In many industries, but especially manufacturing, optimizing the supplier relationship makes supply chains operate more efficiently. With suppliers you can rely on, your business is more likely to hit your own customer commitments. But how do both parties know whether the relationship is strong?
Monitoring supplier performance metrics grants both parties insight into the operations of the supply chain. By recording data through standardized metrics, usually captured on a supplier scorecard, procurement teams can determine if suppliers are performing their role as expected and which suppliers a buyer can lean on.
A transparent supplier scorecarding process also allows the suppliers to grade their customers and trace the history of their relationship with them. Keeping a close eye on these performance metrics and monitoring supply chain processes is key to continuous supply chain improvement, as well as maintaining a strong, strategic relationship with suppliers.
What are Supplier Performance Metrics?
Supplier performance metrics, put simply, are categories that procurement professionals use to grade their suppliers’ performance. They might also be called key performance indicators (KPIs). In a perfect world, buyers and suppliers would decide on these KPIs at the start of their relationship. While this is not always the case, deciding on and then monitoring metrics can keep buyers and suppliers in agreement about the health of the relationship.
A supplier scorecard, sometimes known as a vendor scorecard, is ideally where these metrics are captured. At its best, scorecards are transparent, readily available to both parties in real time. Monitoring and recording performance in the supplier scorecard allows both parties to understand the current state of the relationship. While the performance metrics might differ from company to company, some common gradable metrics include quality, on-time delivery, acknowledgment rate, and responsiveness.
We’re defining an acknowledgement as simply when a supplier confirms that they’ve received a purchase order. In most cases, businesses will ask their suppliers to acknowledge orders in about 48-72 hours, but few businesses keep track of how many suppliers actually followed through.
Like the other metrics, requiring purchase order acknowledgements is only useful if it’s upheld. We’re of the opinion that every manufacturer should set the standard of a 100% acknowledgement rate. This ensures that your suppliers are pushed to recognize and respond to every purchase order that passes through. No more job sheets getting lost or emails going overlooked.
While a 100% acknowledgement rate is possible to accomplish in every supply chain, it is acutely more difficult to enforce and measure if you’re only operating through email. Purchase order management software is the best way to measure how many POs are acknowledged, how many are not, and which suppliers are falling short.
As a rule, any software buyers or suppliers integrate into their daily operations should simplify supply chain processes, not complicate them. Supply chain software should allow suppliers to acknowledge a purchase order with the click of a button (like SourceDay does).
Simply put, responsiveness is how quickly suppliers respond to buyer communications. A response can be acknowledging new orders (as we described above), accepting or rejecting order changers, or simply responding to questions.
While it may seem simple, make no mistake—responsiveness is key to a successful supply chain. Our research has shown that 40% of purchase orders will change on average, and all that change is historically managed through emails, phone calls, and spreadsheets. When suppliers are slow to respond to changes (or don’t respond at all), you’ve introduced risk into your supply chain. It’s imperative that every change is reviewed, discussed, approved, and made transparent to other team members.
Industry standards concerning responsiveness can depend on industry or the geographical locations of suppliers.For example, teams might request responses within 48 hours, but the time frame might be longer for international suppliers.
Like acknowledgement rates, responsiveness is impossible to measure in an email inbox. In order to measure it accurately, communication must be housed in a more transparent platform.
An essential, and arguably the most important, supplier performance metric to measure is “on-time delivery.” This metric directly affects the efficiency of a supply chain. Supply chains consistently hitting above 90% mark in on-time delivery keep their machines running, their inventory low, and their buyers happy. Research has shown that suppliers with strong on-time delivery rates can contribute to as much as 70% of a company’s revenue.
On-time delivery from suppliers impacts every department, so it’s essential that buyers and suppliers clarify what on-time delivery means to them. A complicated order may have multiple deliveries and shipments that arrive at different times. Does the arrival of the first shipment positively affect the on-time delivery metric? Or does the whole order need to arrive on time in full for it to count towards an on-time delivery? As on-time delivery can mean different things to different parties, these differences need to be addressed and clarified when creating KPIs and designing the supplier scorecard.
On-time delivery, acknowledgement rate, and responsiveness are foundational metrics necessary to grade on for an effective buyer-supplier relationship. However, as time progresses, buyers can get more precise in their scorecarding. Some other metrics to add over time include quality checks and price variances.
REPORT: Year-Long Disruption & The Risks to Supply Chains
Why Measure Supplier Performance Metrics
Recording supplier performance metrics acts as a safety net in the face of disruption, whether on a local or global scale At its advent, the COVID-19 pandemic threw supply chains across the globe into disarray. Purchase orders were changing rapidly and lead times were extended. Supply chains with an active and quantifiable performance management system and a standardized scoring process were able to communicate and address the numerous issues that arose daily. With a strong supplier relationship and agile supply chain, buyers and suppliers were able to work together, take corrective action, and avoid late shipments and closures, ultimately protecting their cash flow in a time of intense disruption.
Most importantly, measuring supplier performance aligns performance goals between buyers and suppliers. The relationship between buyers and suppliers should be strategic and mutually beneficial. Buyers need suppliers, just as suppliers need buyers. Scorecarding and measuring performance allows for strategic partnerships, with both parties striving for a more agile supply chain, lower inventory, and an improved bottom line.
Standardizing Supplier Metric Procedures
To keep scorecarding clear and precise, supplier metric procedures must be standardized as much as possible. It’s much more difficult to grade suppliers if each supplier is held to different standards. Of course, this isn’t possible 100% of the time. There may be different agreements in place with some suppliers, but a cloud-based scorecard that can be tailored to individual suppliers makes tracking those differences simple.
Start by clearly communicating new standards, like a requirement that every order be acknowledged within 48 hours for example, to all suppliers. And then follow up. When suppliers fail to meet those standards, share those performance metrics with them and begin a conversation about steps that can be taken to improve. Change management takes time and repetition — lean on transparent supplier scorecards to help keep your grading criteria top of mind.
Learn more about dynamic supplier scorecards.
Automating Supplier Scorecards
Automating supplier scorecarding eliminates the need for time-consuming manual calculations and grading. However, automated scorecarding is only possible if orders are not being managed through email. It is infinitely more difficult to track, respond to, and grade suppliers when you are trying to do so through an email inbox.
Decisions made in email leave no room for clarity in terms of judging “responsiveness” and other metrics like, “on-time delivery.” The only way to automate scorecarding is to get out of email. Then you can have a dynamic scorecard on the cloud, accessible anytime and anywhere, with all the information you need automatically populated.
Benefits of Clear Supplier Performance Metrics
Clear and measurable supplier performance metrics allow buyers to pinpoint, approach, and solve issues in the sourcing process. With effective supplier performance measuring, moments that used to throw the whole process into disarray, are now detectable before they snowball. They are now transformed into opportunities for troubleshooting and growth. Standardized and automated supplier scorecarding leads to lower pricing and lower inventory levels, leading to higher profits.
How SourceDay Can Help
At SourceDay we understand that breaking up with email can feel daunting. But we also know that doing so is the only way for organizations to accurately track the performance of their suppliers.
SourceDay’s collaborative software allows teams to communicate directly with suppliers on outstanding orders, order changes, and even invoicing. By hosting the back-and-forth between your team and your suppliers, SourceDay can present clear supplier performance metrics on dynamic supplier scorecards — that you don’t have to create by hand.
Learn more about how SourceDay can help your team improve supply chain performance and strengthen supplier relationships.