In a previous blog we considered how to deal with a situation where a supplier provides a product that doesn’t meet required standards. Now we look at some ways you can monitor the performance of your suppliers and by doing so make it less likely that you could end up in a such a situation. Here are 6 steps you can incorporate into your plan for managing suppliers.
1. Select Key Performance Indicators/Metrics: What criteria your company holds important for suppliers may differ from those of others. This is because ultimately the criteria will be determined by your company’s goals and strategies and these will differ from company to company. Aberdeen Group, a data science and content solution in a report entitled "The Supplier Performance Benchmarking Report" noted that common metrics used by companies included quality, on-time delivery, service, price, total cost, contract compliance, lead times, responsiveness, accuracy of quotes and promises, technical support and price variances. Although this report is a little dated, these same metrics can still be applied to measure the effectiveness of suppliers today.
A more recent document from the Chartered Institute of Procurement and Supply published in 2013 lists customer service response time, accessibility and responsiveness to account management and warranty claims as other criteria to take into account in the assessment process. Other more macro elements you may consider in assessing the value of your suppliers may include information that does not relate specifically to their dealings with your own company. This may include things such as the supplier’s financial record and their reputation as reported by reputable contacts and partners. Put a list of all the factors your company feels are important together and rank each one according to how important you believe it is. You can then score the suppliers based upon all of these criteria and review this at regular intervals so that you can determine which suppliers should be those with which you prefer to contract.
2. Classify Suppliers: Divide your contacts into categories i.e. those suppliers which provide goods and services critical to your business and those which provide those which are less crucial. In order to be able to do this you will need an understanding of the strategic priorities of your company as well as the logistical realities of your supply chain. Doing this will help you prioritise which suppliers to monitor closely and evaluate often.
In an eBook on Supplier Management energy company, RWE, ranks suppliers’ performance against strategic importance (in a chart) and explains that suppliers have the possibility of moving into a higher rated category by not only improving their performance but also aligning their strategy more with RWE requirements (see page 6 of eBook).
3. Create an Evaluation Methodology: So, above, we touched on the importance of listing and ranking metrics and scoring your suppliers based upon that. By creating an evaluation methodology, you can take a deeper dive. A comprehensive evaluation methodology will include the following:
a. A list of your metrics, the reasons for why they are important for your company and the value attached to each of them. It will also outline how often you will review your suppliers’ performance and review their ranking against all the criteria;
b. Details of which categories of suppliers you will review more often and why - this should be based upon factors such as how critical the goods and services are that they provide for your business;
c. It will also establish values that can be assigned for rankings against each particular metric and questions that need to be asked in relation to these to determine what the correct value assigned should be. It should also stipulate how to gather the answers to these questions e.g. is the answer to be determined from data alone or do interviews with suppliers or people within your own organization need to be conducted?;
d. It will outline which people assigned to which roles are responsible for reviewing supplier performance. This should be reflected in the job descriptions of these employees and these employees should be assessed in their performance reviews on how well they carry out these assessments; and
e. From time to time, you may seek to perform a more formal audit of your suppliers. For such audits you may even like to engage an external consulting firm. Your methodology should also outline in what situations or how often such an audit is to be performed and in which circumstances you would look to engage an external firm to conduct this audit. What will be reviewed in the process of such an audit should also be outlined and this may be determined by the agreements you have with your suppliers i.e. whether they will give you access to their internal policy documents on how a good or service is produced or provided.
For this reason, it’s important that when you engage with suppliers that you include a right of audit clause in the contract you have with them. This clause should outline what documents etc your company or a third party firm you may engage to conduct an audit has a right to review. Vendor audits can be costly exercises, especially when performed thoroughly, and it is important to weigh whether the expense will be worth the effort and determine in what circumstances or at what intervals they are to be performed. This article from the Chartered Institute of Procurement and Supply blog considers the reasons why you should conduct audits on your suppliers - Vendor audits - are they worth the effort and expense.
4. Communicate with your supplier about your company’s assessment of them: Depending on the relationship you have with your supplier and the one that you want to create, you may not want to a disclose with them all the details about the metrics or methodology you are using to rate them. However, it is a good idea to openly communicate with them and be honest about the perspective your company has about the quality of their delivery and performance. By establishing communication about this, you are allowing the supplier to address issues that may be lowering their rating. There may be reasons for their perceived underperformance that you don’t know about or even something your company is doing that is preventing them from being able to adequately deliver that which your company has contracted them to do. Keeping the lines of communication open allows for both the supplier and your company to be able to work through problems and develop solutions that may not otherwise have been found.
5. Use formal warnings: Should your vendor be failing to meet requisite standards and failing to address issues that you have communicated to them in an informal way it is time to start issuing formal warnings and outline the consequences that will follow if they don’t rectify the problem at hand. Make sure these are communicated in writing and comply with and if relevant refer to the contractual arrangement you have with them. Provide the supplier with appropriate and clear time frames for responding to your complaints and itemise exactly what it is that you require from them to repair the situation.
6. Cut Ties: If your supplier fails to correct issues after you have raised them and issued appropriate warnings then it is time to cut ties with them. However, it is essential that you follow your legal obligations in terminating a supplier, including any contractual terms about the circumstances in which a termination is acceptable and the process for carrying out the termination. You also will need to prepare for any consequences that may ensue. Law firm, Thompson Hine, gives a good list of how to carry out and prepare for the consequences of a termination. These include managing communications appropriately so as to avoid legal complications, preparing for the recovery of property and planning for disruptions.
So there you have some steps to follow and ideas on how to best manage your suppliers. We would love to hear your thoughts. Do you work in procurement and manage suppliers day-to-day? What steps, methodology, tips and tricks do you find works best for managing your suppliers?
ContractRoom is a negotiation and contract lifecycle management software that can assist you in managing your supply chain management and automate many of the steps in the process. To find out more please visit our website at www.contractroom.com or request a demo here .
This article was written with the assistance of Jennifer Tran who is interning with ContractRoom over the summer.