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Best Practices for Supplier Performance Management for Small Businesses

4 Mins read

Being good at supplier performance management (SPM, related to supplier relationship management or SRM) is essential for small businesses and manufacturers who rely on external vendors for their raw materials or other goods.

Implementing a strong SPM strategy can significantly help with your internal operations and strengthen relationships with suppliers.

Benefits of supplier performance management

A key benefit of SPM is ensuring value for money. It helps your small business confirm that the goods received meet their needs and the terms of the contracts. By upholding agreed-upon standards, SPM guarantees quality and promotes accountability, which helps minimize the risk of poor supplier performance.

Risk management is another advantage of SPM. By monitoring supplier performance, small manufacturers can proactively address risks tied to their contracts. This helps prevent problems that could disrupt supply, introduce quality defects, or raise safety issues, each potentially leading to serious financial and reputational damage.

SPM also enhances supplier relationships. Clear performance metrics and expectations make it easier for suppliers to meet requirements. Open and honest discussions about performance foster trust and transparency, creating stronger, more collaborative partnerships.

It’s also useful for future procurement decisions. By consistently choosing competent suppliers for new contracts and communicating effectively, you can maintain a high-quality supplier base.

Finally, SPM boosts organizational efficiency by enhancing internal processes. It aligns different departments around vendor management objectives, which ensures that all stakeholders understand their responsibilities in overseeing suppliers.

How to measure supplier performance?

Conducting SPM can vary based on supply requirements. It’s a process that continuously evolves and is refined to develop a system that best suits your needs. Here are the essential guidelines for creating an effective supplier management solution.

1. Pick the Right Metrics

Choosing the appropriate KPIs is important for aligning supplier performance with your business goals. These metrics should mirror the strategic importance of each supplier and encompass various aspects of performance.

To streamline your objectives, break down the metrics into four main areas—quality, delivery, cost, and responsiveness or flexibility. Here’s a closer look at each category with example KPIs to consider:

  • Quality KPIs focus on the alignment of suppliers with your company’s standards for goods and services. Key metrics include Defect Rate, Return Rate, Supplier Compliance Rate, and Order Accuracy.
  • Delivery KPIs evaluate how well suppliers adhere to delivery schedules and their speed. Important metrics here are On-Time Delivery, On-Time and In-Full (OTIF), Lead Time, and Average Delay.
  • Cost Metrics assess the financial aspects of procurement, such as purchase price and overall supplier ROI. Consider Total Cost of Ownership (TCO), Cost per Unit, and Cost Competitiveness.
  • Flexibility and Responsiveness Metrics measure a supplier’s ability to adjust to demand changes and market shifts. Key indicators include Volume Flexibility and Response Time.

It’s also important to include qualitative KPIs alongside the quantitative ones. These are based on your subjective evaluations, such as customer care satisfaction or how well suppliers improve over time.

2. Create a Supplier Scorecard

After selecting the appropriate KPIs, compile them into a supplier scorecard. This tool tracks performance trends over time, offering valuable insights for strategic decision-making. With a comprehensive scorecard, you can pinpoint opportunities for supplier development, negotiate contracts more effectively, or consider alternative suppliers if needed.

Essentially, a well-structured supplier scorecard is a key element of the SPM process and a strategic asset for boosting procurement efficiency and sustaining a high-performing supply chain.

Here’s an example of a scorecard: 

3. Measure and Collect Performance Data

Collect and track data on the selected KPIs to monitor supplier performance against the scorecard’s criteria. Make sure the data is correct and timely; this is crucial for accurate analysis.

While many metrics can be assessed during regular business operations, leveraging software for procurement software that automates the collection and compilation of data can simplify the process. (If you’re using software for manufacturing resource planning, you might already have an existing module that does that.)

4. Analyze the Data

Analyze the performance data to identify areas for improvement and develop a plan for supplier development. Benchmarking suppliers and organizing them into tiers can give you additional insights.

Also, don’t just focus on supplier performance but also think of how you could refine your SPM policy. You might be able to identify blind spots in current performance measurements and need to adjust metrics to improve your SPM process.

5. Communicate the Results

Share the outcomes of the SPM process with suppliers. Clear communication helps address issues and sets the stage for improvements.

Additionally, keep all relevant stakeholders informed. For instance, the finance department might use performance data to assess supplier financial stability. This approach ensures that the entire organization benefits from effective supplier management.

6. Continuous Improvement

SPM is inherently iterative, meaning you’ll be regularly updating performance metrics and objectives to make sure they fit the needs of your company and changes in the market.

To implement continuous improvement, conduct systematic reviews of supplier data, encourage and support supplier innovation, and create an environment where feedback drives positive change. Recognizing and rewarding improvements can also motivate suppliers to consistently achieve higher performance levels.

When should you consider finding a new supplier?

Relationships with suppliers can change, and even those who have been reliable for years might eventually need replacing.

Here are some warning signs that suggest it might be time to look for a new vendor. (Always remember, it’s important to communicate – try discussing issues and seeking resolutions before deciding to switch.)

  1. Late or incomplete deliveries: If a supplier’s deliveries start being consistently late or incomplete, and the situation worsens over time, it’s a clear sign of trouble.
  2. Deteriorating quality: Occasional defective items are manageable, but if poor quality becomes frequent, it’s time to consider other options.
  3. Difficulty in communication: If your attempts to contact the supplier via phone calls or emails consistently go unanswered, this indicates they’re not prioritizing your business.
  4. Unjustified price increases: Watch for price hikes that don’t align with market trends or aren’t clearly explained by the supplier. This could suggest financial instability.
  5. Poor customer service: A lack of personal interaction, no appreciation for your business, repetitive information requests, and complaints from your staff about the service indicate a need for change.
  6. Frequent invoicing errors: Regular mistakes in invoicing could signal deeper issues in the supplier’s accounts, which is concerning for both parties.

When searching for a new supplier, prioritize those who not only meet the necessary quality and delivery standards but also share your company’s values and strategic objectives. Opt for suppliers with solid processes, a reliable track record, and the ability to adapt to market changes.

Mike Lurye is the Director of Business Development at MRPeasy, a manufacturing resource planning software for small businesses.

Suppliers stock image by Kritsana Maimeetook 81/Shutterstock

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