<< What to check
A. Importance of assessing ongoing supplier performance
Having established the supplier’s ability to deliver specified requirements and carried out due diligence, it is vital to ensure the contract is successfully executed. In particular, buyers need to:
• Realise the contract aims;
• Ensure both sides fulfil their respective obligations;
• Manage risk and supply chain vulnerability;
• Deliver continuous improvement, learning and knowledge transfer.
The responsibility for ongoing supplier management often falls between the owner of the contract and the procurement function.
It’s crucial, therefore, to set out at the start of the contract process – ideally at tender stage – who will be responsible for undertaking contract management tasks and ensuring the supplier is performing to standard.
Effective performance monitoring is part of the contract management process and needs to be included in the contract specification.
All contracts require a minimum level of management oversight but, as complexity and risk increase, so the need for performance monitoring rises.
For larger contracts, buyers will need to go beyond ensuring compliance and work with the supplier to secure further benefits, such as cost savings.
Post-contract appraisal is fundamental to contract and supplier relationship management – it allows the buyer and supplier to:
• Monitor compliance;
• Identify non-compliance and trigger corrective action, including contractual penalties;
• Quantify important performance attributes and measure change and improvement;
• Assess supplier performance and compare it with its peers.
Performance is becoming harder to measure because of the increasing complexity of commodities being purchased. Organisations are also demanding greater insight into their supply base, be it supply chain transparency, corporate social responsibility issues or value for money.
Buyers and service users frequently discuss a supplier’s performance and value for money, especially to compare it with another supplier. But how do we support our value judgments with hard facts and determine what is “good”?
It is usual for any organisation to carry out staff appraisals to assess performance and provide feedback. It is well documented that this process helps the organisation to be more effective. Considering this, and the increasing dependency on bought-in goods and services, it seems odd that supplier appraisal isn’t more prevalent in procurement. This could be down to procurement’s lack of experience in this area or the perception that it is a low‑priority activity and that if problems do occur they can be sorted out at the time.
So why carry out supplier appraisal? As an embedded and efficient component of your supply base management it can bring the following benefits:
1. Issues and problems can be identified and resolved quickly
Appraisal can prevent problems escalating and requiring extra effort to resolve. It can also provide an appropriate channel for the supplier to raise issues.
2. It signals your organisation takes supplier performance seriously
Organisations with a supplier appraisal system in place will begin to rigorously question the effectiveness of all suppliers. The business will have to think about what a good performing supplier looks and acts like, which will then raise expectations of supplier performance.
3. Helps align suppliers with organisational goals
Your supply base is helping your organisation function, but do suppliers know what your organisation’s goals and targets are? A supplier appraisal system does not measure performance but can help foster a deeper relationship that can add value. For example, if your organisation’s goal is to increase turnover by 20 per cent in two years, the supply base can help – your suppliers may be interacting with potential customers so introductions and networking are important. Similarly, if your organisation is looking to improve supply chain transparency, appraisal can measure the number of audits a supplier has conducted of their own supply base. These areas may not be core deliverables of the services, but will represent real value for the buyer.
4. Good suppliers will be more willing to work with you
A supplier that prides itself on high performance is more likely to want to work with a buyer that recognises high performance. Recognition of success is important on more than an emotional level – suppliers will want organisations to be referees and provide case studies and client logos as a way of boosting future sales.
5. Poor performing suppliers will be rooted out quickly
Suppliers that often try to get away with low standards or cut corners will think twice before bidding for work for you because they know they will be called to account through a supplier appraisal system.
6. Effective risk management
Potential issues are captured before they become real issues. If a supplier’s performance begins to deteriorate the warning signs may be hard to spot without a good supplier appraisal system. Such a system can mitigate risk on both sides. Often in long–term supplier relationships turnover of staff at the buying company can lead to new performance standards being set for suppliers as employees change. This can be disruptive for a supplier and can lead to performance slipping. An appraisal system provides continuity for the supplier and reassurance that performance standards are not unwritten, informal understandings with individuals, but robust performance measures.
7. Cost savings
When pricing for work suppliers assess the likelihood of things going wrong – the risk premium. This is priced into the agreement, ensuring that if any changes have to be made to rectify a problem the supplier is not making a loss. The risk of something going wrong is far higher for organisations that simply provide a brief then sit back and wait for the work to be delivered without any monitoring or communication in between. Likewise, a supplier will deem organisations that continually monitor performance as lower risk. The more complicated the work the higher the probability the work may not be performed to the purchaser’s requirements. In these cases it is even more important to have an appraisal system in place.
8. Effective relationship management
Buyers don’t often ask themselves what they can do better for their suppliers. A good supplier can only perform to the highest standards if the purchaser supports that performance. An appraisal system that picks up problems and allows the supplier to rectify them as quickly as possible will help nurture a good relationship between supplier and buyer.
9. Effective management of preferred supplier lists (PSLs)
With a comprehensive view of supplier performance it is possible to manage PSLs dynamically. Removing the lowest performing suppliers from time to time, and introducing new incumbents, will encourage competitiveness and maintain a focus on continuous improvement.
10. Enables evaluation and comparison
The data can be used to evaluate and compare performance of new suppliers.
11. Promotes continuous improvement
Non‑compliance events such as a product recall or late delivery can also provide an opportunity to learn and improve. Learning from failure in this way supports continuous improvement and is one of the keys to organisational learning and development.
12. Highlights possible weaknesses with the buyer
Two-way measurement can highlight deficiencies with the buyer, which may be the source of common problems within other supplier relationships.
B. Weighing up the cost
Organisations and procurement departments may consider a full-blown supplier appraisal system to be good in theory, but that the costs outweigh the benefits.
Supplier appraisal activity is not without its costs. There is time and cost involved in setting up, implementing and managing the appraisal system, for both buyer and supplier. Bear in mind, however, that supplier appraisal is one part of the purchaser’s toolkit of skills and it is down to the buyer to deploy those tools in the most appropriate manner.
It is crucial to make an informed decision about which supplier will be appraised, how often and for what reason.
>> Deciding what to monitor
