Research points to keys to improve supplier performance management
According to McKinsey, companies are not spending enough to streamline their procurement operations. They say that for most companies the procurement operating expenses are less than 1% of total spending.
The research indicates that improvements in supplier performance management can save companies as much as 9% of annual revenue. These gains can be achieved by reducing or eliminating the costs of poor quality, chargebacks, late deliveries and delays in getting products to market.
According to the study, supply chain management (SCM) leaders need to embrace digital transformation to create mutually beneficial relationships with strategic suppliers.
And to get there, SCM leaders need to leverage the power of data-driven intelligence and performance scorecards with measurable KPIs to help improve supplier performance.
What else is needed?
Understanding trends driving supply chain management capabilities
In the past, SCM leaders looked at quality, cost, and delivery capability when evaluating suppliers. Today, leading businesses are looking beyond those metrics to implement performance-based contracts to help optimize spending and improve business continuity. How so?
Generally speaking, contracts establish the “rules of the game” for the supplier relationship. Performance-based contracts add metrics and indicators that monitor the total value created as a result of the relationship with the supplier.
Examples of supplier performance metrics include availability, response times, flexibility for change, reliability, maintainability, supportability, total cost of ownership, and even contributions to innovation.
These metrics can be defined quantitatively and/or qualitatively. Often they are agreed upon by both parties and can include incentives for improvements and penalties for failure.
SCM leaders rolling out performance-based strategies need platform-based tools that can enable business processes across internal teams. For example, platform-based tools can enable cross-functional teams to evaluate the capabilities of prospective suppliers upfront, while other teams are tracking existing supplier performance against operational targets and contract governance in real time.
Another trend toward supplier performance management is the need to enhance transparency about environmental, social and governance (ESG)) issues.
Why ESG is so important
ESG is important because the expectations for companies have changed. Customers want to know more about the products they buy, what is in them, and where and how they were made, and who made them.
And, there’s more change on the horizon. Regulators and lawmakers around the world are introducing new policies that protect the planet, its systems, and people.
Extended producer responsibility (EPR) regulations, for example, are reducing the amount of waste headed to landfills. EPR laws impose tariffs, or taxes, on the products a company makes. The amount of the tax is determined by how much recyclable material is used in the products.
And, if that wasn’t enough already, perhaps the greatest influence, are investors and creditors. Companies with strong ESG capabilities and transparent reporting have better access to capital. Why? Because investors can more easily identify risk in companies that are transparent about their practices, partners, and products. They know that, over the past decade, companies with strong ESG capabilities have outperformed those that don’t.
ESG targets for suppliers
Leading companies enlist their suppliers to meet ESG goals. For example, companies will ask suppliers to use renewable energy to reduce overall carbon emissions in the business’s value chain. Or, they may set goals to reduce water use and encourage use of water recycling.
Supplier performance on a range of environmental, social, diversity and inclusion, and business governance practices is increasingly important to companies.
Collaborating with suppliers on environmental targets and representation begins with reporting of baseline information. This information is used to benchmark and track progress toward goals over a defined period of time.
SCM leaders need platform-based tools that automate the collection and analysis of information to track progress on ESG targets and make it available across internal teams that include Procurement, Supply Chain, Sustainability, Corporate Social Responsibility, Legal, and Marketing.
Overcoming challenges in supplier performance management
Supply chains are vast, complex networks. Collecting and analyzing information from the supply chain is difficult because of the amount of data and the many different data types and formats.
To overcome these challenges, SCM leaders are turning to data analytics and artificial intelligence that manages data collection, detects anomalies, and even predicts next-best actions such as spend optimization.
A robust tool set will have embedded risk mitigation features. These will capture, triage, and investigate issues of non-conformance to compliance, quality, and ESG requirements. This is usually done through periodic automated audits which are managed and documented within the platform. Suppliers can upload the required documents via the portal.
Another value-adding feature is measurement and ranking of suppliers over time versus their peers. It helps establish a benchmark to assess such things as non-conformance, risk level, and audit results.
The benchmarks are shared, using anonymized data, with suppliers along with recommendations for actions that can help them improve their standing which is key for continuous supplier performance improvement.
Enabling the Supplier Performance Management Process
A robust supplier performance management process is important for any organization with a complex supply chain. To employ a robust process, SCM leaders need to prioritize a few things.
First, there needs to be a bi-directional approach to performance management design. Suppliers need to be involved in determining how they will be evaluated. When SCM leaders involve suppliers in the design phase, they end up with the correct KPIs and a multi-dimensional scorecard.
Second, beyond arriving at the right KPIs, SCM leaders must maintain active collaboration and timely data exchange between the company and its suppliers. Suppliers are a strategic, auxiliary part of internal manufacturing operations.
Third, SCM leaders must enable transparency in their approach to supply chain management. This will streamline the collection and analysis of data which is critically important for Supply Chain, Procurement, Compliance, Vendor Management, Quality, Sustainability and CSR teams.
Finally, SCM leaders must demonstrate long-term thinking in their engagement with strategic suppliers. By demonstrating to suppliers the intention to continue working with them in the long-term, suppliers will be willing to also invest in serving the company to the best of their ability.
Following these principles and overcoming the challenges are the keys to supplier performance management that gets the maximum value from supply chain partners and the highest return on supplier spend.