As a supplier performance management technology company we are often asked the question ‘What’s the right supplier management measurement mix?’ Organizations have access to data and to data collection and reporting tools. However, garbage in is garbage out when there is a flawed measurement model.
First, understand that more is not better. The ability to ask 25, 50 or 100 questions exists but response rates plummet and data analysis becomes too cumbersome as managers tend to use only 5% of the data they collect for true analysis and improvement purposes.
Second, data doesn’t have to come from a ‘system of record’ or be ‘operational’ to be a key performance indicator. It is perfectly alright to ask a reliable, trusted group of people their observation on a supplier’s delivery performance even if there is not detailed delivery records to report against each period. A ‘roughly reasonable’ process to identify leading as opposed to lagging business intelligence can be gleaned in this manner.
Third, collecting a lot of information but from a narrow subset of performance is not a true indicator of supplier relationship health. For example, collecting 20 cost measures is great but is likely missing elements such as risk, innovation, productivity and quality that are also really important to a complete supplier score.
Given these three factors above, the optimal supplier management measurement mix begins to unfold. The best way to explain how we suggest it be done is to consider a matrix comprised of type of metric, the audience providing the metric and the cadence in which the metric is gathered. We’ll provide details on the components of the matrix and conclude our message with the matrix itself.
We suggest the following, based on discussions with hundreds of organizations that tend to reveal what is a better practice to having balanced metrics with optimal data being collected (not too little or too much) and from the audiences that matter.
These are the key performance indicators (KPIs) you want to track against goals and will trend over time to ultimately judge supplier performance and adherence to SLAs. They can be survey-based or system-based but they are quantifiable. We suggest the KPI’s be categorized within three or more of the following nine business drivers: revenue, cost, quality, cycle-time, productivity, risk, satisfaction, innovation, and safety. Sometimes a few KPIs in each of the nine makes sense, sometimes a few in three or four of the nine make sense. However, using the nine categories helps ensure a broader and more balanced view of KPIs.
Audience: KPI data collection tends to be a narrow audience of middle managers that are accountable both at the supplier and the buyer to monitor these key metrics. Even if the data collection is fully automated a select group of managers must monitor the reasonableness of incoming data and review outputs being reported so they can escalate issues and summarize results to executives.
Cadence: Most organizations will monitor KPIs on a monthly or quarterly basis. Doing this any shorter is burdensome and doing this any longer may be too lagging to be corrective or responsive. Quarterly tends to be the popular cadence but organizations can have a mix of monthly and quarterly.
Feedback is vital to a buyer/supplier relationship. Unlike KPIs feedback is less structured and there doesn’t need to be a goal comparison. Feedback is about given the supplier team and the buyer team a voice in the relationship. Feedback tends to be more leading vs. KPIs that tend to be more lagging. Thus a good feedback system can be an early indicator of future performance problems that may reveal themselves in future KPIs. Feedback should also be simple and concise to maximize response rates and data analysis. We suggest using Net Promoter System (NPS) as it is a proven predictor of relationship health.
Audience: Feedback is the broadest audience. Both supplier and buyer personnel can submit feedback about the relationship. People from accounting to operations to support functions can submit feedback. Levels from the C-suite to the staff can submit feedback. The goal is a broad, open voice of transparent communication that serves as the pulse of the relationship.
Cadence: Early on and for troubled relationships we suggest this be monthly. As it is a single question it should be easy to do. If the trend in the first several months of a relationship is positive perhaps the cadence moves to quarterly. For low priority suppliers it may just have an annual cadence. But, for strategic, visible and costly suppliers where it is important to have a pulse on what is happening, the monthly cadence is suggested.
Supplier risk is most often managed by a governance or compliance team and tends to focus on certain types of risk like financial or IT security. However, relationship risk is really important to also review during a multi-year agreement. Reviewing relationship risk constructs like people, process, culture, and externalities in addition to some of the more classic financial and IT security risk is advised. For example, a supplier using a suboptimal process to manager the services it provides to the buyer puts the services at risk.
Typically, there is one person who is responsible for the broader relationship risk assessment. This may be the business unit manager or the supplier manager whose role is to look at the supplier relationship as a whole. In addition, requesting the supplier do a self-assessment of the risks mentioned above is worthwhile to understand their views on these critical relationship success factors.
Cadence: This is done once per year. If an event occurs that prompts a heightened level of risk perhaps it is done sooner than later.
As a way to get ongoing information from third party sources another component to the ultimate supplier management measurement mix is to have a way to review reputation. Reputation is data from news, social and third party accounts that can give the buyer the sentiment on the supplier outside of its relationship with the supplier. For example, a Twitter feed that talks about the supplier violating a regulation would be negative sentiment and is important to know as the buyer.
This data is not gathered from the buyer or supplier. It should be an automated feed from online news and social media that help the supplier manager understand the overall sentiment (positive, negative, neutral) on the supplier. This can also highlight any major events (ex. merger or acquisition).
Cadence: It is ongoing. If done appropriately it becomes something that is viewed as needed because news and social media are real-time. Being able to review this information as needed is important.
Blue Sky Strategy
Based on the above, we can sum it up in the below matrix. It can be thought of as your Blue Sky Strategy, meaning it is a preferred way of ensuring the optimal mix of data, audience and cadence.
We hope this helps in preparing your supplier management measurement mix. Let us know if you have questions or want to talk further. We can be reached at firstname.lastname@example.org