<< Post-contract appraisal
C. Deciding which suppliers to monitor
The normal distribution of expenditure (the 80/20 rule) means there will be a high concentration of expenditure (80 per cent) with relatively few suppliers (20 per cent).
The maturity of the organisation and the extent of supplier consolidation may vary this a little, but it’s likely that many suppliers and contracts will be of relatively low value and criticality and need lighter management than others. Contract and supplier management activity costs money. As well as the supplier’s cost built into the contract price, contract management will cost the buyer about 2 per cent of the contract’s value, according to the National Audit Office.
To determine which suppliers to monitor use the Kraljic model on page 6, if this has not already been done at pre-contract stage. This allows buyers and contract managers to position each contract systematically and apply an appropriate set of contract and supplier relationship practices, appraisal techniques and governance. See the table below.
D. Procurement roles and responsibilities
Buyer and supplier relationships are becoming more complex. A single contract may span several business units or geographic areas and a single supplier may have multiple contracts and different business units for different services.
In these circumstances buying organisations stand a better chance of improving performance and value if they work in a consistent way.
At the very least, contract management and performance management practices should be applied in the same way and contract and supplier key performance indicators (KPIs) shared with other contract managers and key stakeholders.
To strengthen governance and co-ordination a senior relationship officer could be appointed to manage the most critical relationships.
Procurement does not need to do all of this work itself, but it has a key role in developing the management framework and making sure it is properly applied. It may also be in the best position to consolidate and make sense of the various performance indicators and to co-ordinate stakeholder activity. The supplier is responsible for producing goods and services of the required quality as agreed in the contract, and thus for quality assurance and reporting.
However, the buyer may have legal accountability for the quality of the product or service further along the supply chain and will be held to account if there is a failure. The buyer needs an appropriate level of governance and sufficient monitoring, supported by external audit where necessary, to be confident the supplier’s assurance process is working and they have acted responsibly.
Roles and responsibilities for the various management tasks need to be allocated clearly. Use the RACI (responsible, accountable, consult, inform) model to avoid any ambiguity
E. What to performance monitor
At a basic level, performance monitoring is about whether the supplier fulfils the contract.
Indicators of performance can relate directly to important attributes of the product or service itself, such as measures of size, weight, quality, availability or cost.
It is also possible to appraise the supplier’s performance in the execution of the contract – by, for example, measuring responsiveness to queries, quality of account management and accuracy of invoicing. These are service levels and documented in a service-level agreement and measured by KPIs.
F. performance appraisal methods
There is no hard and fast rule about which characteristics of the product or supplier should be measured or how many measures there should be. It depends on what characteristics are important to the buyer and how KPIs are selected and used.
As a general rule, there should be as few measures as possible (since monitoring costs money) and KPIs should be linked to the user or consumer experience.
Factual, objective information about performance (particularly in relation to the product or service itself) can usually be obtained from the supplier’s or buyer’s IT systems. Examples could include:
• How often delivery is in full and on time;
• The level of non-conformance, e.g. rejects;
• Invoice accuracy;
• Project milestones delivered on time and to cost;
• The number of customer complaints/returns or rectification costs;
• Flexibility (ability to respond to changing needs);
• Levels of waste, CO2 emissions or landfill disposal.
Some performance characteristics, especially in service contracts, require the views of customers or other stakeholders. These may relate to satisfaction with the product or services, responsiveness of the supplier, quality of people or ancillary support services (such as call centres) or perceived value for money.
Ways to collect data include:
• Interviewing against a defined set of questions. This can be face to face, or on the phone but needs to be interactive so that the interviewer can explore more detail when necessary. Sometimes commitment is required from stakeholders, such as engineers in the field, to keep records of their experiences of working with a supplier in order that objective factual data can be used;
• Using customer/stakeholder surveys that can be distributed and collated electronically.
• Verification – perhaps of self-assessment reports and quality information. This is normally part of a product or supplier audit and can involve direct sampling of the product or service (for example as a “mystery shopper”) or by auditing the supplier’s management and control systems. This verification can be a contractual obligation and paid for by the supplier.
Performance information should be reviewed formally with the supplier at intervals. The frequency depends on the duration and complexity of the contract or relationship, but should be at least biannually for high-risk suppliers. The review should cover a range of indicators, including:
• An assessment of KPIs and trends;
• An analysis of non‑conformance events and any follow-up investigation;
• Any changes to the supply situation (supplier or market);
• Any changes in the buyer organisation;
• Progress against improvement or efficiency targets;
• An assessment of any relationship issues or appraisal findings;
• Identification of opportunities to further improve efficiency and quality.
G. Relationship management
While many aspects of supplier appraisal relate to operational delivery, the ability of organisations to work and develop together requires particular characteristics and behaviours on both sides.
These are often soft or intangible and based on the perception of the relationship participants.
Appraisal is often undertaken by interview or survey and compares the relative perception of both parties in a constructive and open way to encourage debate and better alignment.
These techniques are similar to those used for personal development and involve 180 or 360 degree feedback against a common set of parameters, ranked in terms of importance by both parties. Factors that can be appraised include:
• Cultural fit;
• Innovative capacity;
• Openness and trust;
• Mutual understanding;
• Attitude to change.
Appraisal results are used to complement relationship development or to correct negative perceptions or behaviours if a relationship is underperforming.
H. Managing corrective action
If performance monitoring indicates an unacceptable level of non-compliance then immediate corrective action is required. How this is notified to the supplier and how quickly the supplier has to respond is usually defined in the contract.
The performance issue may also trigger service penalties and, depending on its seriousness, require escalation. Each event should be fully recorded and, once resolved, investigated and action taken to prevent any reoccurrence.
I. Supplier performance and risk management
Supplier performance and the status of supplier relationships have a direct bearing on a buyer’s risk profile. This is one of the main reasons why supplier performance and contract management is necessary.
Risk management is a dynamic process. The risk profile you face reflects:
• The importance of the contract;
• The stability of the relationship with the supplier;
• Any change in circumstances that will affect the position of the supplier or your dependency on the product or service being supplied.
Contract segmentation and appropriate appraisal and monitoring techniques will go a long way to providing a clear understanding of the risk profile and any deterioration in performance. However, risk is also affected by external factors such as the supplier’s financial standing, market activity such as the supplier being taken over by a competitor, or by internal factors such as a change in use, increased sales or dependency on a particular product or service.
Dependency can be measured in terms of the proportion of the supplier’s turnover represented by your business, or the proportion of the buyer’s expenditure with a single supplier. Figures greater than 30 per cent either way would be a concern and require closer risk monitoring, especially if supply risk or market difficulty is also high.
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