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.

A recent article in the Manchester Guardian reported on the latest sub-tier supply risk horror story. It is alleged that British supermarket chains Tesco, Asda, Marks & Spencer and dozens of other supermarkets may be inadvertent parties to a different kind of laundering scheme – beef laundering. Greenpeace, after a 3-year undercover investigation, called this situation to the attention of Brazilian authorities, who are investigating reports that major cattle farms and slaughterhouses are sourcing some of their beef from illegal sources. These illegal farms have been deforesting the rainforest to raise cattle. Illegal sources are alleged to have been purposely mixed with legitimate sources in order to hide the illegal beef and leather. This illegal beef is nearly impossible to trace. Apparently Brazilian supermarkets are cancelling contracts with the illegitimate farms, but the British supermarkets are still in the process of auditing and verifying that their meat sources are, in fact, contaminated with illegitimate products.

This situation is disturbing from many points of view. The lack of traceability of the meat is certainly a problem because it is causing deforestation of South American rainforests.  Food safety should also be a critical concern. How does the consumer know that the illegal farms adhere to proper health standards and are not putting sick cattle into the food chain? The meat, leather and cosmetic ingredients that come from Amazon cattle are shipped worldwide, which may mean that many more companies are inadvertently supporting deforestation activities and global climate change.

Sub-tier supplier risk surfaces again. Beef laundering is the latest in a series of unpleasant supply chain discoveries. While such situations may be hard to predict or prevent, they can be mitigated. As companies address supply risk, they need to be continually vigilant about potential risks. And when supply chain problems surface, firms need to act quickly to verify and remedy, if necessary, not wasting time denying the charges. Being proactive goes a long way to avoiding even more damage to the perception of corporations. When the public perceives that a company is not proactive about supply chain risks, the damage caused by poor public perception can easily translate into lost revenue.

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.

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.

I was recently interviewed by Nick Zubko, Purchasing Editor at IndustryWeek magazine, for an article on supplier scorecards. The resulting article, “Who’s Keeping Score?”, summarizes the actions needed to ensure supplier scorecards that are meaningful and actionable and is available online and in the February 2009 issue. To summarize the key points, the article explains that companies need to:

1. Develop an evaluation strategy – what information about suppliers do you need and how you are going to get it

2. Get input from multiple functions in the company

3. Keep scorecards simple

4. Communicate with suppliers about scorecards

5. Start small and expand the process, in terms of numbers of metrics and suppliers measured

6. Close the loop and follow up with suppliers

The article also pointed out the collaborative nature of scorecards, both among different functions in one’s company and with suppliers. When well done, supplier scorecards can be part of an overall supply management and continuous improvement program, rather than an interesting assortment of statistics collecting real or cyberspace dust.