Best Practices for Supplier Performance Management

Aberdeen/iSource survey reveals common practices for best return on SPM programs

Tempe, AZ  January 20, 2003  Measuring supplier performance is a critical activity that is suboptimally managed at most organizations, but a recent survey by technology consultancy Aberdeen Group and iSource Business magazine revealed that enterprises achieving the best results from their supplier performance programs share several best practices in common.

The study, The Supplier Performance Measurement Benchmarking Report: Measuring Supply Chain Success, showed that companies with formal performance measurement programs were able to improve supplier performance by 26.6 percent on average.

And yet the report, based on a survey of supply chain and procurement executives from manufacturing and non-manufacturing companies around the world, notes that just 56 percent of enterprises have put formal supplier performance measurement procedures in place, and nearly three-quarters (72 percent) of survey respondents said their companies measure the performance of fewer than half of their suppliers.

Supplier performance measurement is the process of measuring, analyzing and managing supplier performance for the purposes of reducing costs, mitigating risk and driving continuous improvements in value and operations. Common and consistent measurements can help companies focus resources, identify performance glitches, develop strategies for supply chain improvements and determine the total cost of ownership (TCO) of supply relationships, products and entire supply chains.

"An increased reliance on external supply partners to mange a larger portion of product content and business processes has only increased the need for companies to improve their ability to track, measure and analyze supplier performance," said Tim Minahan, vice president of supply chain research at Aberdeen, and coauthor of the report along with Mark Vigoroso, research product manager for e-business and enterprise applications at the consultancy. "Unfortunately, most companies continue to exhibit inadequate and inconsistent supplier performance measurement procedures. Such factors are putting businesses at risk of inflated costs and performance disruptions at a time when every dollar counts."

Based on the Aberdeen/iSource survey, Minahan and Vigoroso cite several best practices being employed at those enterprises achieving the best returns on their supplier performance management programs.

For example, the analysts recommend tracking the performance of a broad portion of the supply base. Enterprises measuring performance of more than half their total supply base were able to generate more than double the improvements in supplier performance than those enterprises that measured less than half their supplier rolls, the survey showed.

In general, larger enterprises reported tracking performance across a larger portion of their supply bases than did small and midsize firms, and the survey revealed manufacturers to be more aggressive in their supplier performance measurement efforts than non-manufacturing firms, with nearly 43 percent of manufacturers currently applying performance metrics to more than half of their suppliers.

The report also demonstrated the benefits of standardizing supplier performance measurement procedures across the enterprise. Overall, companies that standardized supplier performance metrics across a larger portion of the enterprise were able to achieve better results. Companies that standardized supplier measurements on a business unit or enterprisewide basis were able to drive at least 25 percent greater performance improvements than those that performed such measurements on a site-by-site basis, according to the survey.

In their report on the Aberdeen/iSource survey, Minahan and Vigoroso discuss additional best practices for measuring supplier performance and provide a look at upcoming trends in supplier performance measurement.

The Supplier Performance Measurement Benchmarking Report: Measuring Supply Chain Success is available for free through Aberdeen's Supply Chain Research practice.