How do your Supplier KPIs measure?
Measuring Supplier Performance Key Performance Indicators (KPIs) is critical to developing a Best-in-Class Procurement organization. It can foster better communication, increase spend and order visibility, improve process efficiencies, identify cost savings opportunities and more. However, calculating, analyzing and reporting these KPIs takes substantial time and effort. If a team doesn’t set up Supplier Performance management for success, KPIs can quickly fall to the wayside.
Here are 3 unique tips that have helped clients succeed in their Supplier Performance KPI management.
- Include the KPI within the Supplier Agreement
Include the metrics that will be used to evaluate supplier performance within the Supplier purchase agreement. Define how often the metric will be calculated, how it will be calculated, and who will be responsible for managing the data. These basics will set the foundation and ensure that both parties follow through on contractually obligated supplier performance reviews.
Pro tip: Add a minimum threshold for the KPI and repercussion for failure to meet it. For example, if a supplier on time delivery falls below 95% on time, there will be a financial penalty of 0.05% of the Purchase Order spend.
- Let your Supplier choose a KPI
When selecting the KPIs for supplier performance, it’s important to first keep it simple – and choose only metrics that are critical and drive action. However, it is also a great idea to let your supplier choose one of the metrics. It fosters partnership with the supplier and allows the supplier to choose a metric tailored to ensure they are successful – but might also drive continuous improvement within your organization.
Example: In the wake of a new Supplier-Customer agreement, the supplier chose a new Performance KPI to track the number and additional cost of Emergency / Expedited POs. As a result, it provided new data to the Customer and inspired 3 different Continuous Improvement activities which reduced the number of Emergency / Expedited POs by half.
- Set up a “Grace Period” for Reporting
Reporting a KPI or any data for the first time can open Pandora’s box to data / process issues that you had no idea existed. Every company’s purchasing system is set up a little differently, and it invariably leads to reporting or calculating numbers a little differently. Use the 1st KPI Review as an opportunity to work through any large discrepancies in the KPI and review how the KPI is being calculated. While the KPI might not start out as stellar… let alone close to target… it’s an opportunity to review internal processes and create some action plans for improvement. It’s important to allow both the Supplier and Customer produce data that can be trusted and work past any outliers in the beginning.
The most important part of Supplier Performance measurement is making sure it’s sustainable. Spending time and effort in the beginning to make sure the Supplier Performance management is set up for success will allow your company to reap in more benefits and successes from monitoring and measurement in the long run.
We’d love to hear from you. What is something that helped your company excel in Supplier Performance measurement?