Building a supplier performance measurement system

The SPAA system

The perfect SPM system carefully targets resource to measure just the right things, at the right time, with the right suppliers and outputs information in the most useful and meaningful way. Sounds straightforward enough but organizations frequently seem to get lost in the process of translating this into action, resulting in over-engineering of measurement approaches.

FIGURE 6.1 The SPM system

The SPM system

Measurement needs a purpose and the purpose is the precise targeting of supplier invention. Therefore effective SPM requires a closed loop approach to measurement and so the system of supplier performance measurement, and indeed management in response to measures, is given in Figure 6.1.

If we are to implement an SPM system then we need put in place arrangements for each of the three steps in the cycle. There are different considerations, options or possibilities here and these are expanded through the rest of this chapter; however, before exploring the practicalities we shall consider the characteristics of a good SPM approach.

Reasons SPM systems fail

There is no shortage of SPM systems that have simply failed to get going, keep going or demonstrate meaningful contribution. Supplier measurement regimes can easily take on a life of their own, becoming little more than data collection exercises or ones where good information is simply ignored. One US-based company appointed an individual with the role of analysing and measuring supplier performance. Each month he produced a thick report, circulated to all, that provided supplier-specific data on delivery and quality and performance together with vast market data providing price trends for commodity and key indices. The report was an impressive piece of work; however, in my subsequent discussions with different individuals in the team I asked how people managed the performance of the suppliers they looked after. From a team of 38, only a handful mentioned the report they received, the majority of the remainder did remember the report when prompted but it was apparent the information was serving little purpose.

Reasons why SPM systems fail or end up sub-optimum include:

• measuring the wrong things;

• measuring too many things;

• overburdening system data collection;

• bad data or inputs;

• difficulties securing data or information from disparate systems;

• the important things are hard to measure;

• lack of goal congruence - not linked to goals, or linked to the wrong goals;

• results don't highlight things to act upon;

• outputs don't tell the whole story;

• failure to act;

• suppliers dispute measures or data integrity; and

• measures used punitively, driving defensive behaviour.

Just one of these can be enough to render an entire SPM system worthless or to bring the effort being spent on it into question. Yet all of these are in fact easy to avoid with the right thought and effort at the outset.

10 Characteristics of best practice SPM

There are 10 characteristics that define best practice for any SPM system. Each responds in some way to established best practice, what has been proven to be effective or the published wisdom in this space. These are:

1 Unique to the organizational context-every organization is different and therefore the SPM system must be designed around the organization, the nature of its supply base and what it is trying to achieve overall.

2 Supplier specific -whilst a company may have an overarching approach to SPM approach, SPM systems must, in fact, be supplier specific also and therefore tailored for an individual relationship. One size does not fit all.

3 Goal alignment-what gets measured and specific supplier interventions are value and outcome driven, aligned to the aims and goals of the organization as informed by customer needs and desires.

4 Business-wide approach- alignment to stakeholder expectations and the way the organization does things; using cross functional-engagement to incorporate the needs and wants of internal stakeholders, and perhaps external stakeholders.

5 Supplier involvement as appropriate - depending upon the degree

of importance of the supplier, the potential involvement of the supplier in agreeing what gets measured and how the measures will be used in practice.

6 Focused resources- measurement and intervention resources focused carefully according to the nature and degree of importance of the supplier relationship.

7 Balanced-meaningful, valuable and balanced measures, interpreted where needed and based upon accurate data, using different data sources and comparable to others.

8 Scarcity- keep it simple! The measurement system is designed as

if 'measures were scarce' so what gets measured and outputted makes a difference in some way and is easy to understand and act upon.

9 Fosters positive behaviour- designed to foster the required behaviour rather than hit targets.

10 Meaningful outputs-measures are interpreted, presented and made available where, when and to whom as appropriate in order to influence outcomes and enable actions and informed decision making.

Five steps to put SPM in place with a supplier

The five steps to implementing SPM for a specific supplier (Figure 6.2) are as follows; each is expanded over the next five sections in this chapter:

1 Determine SPM aims - what are we trying achieve overall by measuring this supplier?

2 Determine requirements and targets - what supplier-specific requirements and targets do we need to satisfy and achieve?

3 Determine KPIs - determine the measures, indicators and KPIs that will best demonstrate how the supplier is meeting and working towards the requirements and targets.

4 Measurement system design - design and implement the arrangements needed to collect data and produce the KPIs.

FIGURE 6.2 Five steps to developing an SPM approach for a supplier

Five steps to developing an SPM approach for a supplier

5 Output - develop a means to output the KPIs together with supporting measures or detailed indicators if required so they are visible to the right people, or at the right points in the process, at the right time to enable action and intervention as needed.

These steps are unique to a supplier because each supplier is important for different reasons and therefore each requires a unique and tailored measurement approach.

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