Supplier Development - Performance Monitoring

Since embarking on a career in management consultancy, I have often been asked by clients to identify which part of the purchasing process adds the most value to a business. Good question.

The short answer is that all the individual parts of the buying process are important. This is true but clearly not the answer required. It will depend on many factors as to how this question can best be answered for each individual company. To identify these issues we must first examine the actual procedure involved in purchasing a product or services.

From Buy to Supply

In the first article we examined whether a company was better to make or buy a product or service. This depended on correct identification of your company's core business strength. We will assume, for the purposes of this exercise that you need to buy rather than make. This need to purchase will be linked to identifying potential suppliers of the product or service. Often this process will, and should, involve other areas of your business. This is especially true if it entails the purchase of technical capital equipment.

We then looked at the compatibility between your company and your potential suppliers. The benchmarks we identified at that stage of the process are a pivotal phase of the whole procedure.

The next element, in the procedure, was supplier approval. This addressed the topic of enhancing the performance of potential resources by offering to make them approved suppliers. It was emphasised just how important it was to form alliances with your suppliers, and that openness between both parties would augment the shared business targets. The final stage, of the purchasing process, is monitoring the performance of the supplier on an ongoing basis. Each individual step sounds simple enough, but in reality, as we all know, the devil is in the detail.

So, where's the added value?

We then come back to the question of which element of the procedure adds the most value to a business. From my perspective, although important in their own right, the placing of the order and paying the invoice probably have the least value. Supplier assessment, the choice of several suppliers and contract negotiation will certainly add considerable value. In my experience the aspect which adds the most value in the whole process is Supplier Performance Monitoring.

Continuous ongoing assessment and evaluation of the suppliers performance is vital; if the entire supply chain is to be improved in terms of costs and efficiency. As with other phases in the buying process, this should be a two-way street. The opportunity for the supplier to assess the purchaser's performance, and the establishment of an open feedback system, will pay dividends for both companies. Problems in the supply chain are very often contributed to by the customer's lack of understanding of its own inflexibilities or inadequacies.

The monitoring of a suppliers performance can take many different forms. It will depend on the business sector involved as to what methods are appropriate.

Because this process should involve both parties, I prefer to call it business development, but whichever monitoring methods are involved, the target is always the same - to improve the overall process. To this end, my advice is to keep it simple.

It's as easy as QCLDM

In the article which focussed on supplier assessment we used Quality, Cost, Logistics, Development, and Management headings to measure the suppliers business. This again can be used to ask the right questions in terms of performance.

Quality

• Are the products or services being delivered up to an agreed specification?
• Do you carry out an analysis of rejected goods or services?
• What is the quality of communication and paperwork like?

Cost

• Are the costs kept within agreed parameters?
• Does the supplier have cost reduction programmes?
• How much cost is attributable to the purchaser's inefficiencies.

Logistics

• Are the goods or services being delivered at the right time, right place and in the right quantities?
• Are the products being packaged correctly, in terms of handling and security?

Development

• Is the supplier investing in the buyer's company as a key customer?
• Does the buyer provide an environment for the supplier to invest?

Management

• Do the businesses involved share similar goals?
• Is there a regular contact at board level and shared business plans?

This illustration is proven to be effective in setting down the basics for supplier performance monitoring. Your business will probably want to formulate its own questions under the QCLDM headings. Each business sector and sub-sector will have its particular and peculiar criteria, which need to be identified in order to fulfil the purchasing company's requirements.

Who Polices the Police?

You now have a list of criteria by which you can establish benchmarks for your suppliers' performance, and again, the establishment of a reciprocal monitoring arrangement, by the supplier of the purchasing company, will prove mutually beneficial.

Recent studies have shown that if buyers communicate as openly as possible with their suppliers about what they expect from them, the suppliers will respond by giving back accurate information concerning stock levels, lead times, quality problems etc.

It will also be beneficial to ensure that similar lines of communication exist within the purchasing company, and to that end the actual process of supplier performance monitoring itself needs to be examined on an ongoing basis.

The responsibility, or ownership, for the project within your company, will depend on the importance of the supplier to the core business. It may also depend on the importance the purchasing company places on the process. Some businesses now think supplier performance is of such worth to the business, that they have improvement teams working constantly with their suppliers. This may not be practicable or desirable in your particular circumstances. It's for the individual company to decide.

Whatever approach you adopt it must be easy to understand, for both parties. It must be simple enough to be workable on a day-to-day basis and must involve the entire business as an integrated team.

About Purcon

David Birch is Director of Purcon Training. Coming from a background at the highest level at Jaguar Cars and Nissan Europe, David is in demand for his extensive purchasing knowledge and strategic influence.

For more than 30 years, Purcon has led the way in permanent recruitment and interim management for Procurement and Supply Chain, with offices in the UK, Belgium, Poland and operations across Europe.

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