Seven Steps to Next-generation Supplier Performance Management

By Ron Dimon and Simon Tucker

Managing the performance of your suppliers, a critical component of overall supply and demand chain management, can have a material impact on your company's revenue growth and operating margin. Not investing in how you manage supplier performance, especially in a down economy, can have a negative impact on your profits, assets and cash flow. This article lays out a framework — a "management operating system" — for the discipline of closed-loop supplier performance management (SPM) and shows the hard-dollar return on investment that this discipline can deliver.

A Framework for Next-generation SPM

We developed this framework based on our work with overall enterprise performance management and have found that it works well when focusing on supplier performance or any dimension of the supply chain. The goal of the framework is to help manage the process of strategy to execution. You already have overall company strategic objectives: a certain level of revenue growth at a particular target margin, or an expected level of market-share and brand recognition, for instance. Within those corporate objectives, you have specific supplier performance objectives: a certain level of material quality, cycle times, inventory levels and so on. The challenge is to ensure that you efficiently — and sustainably — execute on those objectives and continuously improve your fact-based decision-making capabilities that get you closer to realizing your strategy.

To do this, you must be able to rigorously answer these questions: "What do we want to happen with suppliers, and how do we want it to happen?" and "What actually happened, and why did it happen?"

Here's the framework.

The framework says that you take your strategic supplier objectives and you debate them: Are we able to achieve those objectives? Do we have sufficient capital, people, customers and markets? What if we negotiated different terms with suppliers? What if we acquired some of our suppliers? What if we outsource more logistics services? What if fuel costs become even more unpredictable? Should we buy or build a certain component? This is where you build financial and operational models to record constraints and vet your assumptions about suppliers. Instead of a few spreadsheets run by a few analysts, this is an open process by the executive management team from all business functions — sales, marketing, procurement, and customer and supplier operations — with multiple scenarios recorded in a multidimensional system. It includes historical performance data as well as internal and external benchmarks to address questions such as "How do we do better than last time?" and "How do we do better than industry averages?" Once the most likely scenario is agreed upon (after a healthy and rigorous debate), this model forms the basis of your suppler plans.

Those plans form the basis for how you decide how and when you are going to deliver products and services to customers and consume materials and resources from suppliers. It's the commitment your managers, sales reps and developers make to execute on the plan (which was based on the models that were based on the strategy). It includes financial plans such as revenue forecast (by product and/or by geography and/or by day/week/month), expense and cost-of-goods-sold budgets, cash-flow forecast, and other plans. It also includes operational plans such as your production plan, materials purchasing plan, workforce plan and even your capital expenditure plan.

Having a systematic debate that informs your decision helps prevent the institutional amnesia that occurs when results aren't delivered as expected and senior management asks why the bar was set too high or too low. When plans are consolidated from each function and each business unit around the company, more constraints and assumptions are uncovered — and those should be fed back into the models so that the next model (next week, next month, next quarter) is even better than before.