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

I am in Covington, Kentucky attending the AME International Lean Conference, Journey to Greatness. Attendance is excellent despite the economy and its adverse impact on other conferences this year.  This may be due to various lean journeys presented by practitioners and couldn’t be more relevant in a down economy.  AME (Association for Manufacturing Excellence) puts on a great lean conference, and this one seems to be continuing the trend.

I will be writing about some of the companies whose presentations and stories I’ve had a chance to hear. For example, today I attended session in which a huge retailer and a manufacturer recounted a story of their unparalleled collaboration together.

On Friday, October 23, I’ll be presenting a workshop, “Managing and Improving Supplier Performance in a Lean Environment”. AME allows people to go to the pre and post-conference workshops without signing up for the conference. The learning objectives for this interactive workshop include:

• Align supplier performance expectations and criteria with the needs of your business
• Develop a supplier evaluation process that fits your company
• Create an understanding of what a lean supplier is in your company’s environment
• Develop strategies for developing lean suppliers
• Manage critical suppleir relationships to maximize value to your company
• Get from strategy to evaluation to action to lean supplier development and performance improvement

This workshop can be delivered on-site, too.

If you are attending the conference, drop me a note at sgordon at valuechaingroup dot com.

-Sherry Gordon

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

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.

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.

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.

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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