The (Missed) Opportunity of Supplier Performance Management

Benefits clear, but few enterprises implementing necessary processes or technologies, Aberdeen/iSource survey reveals

Tempe, AZ  Most enterprises are missing out on the benefits of a well-managed supply base because they do not have in place the technological infrastructure, strategies or processes necessary to properly measure their suppliers' performance, according to a new study from technology consultancy Aberdeen Group and iSource Business magazine.

Enterprises that have implemented consistent supplier performance measurements programs have been able to improve the performance of their suppliers by more than 26 percent on average, according to the study, which was based on a survey of supply chain and procurement executives from manufacturing and non-manufacturing companies around the world.

Yet only 56 percent of enterprises have put formal supplier performance measurement procedures in place, and nearly three-quarters (72 percent) of survey respondents said that their companies measure the performance of fewer than half of their suppliers, according to the study, "The Supplier Performance Measurement Benchmarking Report."

"In short, by failing to measure the majority of the supply base, companies are exposing themselves to large-scale quality mishaps, service deficiencies and cost overruns that can eat into bottom-line profits and damage competitive positioning in the market," write the report's authors, Tim Minahan, vice president and managing director of supply chain research at Aberdeen, and Mark Vigoroso, research product manager for e-business and enterprise applications at the consultancy.

As examples of the potential pitfalls of failing to properly monitor suppliers, the analysts cite Ford Motor Co.'s $3 billion recall of Firestone tires after design and quality issues came to light, as well as Coca-Cola's recall of 15 million cans and bottles of its soft drinks in Europe after contaminated chemicals used at a certain bottling plant reportedly caused several consumers to become ill, costing the company $60 million in lost sales.

Beyond these extreme cases, the Aberdeen/iSource report suggests that with companies on average spending half their earnings to purchase goods and services from external suppliers, it is essential that enterprises be able to measure their supply base's performance in order to asset the true total cost of ownership of their supply relationships, products and entire supply chain.

"A tremendous amount of cost savings and value generation opportunities are falling through the cracks due to insufficient infrastructure and inconsistent strategies for measuring and managing supplier performance," said Minahan in an interview. "Our research indicates that enterprises with established standard metrics and procedures for measuring supplier performance have been able to dramatically increase supplier performance in the areas of quality, on-time delivery, price, total cost, contract compliance, lead times and overall responsiveness, most of which have resulted in hard-dollar savings.

The survey revealed the extent to which supply chain practitioners view supplier performance management (SPM) as a vital process: More than 70 percent of the surveyed enterprises consider supplier performance measurement as "very important" or "critical" to their own companies' operations.

At the same time, nearly 60 percent of the respondents indicated that they were less than satisfied with their SPM capabilities, and only half said their companies had formal procedures in place for measuring supplier performance.

Obstacles in the way of more effective supplier performance measurement included large supplier rolls, disparate data sources and labor-intensive data-collection processes, and inconsistent goals and metrics across different divisions or sites within an enterprise. In addition, the survey found that only a little more than half (54 percent) of the respondents said they use automation tools to measure supplier performance.

Minahan and Vigoroso cite four key strategies for realizing greater benefits from SPM, including tracking the performance of a greater portion of the supply base, standardizing supplier performance measurement procedures across the enterprise, collaborating with suppliers on performance metrics and improvements, and automating certain performance measurement activities.

Those enterprises with the best SPM programs in place were able to improve supplier performance by 26 percent on average, the study showed, outdoing those programs that lacked some critical component. For example, those companies tracking more than 50 percent of their supply base saw more than twice as much improvement in supplier performance as those companies tracking less than 50 percent: 38.5 percent improvement versus 17.4 percent.

Minahan said the importance of effective SPM is likely to grow, given current business trends. "An increased reliance on external supply partners to manage a larger portion of product content and growing number of business processes will make supplier performance measurement a vital business strategy for controlling costs, managing risks and driving continuous improvement across the extended supply chain," he explained.

Looking ahead, a question on the survey regarding future intentions revealed that enterprises anticipate bringing greater automation to their supplier performance measurement programs, with nearly 60 percent of respondents planning to use automation to improve data collections and improve their ability to analyze the collected information.

Enterprises also are looking to expand their ability to predict their suppliers' future performance rather than merely relying on backward-looking assessments of past performance.

The Supplier Performance Measurement Benchmarking Report is available on the iSource Business Web site.