Seven Steps to Next-generation Supplier Performance Management

Building a framework for closed-loop performance management requires focusing on four strategy-to-execution processes


While you are busy buying materials and services from suppliers, making products and services, and delivering to customers, you continually gather information about the business. This includes financial and operational reporting such as management reporting, product quality reporting, vendor-managed inventory reports, third-party logistics (3PL) reports, customer satisfaction reporting and so on. This involves taking the raw transactional data (purchase orders, invoices, bills of lading) and turning them into useful, actionable information.

Once we've gathered believable information (by "believable," we refer to high data quality and common definitions and rules), we want to understand why we got the results we got. If we are spending more with one supplier than expected, what was the cause? Could it be we needed more raw materials or more finished-goods storage than we expected, and if so, what was the cause? Did we do a poor job of forecasting demand? Did we have a pricing promotion that production didn't know about? We want to get to the root cause of variances and problems — also known as "surprises" — and take action to fix them now and prevent them from happening in the future.

Most businesses are doing some form of each of these processes today. And they generally do them in silos: manufacturing has its direct relationships with suppliers, while procurement is brought in to work on contracts; HR isn't often brought in for manufacturing staffing issues until the need is "right now" or until contract labor overtime is too burdensome; and sometimes different parts of the business use the same vendors under different contracts without leveraging them for better prices and terms. By using different technologies, unshared data and business rules, with low or no sharing and collaboration across all four areas of the framework — not to mention low or no alignment with strategy — companies get low visibility into supplier performance, low believability in the numbers, and low accountability for results and corresponding actions. Supplier performance management is about bringing together all of the debate, decide, gather, and understand processes, technology and people into a unified system.

Why Does Unified SPM Matter?

The best way to illustrate the business benefit of a unified supplier performance management system is to show the potential financial impact on a company. We'll present a case study using the computer hardware industry.

We picked Lenovo Group as our target company. Lenovo is the largest IT enterprise in China and acquired IBM's Personal Computing Division in 2005. The company manufactures and distributes brands such as ThinkPad and has manufacturing, distribution and support clusters in Raleigh, N.C., Beijing, Mexico, Brazil, Scotland, Hungary, India, Japan, Australia and Singapore. We benchmarked Lenovo to the following competitors:

  • Apple, Inc.
  • Dell, and
  • Gateway

Using only publicly available GAAP data for the last four quarters for each company, we looked at a variety of results and focused in on two: cost of goods sold (COGS) as a percentage of revenue, and days payable outstanding (DPO). (See Figure 1.)

For cost of goods sold as a percentage of revenue, where a lower percentage means they spend less on raw materials and on the design, manufacture and distribution of products, Lenovo Group ranks fourth out of five. For days payable outstanding , an indicator of how long a company is taking to pay its vendors and other trade creditors, they were second out of five (longer is generally — but not always — better for DPO, since the company can earn on the cash it owes trade creditors).

With only a 2 percent improvement in COGS and a 2 percent improvement in DPO, these incremental improvements would produce $167.7 million in cash as well as $239.7 million in recurring benefits for Lenovo. And we know 2 percent is possible in their industry since the competition is achieving results beyond 2 percent. So how can supplier performance management impact COGS and DPO by 2 percent?

To start, one of Lenovo's "five pillars" of strategy is to "pursue operational excellence," which is about streamlining and improving their global supply chain and logistics network. Some of the initiatives already undertaken to improve the supply chain include:

  • Operating its own facilities closer to their customer base in key geographies;
  • Expanding the reach and impact of its Lean Six Sigma application within the global supply chain; and,
  • Continuing to improve its logistics network
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