Use of Periodic Performance Reviews to Build Buyer-Supplier Relationships

Author(s):

Bill Lasniewski, C.P.M.
Bill Lasniewski, C.P.M., Consultant, Contracted Purchasing Management, Inc., 8860 SW Edgewood St. Tigard, OR 97223 (503) 620-2403
Lee Buddress, Ph.D., C.P.M.
Lee Buddress, Ph.D., C.P.M., Assistant Professor Portland State University, P.O. Box 751, SBA Portland, OR 97207 (503) 725-4769

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Abstract. Supplier management involves more than selection and certification for development of a world-class supply base. The relationship must be built over time by regular performance evaluations and joint efforts in problem solving. The use of a Periodic Performance Review (PPR) enables both suppliers and purchasers to quantify progress toward joint goals. For ultimate success in an ongoing review process, both parties must undergo performance evaluations to build a true partnership and continuously improve for sustained mutual benefit.

Introduction. Currently, various processes for supplier qualification, selection and certification are being utilized to determine the best provider of required goods or services. These processes identify the most appropriate suppliers at the time of selection. It does not provide for the ongoing performance evaluation and improvement necessary to support long term, collaborative buyer-supplier relationships. If suppliers are unable to change to meet changing conditions or to improve, the supplier originally selected as the best choice may become a liability to your organization.

Suppliers are external contributors to the success of the organization and as such should be reviewed in much the same manner as internal contributors. Most companies are in the process of reducing their supply bases to a few "best-in-class" suppliers. To accomplish this, a formal, ongoing performance evaluation process must be instituted. The resultant rewarding of superior supplier performance with additional orders, while eliminating poor performers enables the firm to use limited administrative resources to develop closer relationships with the supply base. This includes evaluation of the status of ongoing work in process and the long-term status of the relationship itself. Additional factors which drive these close partnerships are the need for reduced time to market, faster response to customer demands, Total Quality Management, global competition and constant change in the business environment. The structure of an organization and its strategic plan will in large part determine the approach to be utilized in the review process.

Several recent articles have noted an interesting development: suppliers reducing their customer base. The implication is clear. If a supplier truly is world class, then its best customers will continue to award it ever more business. Given finite capacity, such suppliers must make choices about which customers to serve. If the purchaser's organization cannot continuously improve while it asks the same of its supply base, it may well be relegated to a group of second class suppliers.

Roles and Responsibilities. As with all significant activities, the first step is to secure the active support of management. Next must be a determination of those in the organization who will be involved and a definition of their responsibilities. The following is an example of the participants and their roles and responsibilities on the team:
Management:

1. . Enthusiastically endorse the process
2. Take an active role based on predetermined requirements (dollar impact, critical nature of commodity, service or effect on customer)

Purchasing:

1. Manage the supplier review process internally and between companies
2. Links supplier goals to internal goals and customers goals for a total supply chain management approach
3. Encourage and facilitate continuous open communication between all participants

Quality:

1. Notify the supplier through the purchasing representative of any specification changes or product quality discrepancies
2. Assist suppliers to improve quality processes

Engineering:

1. Direct and encourage both internal and supplier value analysis/value engineering efforts
2. Request supplier input on new product development or re-design of existing products

Supplier:

1. Manage the review process internally and between companies
2. Link supplier goals to customer goals
3. Evaluate, improve its supply base
4. Encourage and facilitate continuous open communication between all participants

Establishing the Review Process. The review process must be a formal, continuous process supported by documentation, so that it is administered consistently. Begin by determining what commodities or services have greatest impact upon the strategic plan of the organization. The following are examples of criteria used to select suppliers with whom to initiate the Periodic Performance Review process.

1. Large dollar expenditures with a specific supplier or for a specific material or service
2. Opportunities for cost reductions
3. Has significant potential impact on:
   • product quality
   • operational success (product delivery or complexity)
   • customer or business success
   • introduction of new products and their design
4. Supplier is strategic to the long term goals of the organization

Commodities will generally fall under the production purchasing umbrella while services purchasing will be classified under MRO. The information provided here can be utilized for either classification. Specific requirements for commodities or services are then determined by the Periodic Performance Review team.

Establishing Goals. For any program to function properly there must be goals that are set with mutual understanding and acceptance. The three basic goal measurement types are:

1. metrics, which have a quantitative measurable performance over time,
2. responsiveness, which is a subjective or qualitative measurement rated by having either met or not met certain criteria, and
3. the project oriented goal, which has a specific task within a predetermined timeframe for completion.

Two critical aspects of any performance management program are the care with which performance measures are selected and defined, and the consistency with which they are applied and administered. This is as true internally as with the supply base. The old adage, "Be careful what you measure; you'll probably get it" is especially true in measuring purchasing and supplier performance. Measurement metrics will drive performance. If buyers' performance is primarily based on cost reduction/cost avoidance, quality and on-time delivery may suffer as orders continue to be awarded to cheap (and non-responsive) suppliers. Internal performance measures must be concurrent with those used in evaluating suppliers.

Process Features. Key features of the Periodic Performance Review process should include the following:

1. Linkage of the supplier goals to the organizational goals
   • specific and relevant to the commodity or supplier
2. Effective measurement of the suppliers performance
   • must be measurable and attainable
   • flexibility in the performance report to accommodate different suppliers, commodities or services
   • standardized format for documentation of the performance measurements
   • clarify objective and subjective measures
   • involve supplier in the goal-setting process
   • incorporate industry standards/benchmarks when possible
3. Communicate status on a regular predetermined basis
   • communicate less than acceptable and exceptional performance immediately
   • monitor performance trends and provide appropriate feedback
4. Enhance the partnership
   • promote a win-win relationship
   • assure open communication for feedback between parties
   • recognize and reward performance exceeding expectations

Periodic Performance Review Measurement Matrix/Process. The next step is development of the measurement tool or form which identifies the specific items which will be measured and the value of each category. As noted previously, performance measures may include quantitative, subjective and project attributes. A quantitative approach with multiple subsets judged independently is often the preferred approach as performance measurement is then based on hard data which is easily documented and understood by both parties. Qualitative or subjective evaluations may also be used where necessary as not all facets of an evaluation may be measured quantitatively. Each will be broken down into specific categories as required for a thorough evaluation.

While any category is subject to the interpretations of the individuals preparing the evaluation, the process should be documented in advance providing guidelines to assure consistency. The more carefully the measures are defined and documented, the less likely are subsequent misunderstandings. These guidelines and the process should be shared with the supplier in advance so there is a clear understanding of the criteria under which they will be measured and affords them the opportunity to have input into the process. This will aid in consistency in the event of personnel changes from one evaluation to the next. The approach selected is based on the organization's preference and does not matter except that it be equitable and representative of the required performance of all parties participating.

The following is an example of a periodic performance review form which can be modified to meet specific needs. The form is used to accumulate and quantify data on performance from one periodic performance review to the next. QUALITY (50 Points)

Defects during period/Total parts received during period Convert the above answer to parts per million (PPM).
Defects Points
0 50 pts
1-100 PPM 40
1-200 30
201-250 20
251-300 10
Over 300 minus 10 points for each increment of 50 PPM Nonproduct failures. Each failure deducts x pts.
(example - aesthetics)
RELIABILITY (+/- 15 Points)
Mean Time Between Failures above Y hrs = 15 pts
(MTBF) below Y hr s= x pts per increment
TECHNICAL SUPPORT (30 Points)
Criteria Score (Points)
Not Acceptable Acceptable Superior
Responsiveness 0 3 5
Corrective Action 0 3 5
New Product Dev. 0 3 5
Value Added & 0 3 5
Special Proc.
Cont. Improvement 0 3 5
Engineering Support 0 3 5
DELIVERY (20 Points) Standard ordering processes
Criteria Standard Delivery
100% on time 20
Each % below 100 -1
80% on time 0
80% on time -5
70% on time -10
DELIVERY (20 Points) Supplier managed inventory
Kanban or Stockless
Criteria Score
100% material available
Mtl Shortage (per part/day)
# days parts shortage: Score:
PURCHASING RESPONSIVENESS (10 Points)
Administrative Quality: x pts
Lead time: x pts
Price: x pts
Flexibility: x pts

Additional worksheets for the above categories can be used and made a part of the review for clarification of how the points were determined. Below an example using the Purchasing Responsiveness category is provided:
Category Weight Score Weighted Score Trend
Admin. Quality 25% 3 0.75 -
Lead Time 25% 9 2.25 +
Price 25% 6 1.50 0
Flexibility 25% 8 2.00 +
Administrative Quality:
Strengths:
Areas for improvement: Focus for Improvement:
The same information would be documented for each category.

In all of the above example areas, modifications should be made and mutually agreed upon as soon as the program is introduced.

Supplier Rating Programs. The final stage of the process is to rate suppliers. Again, it is not so important the method or terminology utilized, but that the program be equitable and consistent. Following are examples of classifications and definitions:

Certified: A supplier who consistently meets or exceeds established goals for a specific predetermined time period (6 months, 3 quarters, a year, etc.)

Preferred: One who meets established goals for 2 out of 3 of the last review periods and does not fall below a specified score during the entire time period

Approved: Has not met all established goals on consistent basis but has shown significant improvement over the past predetermined time period

Tactical: A supplier who has a negative impact on the organization through consistent poor performance. This supplier is retained until such time as a suitable replacement can be qualified. Limited or no consideration will be given this supplier for additional or new business. Not Rated: A new supplier

Conclusions.
Continuous improvement is a requirement to maintain competitive advantage in today's world economy. A firm's suppliers represent a major portion of the means by which an organization meets the demands of its customers and its stakeholders. To compete successfully and be recognized as "world-class", a firm needs the support of "world-class" or "best-in-class" suppliers. This is best accomplished by building close, collaborative relationships with the best available suppliers. The Periodic Performance Review is an effective tool to help establish and maintain close relationships with those best. suppliers. Development of this process must include the endorsement and support of management. Effective implementation should include input from the suppliers as well as support from the suppliers' management. The process must be documented and understood by both parties to assure consistency. Joint efforts in the implementation and continuous utilization of this tool will facilitate the development of true partnerships with mutual long term benefits.

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