Organizations that have contracted work, services or goods from a supplier must have a way of knowing if what they’re getting is what they paid for. Measuring supplier performance is a common good practice implemented by many organizations in order to identify in what extent are supplier’s meeting their obligations, facilitate performance improvement and improve relationships between both parties.
There are many tools and techniques for measuring supplier performance. This process requires time and resources, and organizations need to carefully consider which method adapts best to its circumstances and needs. Below, the main factors to take into account when carrying out this process are briefly described.
Determine what is good performance
The first step to measuring performance is to determine which activities are critical for the success of the contract and what are the characteristics of good supplier performance. From this understanding of the dimensions of a good performance, Key Performance Indicators (KPIs) should be developed.
KPIs should meet the following criteria:
- Completeness: all significant aspects of the goods/service should be included in the measurement of performance.
- Clarity: both parties should have a clear understanding of the performance measures to be used.
- Measurability: performance requirements should be expressed in measurable terms and should be based on data which it is possible to gather.
- Focus: specifications should be focused on the agency’s procurement objectives (which translate to outputs and outcomes), not on processes.
Some of the aspects of the contract that are usually measured are:
- On-time delivery.
- Correct quantity.
- Number of customer complaints.
- Product/service cost.
- Service/product quality (against agreed terms).
Determine which measurement approach to use
There are many approaches for measuring supplier performance. Some are more complex than others and they all have their advantages and disadvantages. Here, some commonly used approaches will be mentioned:
- Categorical system: this method is easy to use but it is subjective. The aspects being measured are weighted equally and it relies on a person’s perception about performance and not on quantitative data.
- Weighted-point method: this method assigns a weight to each aspect being measured depending on its importance. This is considered a reliable and flexible method.
- Cost-based system: with this method it is possible to quantify the additional costs incurred if a supplier fails to perform as expected. This is a very objective but complex method.
This process is usually time consuming for many organizations, especially for those that have a large number of suppliers along their supply chain. A well carried out process will ensure useful and objective results that will serve to improve performance and business relationships between an organization and its supplier(s).