Despite fluctuations in the global economy, companies have continued investing in globalization and outsourcing programs. With this increased and complex reliance on suppliers, managing suppliers has taken on a new sense of urgency, particularly in the executive suite.
Typically, at least half of every revenue dollar is spent on goods and services purchased from external suppliers. As companies focus on their core competencies and outsource their non-core operations, this percentage has steadily increased. In certain industries, such as technology and automotive, purchases from external suppliers can add up to 80 percent of the total cost of new products.
While there are clear cost and efficiency benefits to utilizing suppliers for certain aspects of the business, the reliance on third parties significantly raises an organization’s supply and pricing risk and increases its exposure to adverse scenarios such as safety issues and lack of regulatory compliance. To continually improve operational performance, manage costs and reduce regulatory risks, a company must be able to select appropriate suppliers and monitor and manage their performance over time.
Companies that implement successful supplier lifecycle management programs are able to identify problems earlier and implement corrective actions more quickly—before the problem snowballs and affects both their reputation and earnings.
Supplier lifecycle management is the process of qualifying, evaluating, classifying, developing and analyzing and managing supplier performance to reduce costs, mitigate risk and drive continuous improvements in value and operations.
Companies that have implemented supplier lifecycle management programs have been able to significantly improve the efficiency and effectiveness of their supply chains. Key benefits that these companies have realized include:
- Identify and address weak links, as well as reward strong performers within the supply chain, by using Key Performance Indicators (KPIs) to ensure a well-functioning and competitive supply chain.
- Reduce supply risk by gaining visibility into metrics that serve as an early warning system for potential supply interruption, quality issues or price fluctuations.
- Develop a scorecard on how well a supplier is performing against its contract terms and, as a result, employ a mechanism to implement contract compliance.
- Increase organization-wide alignment on key operational objectives. When setting KPIs for measuring a supplier, gain the ability to identify the primary business objective from this list: a) reducing component costs b) improving component quality c) increasing component delivery flexibility d) accelerating volume ramp-ups, etc.
- Build a strong foundation for implementing continuous improvement programs to identify future cost savings, improve quality, increase flexibility, improve delivery metrics, etc. For example, our customers use it to benchmark a supplier against its peers to compare their cost, on-time delivery, quality, support and responsiveness to issues, and then use the information to set future process improvement goals for the supplier.
- Establish a way to evaluate a supplier’s capabilities, which serves as input into future sourcing decisions. For example, if a company is looking to expand their supply base in anticipation of higher demand, it can use this data to select a supplier with the best record for both delivery flexibility and the ability to rapidly scale.
Best Practices to Measure Suppliers
Best-in-class organizations consistently employ the following best practices to consistently measure supplier performance:
- Identify metrics, thresholds and targets: Capturing key performance metrics within the supplier’s contracts ensures that all key terms/measures are contract compliant and visible. Second, gather input from key relationship managers to understand their supplier performance objectives and use the information to establish metrics that are aligned with overall strategy. These metrics and targets should be shared with suppliers and mutually agreed to, so both the company and suppliers can create a meaningful performance management program.
- Collect data through various mechanisms: On a consistent and frequent basis, the company should collect information to calculate current values on an agreed upon set of metrics, thresholds and targets. Various methods to gather this data include supplier assessment surveys, ERP system information, homegrown operational systems, instant supplier feedback, etc.
- View and analyze aggregate information: Once data is collected, it should be aggregated to report on performance versus plan. While spreadsheets and other basic tools can be used for analysis, supplier performance management systems significantly improve the ability to properly analyze the information. For example, KPIs allow companies to monitor the progress of their suppliers, ensuring they get early warnings if suppliers are under-performing. KPI scores can be compared with contract terms to ensure contract compliance and scorecards further aggregate this information and offer the ability to view supplier performance at a moment in time or to monitor trends over a certain period.
- Identify gaps, prioritize and communicate: Scorecards, trend reports and alerts help identify gaps between target and actual performance for every supplier. The purchasing organization should use this information to review the impact of performance gaps on their business in order to prioritize them and then communicate with the supplier regarding the issues and ask for a remediation plan with specific targets. Collaborative supplier portals that provide this information to suppliers, along with securing the ability to set priorities, ensures that nothing falls between the cracks and that both parties agree on what is working and what needs improvement.
- Implement continuous tracking and optimization: Supplier performance management is not a one-time process. Performance should be tracked on an ongoing basis—both to ensure that previously identified gaps have been remediated and to keep the focus on continuous benchmarking and improvement. This approach empowers an organization to make the best supplier decisions moving forward, for example, phasing-out a supplier or altering contracts to include financial penalties if remediation targets aren’t achieved after performance gaps have been addressed. Reactive actions and proactive actions have to be set-up and controlled to ensure a sustainable improvement of the supplier base.
A supplier lifecycle management initiative must be sustainable as it provides a core foundation for qualifying, evaluating, classifying, developing and analyzing and improving supplier performance across the board. Hence, a technology platform is necessary to make the underlying processes repeatable and consistent, scalable to support growth, and transportable to other geographic regions where company operates.
History teaches us that an organization will only enjoy limited benefits from such an initiative if it is implemented using spreadsheets and manual methods. However, enabling technology is only effective if it offers quick and easy access throughout an organization, providing key personnel the ability to gather the necessary input from supplier-facing staff.
A supplier lifecycle management initiative provides a critical foundation for improving operational performance, reducing supplier risk, reducing component costs and improving supply chain efficiency. It is not about completing a one-time review with suppliers.
To be successful, it must be sustained on an ongoing basis using enabling technology – and ideally implemented globally. With these elements in place, a company’s supplier lifecycle management initiative can significantly improve operational performance and competitive advantage.
About the Author:
Martin Berr-Sorokin is Senior Vice President and General Manager of Supplier Lifecycle Management at Emptoris, responsible for overseeing the development and implementations for the industry’s leading solution.
- Companies that implement successful supplier lifecycle management programs are able to identify problems earlier
- Performance should be tracked on an ongoing basis
- A technology platform is necessary to make the underlying processes repeatable, consistent and scalable