Two-Way Performance Report Cards - A Prescription to Keep You and Your Supplier Healthy

Author(s):

Ray Bacanskas, C.P.M., P.E.
Ray Bacanskas, C.P.M., P.E., Senior Consultant, BellSouth Telecommunications, Inc., 675 West Peachtree St., 39S40, Atlanta, GA 30375, Tel: 404-420-6050, Fax: 404-525-3045, email: ray.j.bacanskas@bridge.bellsouth.com

84th Annual International Conference Proceedings - 1999 

Abstract. Supply Chain Management is in an enviable position to make a significant difference when it comes to product and service performance. Participating and playing a key role during the RFP/RFQ process and then staying actively involved during product/service growth, maturity, and eventual decline, places SCM in a position "to make a significant performance difference." SCM has at its disposal a very important tool that can be used to monitor and improve performance. This tool is the two-way performance report card that measures both the buyer and seller. Both share in the rewards of improved performance. Too often, buyers place their entire energies on only measuring supplier performance and very conveniently overlook how they the buying company performs. One way performance report cards produce a distorted view of seller performance and have a limit on how much improvement can be obtained, as there are many performance related dependencies between buyer and seller.

Introduction. The BellSouth report card process started about five years ago as a result of poor performance on the part of one of its key suppliers. Something had to be done quickly to rectify the situation, as customers' service levels were seriously impacted by the poor performance. This event started the report card process that continues today. Although there are many similarities between the report cards of then and now, there are also some key differences. For about the first three years, the report cards were one-way. They only measured supplier performance. About two years ago, when the purchased "product" mix started to include more and more services suppliers, which was attributed to outsourcing, it became obvious that the buyer had a very important role in maintaining and improving performance levels and hence the shift started to two-way report cards.

Buyer performance has a significant impact on the overall performance and therefore should be considered as a part of any performance monitoring and improvement program. Based on actual situations, this paper outlines the process that is used to produce two-way report cards. Basically, the steps to produce a two-way report card are the same as for a one-way report card, except that a set of measures are developed for the buyer, a number of which are closely tied to the supplier measures. The level of difficulty to implement a two-way report card is about the same as for a one-way. I find that difficulty is not the issue when it comes to two-way report cards. The issue lies in the fact that buyers do not want to admit that they are not perfect and fail to realize that their performance has a significant bearing on optimizing performance levels.

Process Summary. What follows is a summary of the two-way report card process. Key areas covered are:

  • Prerequisites #1 and #2
  • Organizational Roles and Responsibilities
  • Performance Measures, Objectives, Grading Criteria, Grade Adjustments
  • Report Card Format
  • Publication Universe and Publication Frequency
  • Remedies and Incentives
  • Roles of Quality Action Teams
  • Summary

Prerequisite #1. The success of the two-way report card is directly related to the support obtained from upper management. Your company, as a buyer, will be graded and the grades will be published for everyone to see. Many people have a problem with this "general judgment" approach. Therefore, it is very important to first obtain support from upper management prior to embarking on two-way report card program. Otherwise, your two-way program is doomed to fail. After all, publishing the fact that a buying company is not perfect is hard for some individuals to admit. Even with support, expect reluctance to two-way report cards from some organizations or individuals because they simply do not want their performance publicized.

Prerequisite #2. The success of the two-way report card is also directly related to the willingness of suppliers to participate. Suppliers after having won your business, do not want to lose that business. Simply put, they do not want to "bite the hands that feed them." Suppliers must be assured that two-way report cards are accepted and strongly encouraged by upper management and that there is more risk in not participating than in participating.

Organizational Roles and Responsibilities. In BellSouth Telecommunications, the report card process resides in the Supply Chain Management (SCM) organization. When the process started five years ago, it was felt that SCM was best positioned with respect to suppliers and internal organizations to handle and coordinate the report card process objectively and efficiently. Another key factor was that the Quality organization resided in the SCM organization, which it still does today.

Generally, a relatively small number of participants are involved in developing the two-way report card. Basically, these are the participants and their respective roles and responsibilities:

ORGANIZATION: SCM - REPORT CARD SUBJECT MATTER EXPERT
ROLE: Report Card Subject Matter Expert (SME)
RESPONSIBILITIES: Facilitates meetings, provides overview of report card process, guides team, sets up report card format, point-of contact with suppliers, produces the first one or two report cards.

ORGANIZATION: SCM - SUPPLY LEADER OR CONTRACT MANAGER
ROLE: Contract Owner
RESPONSIBILITIES: Helps to identify performance measures for buyer and provides input on seller measures. Negotiates performance clauses including incentives and remedies. Is the owner of report card process after implementation, unless the Client chooses to take ownership of process.

ORGANIZATION: CLIENT ORGANIZATION STAFF - 1
ROLE: Represents organization receiving product or service - specific area of expertise.
RESPONSIBILITIES: Helps to identify performance measures, objectives, and grading criteria for buyer and provides input on seller measures. May elect to take ownership of report card process after implementation.

ORGANIZATION: CLIENT ORGANIZATION STAFF - 2(OPTIONAL)
ROLE: Represents organization receiving product or service - specific area of expertise.
RESPONSIBILITIES. Helps to identify performance measures, objectives, and grading criteria for buyer and provides input on seller measures. May elect to take ownership of report card process after implementation.

ORGANIZATION: SUPPLIER - SALES ORGANIZATION
ROLE: Initial point-of contact with buying company
RESPONSIBILITIES: Helps to identify seller team representatives and coordinates meetings. Provides input on Supplier report card and helps to identify performance measures, objectives, and grading criteria for buyer report card.

ORGANIZATION: SUPPLIER - TECHNICAL STAFF
ROLE: Product/Service SME
RESPONSIBILITIES: Provides input on Supplier report card and helps to identify performance measures, objectives, and grading criteria for buyer report card.

ORGANIZATION: SUPPLIER - CUSTOMER SERVICE
ROLE: On-going point-of contact for internal organizations
RESPONSIBILITIES: Provides input on Supplier report card and helps to identify performance measures, objectives, and grading criteria for buyer report card. Generally is the point-of-contact for internal seller organizations and interface to buyer report card SME/Report Card owner.

OTHER KEY MEMBERS - OPTIONAL

The actual number of participants may vary depending on the particular report card. Generally, there should only be about six participants, if the optional ones are excluded. It is recommended that the number of participants be kept to a minimum: less opinions = less wasted time. Typically, team members solicit input from other organizations outside the meetings. This is more practical and efficient than having too many people during any meeting.

Performance Measures, Objectives, Grading Criteria. These key items are identified and selected by the buyer and seller. The performance measures should always include items that can be equated to quality, cost, and timeliness. Therefore, it is very important that great care be taken to make sure that the right measures, the right objectives, and the right grading criteria are selected.

  • Measures. The measures selected should be those that provide the best gauge of contracted product/service performance. The measures can cover a wide range of products/services, from the simple, like mail or temporary office services, to the most complex, like internet routers or telephone switching equipment. As a general rule, there should be no more than eight to ten buyer measures and about the same number of seller measures. The final number selected is largely depended on importance and the availability of supporting data. Buyers and seller should have input into each others measures. At least 50% of seller measures should be based on buyer measures. These measures are dependent on each other, so that buyer performance impacts seller grade and vise versa. This way, both the buyer and seller have an ownership in the process and both must work together to improve their own and each others grades. As an example, on-time delivery/lead-time are two likely choices for dependent buyer/ seller measures. After the report card is developed and it has time to mature, the number of measures can be adjusted as appropriate.

  • Objectives. The objectives are set by the buyer and the seller. The objectives should be based on contract or agreed upon objectives.

  • Grading Criteria. The grading criteria is an algorithm used to gauge the degree to which buyers/sellers are meeting performance objectives. The most convenient grading scale to use is the familiar point-grade system because everyone is familiar with it. As an example, assume the following: On-time delivery has a delivery objective of no more than 30 days. A grading scale could be set up as follows: A for < 30 days, B for 35-30 days, C for 40-36 days, and so on. It is convenient to set the objective in the B range and performance exceeding the objective as an A, and anything below the objective in the C to F range.

  • Grade Adjustment. If the buyer and seller grades are dependent on each other, adjustments to grades may be necessary. As an example, an adjustment to a grade may be appropriate in a situation where the seller receives a poor grade for on-time delivery but it is "found" that the buyer lead-times are significantly shorter than the agreed upon time frame. As an illustration, suppose the seller received a D grade and the buyer also received a D grade. In this situation, a one grade adjustment to sellers grade, from a D to a C, may be appropriate. If the buyer received an F, a two grade adjustment may be appropriate. Depending on the particular circumstances, there are a variety of ways to adjust grades.

Report Card Format. It is suggested that the report card summary document for both the buyer and the seller be kept as an EXCEL file, showing the Performance Measures, Results, and the Grade. In addition to the individual performance measure results, it is also suggested that an overall grade be also shown, which is a composite of all the grades. The report card results can be conveniently shown quarter to quarter, month to month or whatever the measurement period selected. This way, results can be easily tracked and in cases where corrective action is needed, individual measures can be tracked for improvement. The illustration shown below is from the buyer's perspective.

PERFORMANCE MEASURES 2Q99 RESULTS 2Q99 GRADE
1. ON-TIME DELIVERY 32 DAYS AVG. B
2. FAILURE RATE 0.28% A
3. RETURN RATE 0.80% C
OVERALL GRADE 3.0/4.0 B

Similarly, as it is convenient to summarize results in the EXCEL file, it is also convenient to set up a WORD file that contains the same measures, objectives, the grading scale, and descriptive/clarification information. The EXCEL and WORD files go hand-in-hand and present a complete picture. As an example, this file may look something like this:

PERFORMANCE MEASURES OBJECTIVE GRADING SCALE
1. ON-TIME DELIVERY 30 DAYS AVG.
Measurement is based on quarterly results
A for < 30 days B for 30-35 days, etc., etc.
2. FAILURE RATE 0.30%
Measurement based on 12 months moving average
A for < 0.30% B for 0.30 - 40%, etc., etc.
3.RETURN RATE 0.60%
Measurement based on 12 months moving average
A for < 0.60% B for 0.60 - 0.70% C for 0.71 - 0.80%, etc., etc.

The examples shown above apply for the buyer and seller. Buyer and seller results can be shown on the same EXCEL summary report card or on individual report cards. The WORD documents stand on their own. One should be produced for the seller and one for the buyer.

Publication Universe and Publication Frequency. For the report card to have meaning and to be effective, the publication universe should at least include the following: Product/Service responsible Vice-President(s), Department Head(s), Select Directors - Production, Quality Assurance, Sales, SCM Contract Managers, and any other key managers. Generally, the total distribution (buyer and seller) should be somewhere in the range of 15-20. The publication frequency is determined by the buyer and seller. Some of the factors that determine publication frequency are: key/strategic products/services, initial supplier/buyer performance levels, availability of data, and convenience. Based on past experience, quarterly publication serves the intended purpose the best.

Remedies and Incentives. Why should anyone have to pay for something that does not perform as contracted? Without getting into the legal aspects, a buyer is entitled to get back some percentage of what was paid if a product or service does not perform as per agreement. This of course assumes that the buyer had no part in the sub-standard performance. If a buyer did have a part, that part would have to be factored out. If the buyer's part is accounted for and excluded and the product/service performance is still below what was contracted, the buyer is entitled to a rebate (remedy). The report card is a convenient tool to use for remedy situations. The buyer and seller must agree in advance at what point remedies "kick-in" and how they are applied. One way to handle this would be to set a portion of 'payment to seller money' aside (risk money). This money, or a percentage of the risk money tied to performance levels achieved, would be paid to seller only if the performance levels met contracted objectives. The situation is a little different with incentives.

It's the buyer's decision whether incentives should be paid for "above and beyond" contracted levels of performance. Generally, product performance is excluded, as the performance should already be designed into the product. If it's over-designed, that's the seller's decision and the buyer's gain. However, it may be economically justifiable to offer incentives for performance related to a service. Again, the report card can be used as a tool for incentive situations. Money could be set aside as in the situation with remedies. It is always a good idea not to jump into offering incentives right from the start. A waiting period to gauge true level of performance is suggested. Depending on a given situation, at least six to twelve months are needed to get a real good benchmark of how much supplier effort is required to produce "contracted performance." Then, a simple cost/return analysis could be performed to determine if it's worth paying additional money to obtain a higher level of performance.

Quality Action Teams (QAT). It is always a good idea for those directly involved in the report card process, generally those that originally developed the report card, to meet periodically to review buyer and seller report card results. The QAT is a perfect forum to do just that. The QAT meeting could be facilitated by either a buyer or seller representative. The role could even shift periodically. During the QAT meeting, substandard performance is addressed and corrective action plans put in place by either the buyer, seller, or both. The meeting proceedings should be well documented, including issues, responsible parties, and agreed upon dates for resolving the issues. The number of QAT members should be kept to a minimum, not only to keep costs down but also to reduce the number of opinions.

Summary. Two-way report cards most definitely have a place in today's work environment. They are applicable for both products and services but are most useful for services. All companies have gone through varying degrees of outsourcing their services and that's were most of the performance risks reside, as outsourcing and loss of control are synonymous. What was once an in-house function and under internal scrutiny and control may now reside somewhere else. Two-way report cards can help you regain the control you once had. You may already be doing something to keep track of outsourced function performance and that's great, but consider using the two-way report card as an additional tool to keep you and your suppliers healthy and on track.

What I have provided is only a summary. There may be specific situations or conditions that I have not addressed due to size limits on this paper. Please feel free to call or email me and I will be happy to discuss your situation with you and hopefully provide you some guidance.


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