will really understand what it is in the context of your company. It’s important to make sure that everyone understands what you’re talking about.

• Others may generally know that SPM is a good thing and that every company is supposed to being measuring and improving supplier performance. But until you explain exactly what it means for your company and what the benefits are, SPM may appear to be, as they say in entrepreneurial circles, just a vitamin, not a real painkiller. Does it just make you feel better? Or does it really solve problems and take away real pain?

• Because quantifying the cost savings of SPM can be more art than science, proponents try to get by with the goodness argument rather than demonstrating potential ROI. The financial benefits of implementing SPM are multi-faceted and not as easy as, say, beating up a supplier up on price. But the benefits are still very real and demonstrable – and much more sustainable than ill-gotten price reductions. So procurement and supply managers need to quantify benefits to the extent possible in order to sell SPM.

• Proponents of SPM sometimes underestimate the effort required to put a good SPM process in place. SPM involves change and change management. For example, different functions may need to work together as never before to address both internal and supplier issues. Feedback may be needed from people who have never been involved. The customer firm may need to make internal changes that will enable improved supplier performance.  So don’t undersell or shortchange the planning and implementation effort, or the results will not live up to expectations.

• SPM in general and scorecards in particular can get oversold as a panacea to supplier problems. Scorecards do not equal results. Supplier scorecards help diagnose problems. People solve them.

In summary, to gain full support, define SPM in the context of your company and demonstrate how it can help prevent and alleviate the pain caused by supplier performance issues.

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 survey of  223 procurement, supply chain and supplier relationship management by the consultancy, State of Flux, almost two-thirds said that they did not have a definition of Supplier Relatinonship Management (SRM) in their companies.  The conclusion of Alan Day, Managing Director of State of Flux, a supply chain consultancy in the UK, was that organizations are confusing SPM with SRM. SPM, he asserts, is “about getting what you have been promised in a contract, whereas SRM is about collaboratively driving value as part of a two-way relationship.”  It may be a matter of semantics, but I disagree. There may be no definition of SRM in many companies, as the concept remains amorphous. Senior management often views SRM as “goodness” without a defined ROI and thus does not consider it a priority.

Tracking supplier compliance against contract terms is not SPM, however. It is just one tactical part of SPM. The purpose of SPM is to obtain a result, which is reducing risk and improving performance. Understanding supplier performance is more than ensuring that requirements are met and should involved a two-way flow of information. To the extent that a customer and supplier have a relationship, the more insights a customer firm will have into performance and the more chance that the supplier will improve performance. SPM requires collaboration between customer and supplier to be successful. State of Flux defines both SPM far too narrowly.

Day’s assertion that SRM “tends to be an add-on to the day job of buyers and category managers, rather than a core role” is true in the case of companies that do not have a supplier management function distinct from the sourcing function. Buyers are typically spending their time focusing on new procurement rather than managing and maintaining relationships within the current supply base.

Can you successfully manage performance without having a relationship with a supplier? Not likely. Supplier Performance Management without some type of Supplier Relationship Management is an empty process.

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.