Supplier Metrics that Matter

With skyrocketing costs and stagnant growth, performance is becoming ever more important to your supply chain. But how do you insure you get it? You start with measurements – against good metrics. Today we’re going to tackle supplier metrics.

Back in the fall of 2005, CPO Agenda ran an article titled Supplier Metrics that Matter that contained some good advice for developing good supplier metrics – including the following checklist that needs to be highlighted and expanded upon.

  1. Measure
    Specifically, measure what is important – not just what’s easy. For example, prompt invoice delivery is easy to measure, but what’s important is invoice accuracy.
  2. Develop and Utilize
    Metrics and outcome measurement. Utilization is the key. If you see a performance metric dropping, dig in, find out why, engage with the supplier, jointly develop a corrective action plan, and make sure it’s followed through. Otherwise, the metric will likely continue to drop.
  3. Accept approximation
    Some critical dimensions, such as the quality of the working relationship and strategic value, will involve subjective measurements by experts. They won’t be perfect, but without any assessments, you’ll have no foundation for improvement.
  4. Embed the Metrics in your Supplier Management Processes
    This process should include a discussion of how a supplier is to interpret the metrics, how they could go about improving their performance (and becoming or staying a strategic supplier), and about how they can improve the quality of the relationship. Furthermore, this conversation should be two way and the supplier should be able to highlight processes, requirements, or directives that are prohibiting them from doing as well as they could. For an extreme example of how arbitrary directives can greatly increase cost or decrease performance, let’s take Alan Buxton’s example of why project design matters. The UK Ministry of Defence was mandating waterproof matches in boxes of 17. However, most suppliers produced these in boxes of 25 by default. In order to supply boxes of 17, the supplier had to unwrap and repackage boxes of 25 into boxes of 17 which increased costs by 300%!
  5. Jointly Define the metrics.
    This will insure that both parties understand the metrics, what the goals are, and what needs to be done to meet them. It also makes sure that the metrics match the intentions. For example, if you want to insure rapid replenishment, you shouldn’t be measuring just average delivery time, because replenishment will also require the supplier to produce the goods as well. You need to be measuring average turn-around time from the time the order is placed.
  6. Share Competitive Data
    If you want a supplier to understand how well, or poor, it is performing, you need to let it know how well it is doing with respect to its peers, in aggregate and individually. (Just be sure to cleanse the competitive data of identifying information.) If you’re telling your supplier that 93% on-time-delivery is bad, then it needs to understand that average performance is 97%, for example.
  7. Focus on Value
    Don’t define metrics for the sake of defining metrics – make sure there is an associated value to be gained by their definition. You can define a metric on everything – delivery, cycle time, invoice processing time, etc. – but if you define too many metrics, or too many metrics that don’t allow you to improve the overall value of the relationship, then you’ll get lost in the sea of data and not make much progress. Start by defining the major operational areas of importance and identifying the three to five most relevant metrics. If you get them right, you’ll likely find that they’re all you need.