How to start measuring supplier performance
By Ross Gilchrist from Inecom
There are literally hundreds of ways to measure the sales process. But are you analysing supplier performance as well as the sales team are analysing customers? In this article, we’ll look at why it’s important to analyse your supplier performance and how to get started.
Sales and procurement are intertwined. Your company’s sales performance is only as effective as the smooth-running of procurement. No matter how brilliantly your sales team is performing and how smoothly your warehouse runs, if a supplier misses a delivery or sends sub-standard goods, you will feel the cost.
This is why supplier performance analysis is important. By measuring supplier performance, you create the opportunity to influence it. You can make decisions about your suppliers that will ultimately improve the whole business and protect it from supply chain risks.
Implementing supplier performance analysis can seem like hard work - but it doesn’t have to be. There are a few practical steps you can take to develop an effective way to measure and report on your suppliers’ performance.
1. Be proactive with performance analysis
Many companies make the mistake of delving into performance analysis only when one of their suppliers lets them down. But why wait until things fail before you fix it? As with machinery, a preventative approach is the best way to avoid issues. Make it part of your processes to look at the past three, six and twelve months of supplier performance and determine whether suppliers are meeting their obligations. Sporadic or one-off exercises won’t give you the data necessary to diagnose problems properly – continuous analysis is the key.
There is another benefit of measuring supplier performance on a continuous basis: it holds suppliers to account. Most suppliers tend to focus on improving their performance when they know they are being monitored and evaluated. By analysing your suppliers’ performance on a regular basis, you can start collaborating and cultivating stronger relationships, or see when it’s better to part ways.
"Many companies make the mistake of delving into performance analysis only when one of their suppliers lets them down. But why wait until things fail before you fix it? "
2. Start with the basics
The first and most simple way to analyse supplier performance is with the three-way match. This refers to a procedure that matches an invoice received from a supplier with both the information on your company’s purchase order and the customer’s goods receipt or packing/receiving slip – this can be done easily using an enterprise resource planning (ERP) system.
The three-way match answers two simple questions about your supplier’s performance:
· Is there any difference between what you ordered and what you got?
· Is there any difference between what you got and what you were invoiced for?
While the three-way match is a great starting point, it only tells a very small part of the story. It doesn’t talk about one of the most important factors that will impact your sales and business: timing.
3. Timing is everything in procurement
Did your suppliers get the goods to you in the timeline expected? If not, what percentage variance are they delivering under? These are essential questions to ask when analysing supplier performance because they have an immediate knock-on effect to your sales and customers. If a supplier is continuously letting you down with delayed shipments, you are continuously letting your customers down, which will ultimately drive them away.
4. Enter DIFOT
Delivery in full, on time (DIFOT) is a fundamental measure when analysing the performance of your supply chain. The fundamental goal of your supply chain is to get the products your customers need, when they need them, in the quantity they ordered. DIFOT directly measures how successful your supply chain is at meeting this goal.
Most companies already know what their DIFOT percentage is, but it’s also important on the purchasing side to measure the performance of your suppliers. Are you getting what you order, when you need it, in the quantity you ordered?
If you already have the DIFOT percentage for your suppliers, it’s worth digging deeper into their performance:
· How often are you receiving short shipments?
· If there are delays, what are the average delay times?
· What’s the quantity ordered versus quantity received?
Once you have this information, you can start using it to make better procurement decisions.
"The fundamental goal of your supply chain is to get the products your customers need, when they need them, in the quantity they ordered."
5. Your suppliers are not meeting your expectations – what next?
Start by looking at what part of supply chain is letting you down. It might not be the supplier that’s the problem, but the freight provider. Is the freight company doing their job?
If your rear-view analysis reveals that your suppliers are constantly letting you down, something is obviously not working.
What happens next depends on the answer to a simple question:
Is there an alternative supplier?
If yes, you are in a better position to negotiate with your current supplier. If negotiations fail or the supplier continues to let you down, you can simply start using the alternative supplier. After all, if your existing supplier is not reliable, it’s a long-term risk to your business.
If there’s no choice of supplier, it becomes a conversation on how to get the best type of service. Track their contractual obligations to prove where they are hitting and missing their KPIs. Simply dictating new required standards will not prove beneficial – there may be good reasons why they aren’t delivering on time. Many Australian companies are importing from overseas, so many aspects are out of the supplier’s control. The order may have missed the ship at China or the ship was delayed by storm. Perhaps your expectations for lead times are unrealistic – a discussion will soon reveal whether this is a case. Knowing their true ability to deliver on time will allow you to build a buffer into your lead times, so your customers are not affected.
Evaluating your supplier performance doesn’t have to be paralysis by analysis. Work out which metrics are important to your business and use them to drive the decision-making. How deep you analyse is up to you. The goal is to gain enough information to make better decisions about your suppliers and your procurement processes as a whole. Done right, this can generate benefits that flow all the way to your customers.