According to a study conducted by McKinsey Quarterly, companies typically spend less than 1% of their total supplier spending on procurement operations. While companies are spending massive amounts on buying components and raw materials from several suppliers, they are underinvesting in procurement operations, especially in areas like supplier program and performance management.
A study conducted by McKinsey’s Rapid Procurement Contract Insights (RPCI) revealed that improving effective supplier performance management can result in a 20% decrease in indirect costs. About 10% of these costs are related to rework due to unacceptable component quality while an additional 7-10% increase happens because of overtime or customer back charges due to late delivery of components.
Today, there is a renewed focus by SCM leaders to drive up supplier performance. The only way to do this right is by using the power of data and digital transformation. Manufacturers have to build strategic partnerships with their key suppliers in order to derive maximum benefit from the relationship. Clearly defining the “success criteria” and expectations from all suppliers is a crucial first step to supplier performance management. A well-designed Supplier Scorecard will help both manufacturers and suppliers keep track of all Key Performance Indicators (KPIs). A metrics-driven supplier management system with a partnership mindset will act as a game-changer for procurement operations.
In this blog, we highlight four key aspects that will go a long way in helping quality and SCM leaders design a supplier performance management system that works. At ComplianceQuest, our Supplier Management solution is designed to help with streamlining your supply chain output by integrating quality, safety, performance management and collaboration tools to increase supplier performance while reducing risk and cost.
If you’d like a more detailed perspective of how SCM leaders can embrace digital transformation, data, and, possibly even Artificial Intelligence (AI) to drive supplier excellence, read this whitepaper here.
Need for a well-designed Supplier Performance Management (SPM) Process
A well-designed supplier program and performance management is crucial for any organization, but especially necessary for companies with complex supply chains. The following four aspects can help SCM leaders design a performance management system that works:
- Performance design: Suppliers should be part of the process of designing the performance management system. They should discuss and arrive at the right KPIs and also design a supplier scorecard with relevant dimensions covered. Performance management works best when it is bi-directional. The company must take all steps necessary to design programs and processes to support supplier performance.
- Active collaboration: It is critical to build a continuously improving supplier relationship process. Your suppliers must be treated as if they are an extension of your company’s manufacturing operations. It’s not “us versus them”. A siloed approach is deemed to result in failure and must be avoided at all costs.
- Transparency enables risk mitigation: Transparency of the entire supply chain will help all stakeholders involved mitigate risks with a data-driven approach to risk management.
- Think long-term: SCM leaders must show a strong commitment to supplier success so that suppliers are willing to invest in the company’s long-term success.
Understanding the risks associated with supplier performance and proactively designing an action plan for risk mitigation is of vital importance. One methodology supply chain leaders are adopting now is supplier benchmarking. By assessing the long-term reliability of the supply chain and comparing supplier performance against a set of pre-determined benchmarks, SCM leaders can enable continuous improvement.
The bottom line: At the end of the day, goal alignment, transparency and collaboration will ensure a win-win partnership between the buyer and supplier. An effective supplier program and performance management effort must be optimized for the same.