Overview of Supplier Performance

Regularly tracking the performance of your suppliers and your relationship with key suppliers is critical to ensure the success of your organisation.

Measuring your supplier’s performance should begin after the contract has been awarded. In order to measure a supplier’s performance, you need information, including feedback from customers, with the means to capture and interpret this information.

The aim is to know whether the supplier is delivering products or services in line with the terms of your contract in relation to quality, quantity and timing. It is also important to have this information in a form that you can use to take action to improve performance over time.

Key performance indicators, or KPIs, are a key tool to measure the performance of suppliers.

KPIs are usually performance measures agreed between you and your supplier and written into your contract. The starting point is a clear understanding by both you and the supplier of how and why the contract terms contribute to the achievement of the contract’s objectives. KPIs measure and drive the performance of suppliers to meet these objectives effectively.

While cost savings are an obvious objective of procurement performance, it is not just restricted to that. By measuring the performance of a supplier against the 5Rs, organisations can find answers to other important questions like:

• What needs to be improved?
• How do we compare with other organisations?
• Are we getting better or falling behind?

Although procurement KPIs are interdependent, they can be split into three categories:

1. Quality KPIs:

• Compliance with specification
• Supplier defect rate
• Purchase order accuracy
• Right first-time quality

2. Delivery KPIs:

• Correct volume of product delivered
• On time delivery in full
• Supplier lead time
• Purchase order cycle time

3. Cost-saving KPIs:

• Cost per invoice and purchase order
• Price against standard
• Achievement of actual cost savings target
• Price competitiveness

Benchmarking is another important tool to measure performance. This enables your organisation to compare prices and performance against other organisations in similar sectors. The marketplace is always changing so you need to make sure you are still getting value for money by staying informed about developments in your sector.

Some of the procurement benchmarks that organisations can use include:

• Procurement operating expense as a percentage of total spend.
• Cost reduction savings as a percentage of total spend.
• Average purchase order processing cost.
• Percentage of active suppliers accounting for 80% of total spend.
• Percentage of total spend managed by procurement.

Monitoring Supplier Performance

An organisation should have a system to monitor the overall performance of its suppliers of products and services, to make sure that deliveries are on schedule and comply fully with the terms and conditions of the contract.

In addition to using the performance measures illustrated above, there are some other key activities to effect in managing a supplier’s performance: 

Continuous improvement: You should always be looking to find new ways of doing things that make you more efficient and reduce cost. Make sure you can collect the best ideas and put them into practice.

Communications: Poor communications can affect relationships with suppliers and obstruct the collection of information.

Challenge:  A positive and trusting relationship with your suppliers will make it easier for either side to challenge the other and suggest ways to improve the contract without fear of conflict.  

Financial penalties: If financial penalties for poor performance are included in the contract, make sure you are able to enforce these payments in line with the contract conditions.

Use your contracts with your suppliers to actively manage your relationship with them for continuous improvement. By monitoring their performance against the contract terms, you can:

• Reduce risk
• Improve your relationship with suppliers
• Achieve better value for money