Every business depends on reliability and consistency from its suppliers in order to meet its own performance targets in delivering products or services to clients. Yet it would be unrealistic to deny the possibility of performance failures from suppliers, and even to allow for them.
Agreeing and communicating acceptable quality levels with suppliers is a fundamental part of the supplier contract so that expectations and obligations are clearly understood. It is then essential to have a supplier performance monitoring system in place to understand whether those obligations are being met.
We have already said that some failures are inevitable. With an effective system to monitor supplier contracts you can establish success and failure rates against AQLs, for example, if you have 82% on time compared with an AQL of 87% minimum, then there is a problem.
But there is more to it than that. Poor performance can cover a wide array of aspects. Lapses might be sudden events or problems that creep up over time. Their consequences might be trivial or catastrophic. They might be applied to particular suppliers or specific steps in the supply chain.
A coherent supplier performance review system that utilises a simple supplier performance monitoring template can help with monitoring the performance of the entire supply chain but can also zero in on specific areas such as supplier location, type of supplier, performance criterion (eg quality, compliance, timeliness). It will also make it easy to assess any changes over time and quickly highlight any improvement or deterioration in performance.
How do we define supplier performance?
When you sign a contract with a supplier, you agree to pay money in exchange for receiving a product or service that meets certain criteria. These might broadly relate to quality, timeliness quantity or compliance with some mutually agreed third party standard. We can call these our delivery targets and some people like to subdivide them into time, cost, quality and opinion metrics.
We measure supplier performance in terms of compliance with the contractually agreed delivery targets. Satisfactory performance doesn’t necessarily mean that everything is perfect every time, but it does mean acceptable quality levels are being hit with the delivery targets, for example 92 percent on time when the agreed AQL is at least 87 percent.
What do we mean by poor performance?
Unsatisfactory supplier performance is not so neatly defined. In essence, it means failure to deliver to the agreed metrics. That is fine when the metric is measurable such as delivery on time or compliance with a highly specific quality standard. However, there is also the potential for more subjective elements such as quality of the working relationship or delivery of innovation.
Clearly, it is essential to define poor supplier performance within the supplier contract to avoid any such ambiguity. It is in everyone’s interest to be alerted to performance deficits and the first step is having clarity so there is no need to waste nervous energy debating whether the performance issue exists.
Sometimes, poor performance might be defined by several different targets coming together, or not coming together, either at a specific point or over time.
When a supplier is delivering widgets of a certain size in certain quantities at certain times, then setting and agreeing AQLs is simple. Everyone can see whether performance is good or bad and whether it is improving or deteriorating according to the different parameters. However, where the delivery targets relating to the product or service are not so easily defined, it is essential to take extra time to get complete agreement and clarity at the contract negotiation stage.
Follow a suppliers performance over time to see if they are getting better or worse in certain areas and take the necessary actions
More than just quality assessment
When conceptualising supplier performance monitoring, we tend to think in terms of quality, as this is the easiest type of performance breach to envisage. For example, products being delivered late or damaged.
However, that is only one aspect of supplier performance monitoring. There is the potential for breaches in other areas that can have far more damaging consequences than a couple of late deliveries. These vary depending on your business, but might include CSR risks such as those highlighted by the BBC in 2016 that placed several high street fashion brands in a damage limitation posture, or the great horsemeat debacle in the frozen food industry in 2013.
Areas for assessment might include the following:
- Legal and regulatory compliance
- Corporate social responsibility
- Financial stability
- Data protection and security
- Business continuity planning and disaster recovery
These are just examples, and the list is by no means exhaustive. The important point to keep in mind is that in every area delivery parameters and acceptable performance levels must be clearly communicated and agreed.
With Kodiak Hub's dashboards you'll be able to quickly spot and follow the performance of your supplier base as a whole or narrow down on specific customized categories or suppliers.
How to assess poor supplier performance
As well as agreeing these AQLs, it is necessary to be transparent from the outset on how these parameters are measured and assessed. With some aspects of supplier performance, that is simple. If widgets arrive two days late, or they measure 12mm instead of 15mm, the performance breach is clear for all to see.
Other aspects might only become observable or obvious over time. For example, in decentralised organisations, weaknesses in a specific area might go unnoticed for months until something finally snaps.
Alternatively, extraordinary circumstances can highlight a weakness that had lain unobserved for some time. A Houston-based business that was hit particularly hard by Hurricane Katrina turned to its disaster recovery plan only to realise that the annual review had been a little too cursory and half the emergency contacts had either left the company or changed their telephone numbers.
These are just a few examples of how a centralised supplier performance management system can not only help you stay on top of supplier performance monitoring, but can potentially prove its worth by saving you from a world of pain when you least need it.
Below figure shows a snapshot of how Kodiak Hub helps you to quickly take action via our collaboration function when noticing a supplier lacking in certain areas. So that you can set up an action plan to come to terms with how you should move forward.
Root cause analysis
The primary purpose of this kind of supplier performance review process is to understand the “what” of poor performance. However, while some might argue that it is “up to the supplier to fix it,” understanding the “why” is often as important for the customer as it is for the supplier.
Sometimes the poor performance really is the result of a basic failure that the supplier needs to “fix” through improving its own internal processes. But on other occasions, it might be indicative of some wider issue such as economic or political conditions. This is where being able to cut and slice supplier performance data by sector, geography or individual suppliers can lead to some truly valuable insights that can benefit your business, your customers and even your suppliers, too.
With Kodiak Hub's analytics tools you'll be able to understand why some suppliers may be performing better than others in certain areas. In below figure we've compared Quality Management & Quality performance criteria between a set of suppliers. A supplier that lacks quality management, will likely not excel in quality performance, and should they show high quality performance, but lack management capability, this discrepancy could also cause issues/incidents.
This is just one of many insights you can gain from using tools to monitor and spot potential risks in your supplier base. Learn more on 30+ Ways to Conquer & Spot Supplier Risk
Don’t leave it to chance
Any business can be thrown off kilter by poor supplier performance. Customers are not interested in excuses if supply chain problems prevent you from delivering your product or service as agreed. Insidious issues can transform from minor inconveniences to critical breaches if left unaddressed. Worst of all, fundamental breaches of corporate social responsibility by suppliers will rub off, and in today’s data-rich world, ignorance is no defence.
Supplier performance monitoring is too important to be left to chance. This e-book provides a more detailed analysis of what supplier performance monitoring software can achieve, as well as some ideas on the sort of areas your own supplier scorecard might cover.
Or you can just book a demo with us below and we'll let you know how Kodiak Hub can help you with monitoring your suppliers performance way better than any spreadsheet or homegrown solution could ever do.