Tips For Measuring Supplier Performance

Author(s):

Mark S. Miller C.P.M., C.I.R.M.
Mark S. Miller C.P.M., C.I.R.M., Purchasing Manager, Case Corporation, Racine, WI. 53404, (414)- 636-6565, MMiller@Casecorp.com.

83rd Annual International Conference Proceedings - 1998 

Abstract. Measuring supplier performance is an important purchasing tool. This paper will review the steps we took in establishing supplier performance measurement program. I will review: the results of our supplier performance benchmarketing, measurement details we established for the four performance factors we selected, and general tips that you should consider in your supplier performance measurement program.

What others are measuring. We had much debate as to the most important factors that should be used to measure supplier performance and the weighting the individual factors should get in the overall supplier rating. We established a team to study other companies who had an established supplier performance measurement program to determine which factors and weights they were using . The following are the results of our study:

Walker Manufacturing
Factors Weights
Quality 35%
Delivery 35%
Price 20%
Support 10%
AT&T
Factors Weights
Quality/Reliability 8%
Delivery 25%
Business issues 15%
Qualification 10%
Quality management 12%
Vendor co-operation 20%

S C Johnson's Wax
Factors Weights
Quality 35%
Delivery 35%
Price 20%
Support 10%
GTE
Factors Weights
Delivery 25%
Pricing 10%
Customer service 25%
Product quality 25%
Cummins engine
Factors Weights
Quality 25%
Delivery 25%
Price 25%
Subjective 25%

Factors and weights we used. As a result of our benchmarketing study we decided to use the following factors and weights in our supplier performance measurement program:

Factors Weights
Delivery 30%
Quality 30%
Value 20%
Partnering 20%

Details of the four factors. The next task for the team was to define in more detail each of the four factors we are measuring . The following are details on how we measure supplier delivery, supplier quality, supplier value and supplier partnering attributes.

Measuring supplier on time delivery . We found there are many different ways to measure supplier on time performance. The first decision we made was that we were going to establish a mechanical method to measure delivery performance. Our volume of receipts are so large that it was not practical to have a manual measure that was accurate. Some of the other important factors to consider in measuring supplier on time delivery are:

  • Should all orders be measured? We decided it was necessary to measure all orders as well as just the adequate lead time orders. Two grades are established for each supplier: total orders and adequate lead time orders. Since we have been measuring both ways, we have found the results are similar regardless if looking at the totals or just the adequate lead time orders. By measuring both ways we have removed this as a point of dispute with suppliers.
  • Should on time delivery be based on shipment date or receipt date? Since most of our contracts call for FOB- supplier plant, we decided to measure on time based on ship date ( using advanced shipping notice or ASN ) . This removes the performance of carriers or the promptness of internal receiving operations from the measurement.
  • What window should be used? The window that is used to measure on time delivery is important . We decided that a window of three days early to the shipping date would be considered as on time initially. Other companies have narrowed the on time delivery window to hours.
  • What calculation method should be used? The measurement calculation must also be decided. On time delivery can be measured in many different ways ( pieces, dollars, orders, etc.) and the results will vary depending on the calculation method used. The key is to decide how you are going to measure on time delivery performance and communicate it to your suppliers.

Supplier quality measures. There are a number of ways to measure suppliers quality performance . Some of those we considered were: the number of deviations requested, accuracy of paperwork, field campaigns and the suppliers cost of quality. We decided to use inspection data and warranty data to measure supplier quality performance.

The inspection measures are based on the number of rejects versus lines inspected . The inspection statistics are tracked in the system. For example if 100 lines are inspected from a supplier and 4 are rejected the reject rate is 4%.

We had many discussions as to whether warranty records should be used for measuring supplier performance. Was the warranty caused by the supplier or was the problem with our design? We are still discussing these issues.

Measuring suppliers value performance. We decided that value would be calculated from a subjective survey that the buyers would fill out quarterly. The value survey asks the buyer to look at total acquisition cost not just price. Total acquisition cost considers all costs: freight, handling, quality, administrative not just the price quote. "Soft" cost reductions such as cycle time reductions, inventory reductions, EDI transactions, and assistance in initial designs are to be considered. Cost reductions and cost increases compared to the inflation rate are also to be considered by the buyer when rating a suppliers value performance.

Measuring suppliers partnering performance. The partnering measure is another survey that is filed out by a team of company personnel that deals with the supplier. The rating team consists of the buyer, expediter, engineering, receiving, accounts payable and quality.

There are five main areas that are measured: accessibility, responsiveness/ attitude, engineering/ technology, administrative practices and proactive/ innovation. Questions in the partnering survey ask the team to consider issues such as: supplier sense or urgency, process control plan, use of EDI, invoicing process, billing procedures, customer service support, design process and quality of supplier personnel.

Tips for Measuring supplier performance. There are a number of things we learned in establishing our supplier performance measurement program that may help you. The following are six tips :

  1. Minimize the number of measurements - It is important that your supplier performance measurement program is easily understood by the suppliers. Minimize the number of factors you use to make your program easier to explain.
  2. Measurements must be easy to calculate and explain - We reviewed many complicated models to measure quality and delivery , but selected methods that were simple to understand and calculate. To be effective these measures must be easy to calculate and understand.
  3. Subjective ratings are OK - We originally thought that all the measures should be computer generated and objective. We found , however, that many companies were measuring costs and customer service( partnering) using subjective surveys that the buyers and others within the company filled out.
  4. An overall rating is needed - All the companies we benchmarked calculated an overall rating to be used to compare one company from another.
  5. Involve suppliers in developing your program - We asked a team of suppliers to help develop and explain our supplier performance measurement program. The suppliers helped us find the companies for our benchmark study and they also helped us how to develop a program that was easy to understand .
  6. Make detailed audits available - We feel it is important to furnish suppliers with the detailed results. Thus we furnish the supplier all the details of delivery, quality , value and partnering if they request them.

How to use Supplier performance measures. We have found that a program to measure supplier performance is very useful. The following are four important uses for supplier performance measures:

  1. Improve supplier performance - We have found our supplier performance has improved significantly since we been formally been measuring it. We are able to identify which supplier needs to improve and work with the supplier to establish a corrective action plan.
  2. Recognize exceptional performance - We have used the supplier performance measures to recognize supplier with exceptional performance. Many companies we talked to used the supplier performance rating to award annual supplier awards for those who rated very high.
  3. Improve supplier communications - As part of the supplier performance measurement program we send out supplier "report cards" on a quarterly basis and meet with suppliers at least annually to review the past years performance and set goals for the coming years. It makes gives suppliers a clear message of what performance you expect from a supplier. Measuring supplier performance drives better communication with key suppliers.
  4. Identify suppliers with developmental needs - The supplier performance measurements program points out dramatically suppliers who need to improve and are useful to develop improvement plans or alternate sourcing options.

Summary. To improve supplier performance you must first have a system to measure it. We have used our supplier performance measurement factors: delivery, quality, value and partnering, to establish " annual supplier performance agreements" that establishes mutual goals . A supplier performance measurement program is an important purchasing tool and I hope the six tips and four factors outlined above will help you with your program.


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