Peter E. O'Reilly, C.P.M.
Peter E. O'Reilly, C.P.M., Assistant Vice-President, MetLife, New York, NY 10010, 212/578-2470.
This paper will discuss a new technique to employ when analyzing the performance of suppliers. With the greater emphasis in today's business world on quality-related issues, it is recommended that customers (end users) be given a more interactive role in grading the compliance to expectations by vendors. To that end, the application of a supplier performance evaluation system based on the service Quality format should be implemented in Purchasing organizations.
WHY SURVEY SUPPLIERS' PERFORMANCE
Most supplier evaluation systems use some type of quantitative means to ascertain the efficiency of vendors. In this way, a degree of objectivity is integrated into the process. A numbering system is devised that not only evaluates a single supplier, but also allows a Purchasing Unit to compare a wide array of vendors. The suppliers are given "report card" type grades on a periodic basis.
Performance evaluations serve as an excellent means for suppliers to determine how well they are doing, and whether corrective steps are needed. The scores a vendor receives can also motivate it to do better.
A key question arises from most supplier evaluation systems, "who should determine how well a supplier is performing, the buyer or the customer?" This point will be examined throughout the paper.
TRADITIONAL EVALUATION METHODS
It is not the purpose of this paper to analyze in depth supplier performance systems. However, time will be spent in a general review of the more popular methods employed by Purchasing Units. Most evaluation techniques fall under the umbrella of these three approaches: categorical, weighted-point, and cost-ratio.
The categorical method utilizes input from several sources within an organization. It is easy to operate and is relatively inexpensive. While the categorical system's three-point scale is simple to understand, it tends to be too subjective. It is also limited when brought into situations where corrective actions are necessary. Data from both past and current experiences enter into this evaluation process.
The weighted-point methodology is oriented more towards objective analysis than the categorical plan. A Purchasing Unit would assign weights to each dimension (such as quality, service and price). These weights would reflect the relative importance of each service factor. The past performances of suppliers are graded under this approach. The weighted-point plan is both easy to use and cost effective.
Finally, there is the cost-ratio plan, in which not only are the costs of the goods or services to be purchased evaluated, but many associated costs, as well. As might be expected, this method can be extremely complicated to operate. It is best used in conjunction with a computerized cost-accounting system. While the cost-ratio approach can be enlightening, it is often considered too complex to maintain for the average buying entity.
SO WHAT'S WRONG WITH TRADITION
The current business climate in America, and the rest of the world, has made the venerable adage, "if it ain't broke, don't fix it", an impediment to achieving a competitive advantage. Today's business gurus, such as Peter Drucker, Michael Porter, and Tom Peters, all preach that any firm that adopts this slogan as its vision statement is doomed to failure. The same logic should be applied to the traditional methods used for determining suppliers' performances.
While the traditional techniques do introduce a semblance of objectivity and feedback, they also have glaring limitations. For the most part, the traditional plans have a restricted core of participants. It is not uncommon for many of these methods to rely exclusively on input from Purchasing personnel. With such a small survey population size, and corresponding one-dimensional point of view (that of a buyer), the traditional approaches tend to ignore the most important stakeholder in the entire process, the customer. Missing from traditional systems may be significant benchmarking criteria from customers, which would help buyers better understand not just the levels of service received, but the levels of service expected.
WHY CHANGE TO SERVICE QUALITY
Service Quality (SERVQUAL) is a concept developed by Parasuraman, Zeithaml, and Berry in association with Texas A&M University. Fundamentally, the concept espouses the greater involvement of customers when trying to evaluate aspects related to Quality. Service Quality relies on standards created by customer input for measuring performance.
Peter Drucker has urged companies to differentiate between being "effective" and being "efficient." According to Drucker, effectiveness relates to doing the right thing, while efficiency focuses on doing things right. It is more important to be effective and do the right thing than it is to be efficient and do things right. This premise is at the core of the Service Quality method of performance evaluation.
It does a Purchasing Unit little good if a supplier receives high grades for performing a function that is not needed by a customer. The emphasis of Service Quality is to have the customers identify for Purchasing not only what is important from their point of view, but what is the desired level of service sought. Therefore, Service Quality will strive to determine first, what is the effectiveness of the services demanded by the customers and then, how efficiently they were delivered.
The researchers who developed the Service Quality approach concentrated on service industries or functions. They found that there were five types of service gaps that could exist between a service provider and a customer. This paper will explore the service gap that occurs when there is an aberration between a customer's service expectations and a customer's service perceptions. In other words, the focal point will be the deviation in a customer's mind when the level of service received (or perceived) falls short of the level expected.
The Service Quality technique requires participants (customers) in the supplier performance evaluation transaction to first record specific performance levels sought or expected. This input should reflect the ideal service performance conditions. The format then seeks the actual performance level provided. The differences between the expectations and the perceptions give the buyers feedback on the supplier's execution of the services in question.
The service gaps between expectations and perceptions are further used in connection with weighted statistics that are based on the customer's evaluating (and scoring) the specific services under review. This process involves the determination of the relative importance of service dimensions by the customers and will be discussed later. The initial service gap calculated by the Service Quality method forms a type of benchmark. It is the objective of both the buyers and the suppliers to reduce any existing service gaps so that perceptions match or exceed expectations.
IDENTIFYING WHAT TO MEASURE
As stated earlier, it is vital that the Purchasing Unit rely on the customers to determine the service dimensions that should be measured. According to the authors of Service Quality, there are five general service-related dimensions that lend themselves to evaluation by the customers. These dimensions include:
While Purchasing personnel can have a good idea of the service dimensions important to customers, it is essential that the customers have a say in what dimensions will be included in the survey. A quick and meaningful way of gaining this knowledge would be through focus group sessions involving a cross section of customers. The use of focus groups can reduce the content of the evaluation format to only key dimensions, thereby, possibly increasing the survey completion rate. Some of the dimensions that are often found on supplier performance evaluation forms include: cost, quality issues, delivery matters, cycle time, service, and people skills.
DEVELOPING A SERVICE QUALITY SURVEY
Once it has been ascertained what dimensions the customers want evaluated, the actual form can then be created. As brevity is a vital element in most surveys it is suggested that a supplier performance evaluation consist of four parts: expectations vs. perception statements, relative importance of dimensions, overall evaluation, and general questions/ general comments.
It is the first segment of the survey that will set the tone for the entire evaluation process. The Service Quality technique requires that each service dimension be evaluated in terms of expectations and perceptions. As an example, consider a service dimension relating to the maintenance of equipment. A dual set of statements, one for expectation levels and one for perception levels, would be developed regarding maintenance. The expectation statement could read: The supplier should provide maintenance in a timely manner. The corresponding perception pair to this statement could be as follows: The supplier provided maintenance in a timely manner. Each statement would ask the customer to make a quantitative response usually in the form of a Likert Scale (ranging numerically from 1 to 5 or 7).
The differences between expectation and perception scores form the raw service gap, which is applied to the second portion of the evaluation, the relative importance of the dimensions. In this section customers prioritized the associated dimensions. The results here are used to weight the service gap results, thus providing Purchasing with weighted service gaps. This process closely resembles the weighted-point evaluation method.
The first two segments form the main structure of the Service Quality approach to supplier performance evaluations. The third part asks the customers to provide a traditional report card-type grade to the overall performance received from the supplier. Lastly, the survey gives the customers an opportunity to answer specific service-related questions and/or comment on any particular concerns they may have with either the supplier or Purchasing. It should be noted that the Service Quality method focuses on service-related dimensions rather than manufacturing-related factors.
WHAT TO DO WITH SURVEY RESULTS
When a supplier performance evaluation survey using the Service Quality method has been completed and the data has been compiled, a Purchasing Unit should have a wealth of information on both its customers and suppliers. Weighted service gap scores for each dimension evaluated, as well as a combined weighted service gap, are available for closer scrutiny by several stakeholders: the buyers, the customers, and the suppliers.
As previously stated, the service gaps act as a benchmark for analyzing service levels. Initial gap scores identify how far suppliers are from meeting the expectations of the customers. Subsequent surveys will show how effective corrective procedures on the part of the suppliers have been in reducing the service gaps. Other survey results can highlight general or specific concerns expressed by the customers.
The following steps are suggested for implementation once the survey data has been finalized:
It is imperative that all involved Purchasing personnel be brought into the survey review process as they may have valuable input relevant to survey results. There are at times situations where there are questions concerning what customers were trying to say. If possible, utilize focus groups to help explain any hazy issues.
The supplier should act as a partner with Purchasing to close any service gaps. The supplier's representatives should have access to survey results. The supplier should be given some time to study these findings and prepare a strategy to address ways of improving service. The buyers and the supplier's representatives should jointly create and implement any necessary action plans to reduce service gaps. Included in these plans should be an agreed-upon schedule for all phases of work.
Most people are inundated with surveys either at home or in the office. A good way to increase response rates is to show the customers that their input matters. One way of demonstrating this point is to inform the customers of the survey results. In addition, any corrective actions that have been implemented or are planned in response to survey feedback should be relayed back to the survey participants.
Generally, supplier surveys can be distributed on an annual basis unless there are significant service gaps. Should major service problems exist, resurveying on a six month schedule may be called for. It is important to give corrective steps a chance to work before resurveying a supplier.
Asking a supplier to remedy a large service gap allows Purchasing personnel to conduct a type of reality check. Remedial work on the part of the supplier may result in an improvement in the service gap or the problem situation may not change. The Purchasing Unit should be prepared to study alternative suppliers if the service gap cannot be reduced to an acceptable level. Some suppliers may be incapable of providing the level of service requested by the customers.
ADVANTAGES AND DISADVANTAGES OF SERVICE QUALITY
The Service Quality technique for supplier performance evaluations has some significant benefits for a Purchasing organization:
As with most survey approaches, the Service Quality method does have some drawbacks:
APPLICATION OF SERVICE QUALITY FOR SUPPLIER PERFORMANCE EVALUATIONS
This paper has attempted to educate the reader on the theory behind the service Quality technique and how it can be applied to supplier performance evaluation surveys. The components of such a survey have been reviewed, as have the pros and cons of using such a method.
As previously stated, many of the more traditional approaches to surveying supplier performance rely too much on input from the buyers. Purchasing personnel, while involved with many aspects of a supplier's performance, such as delivery schedules and costs, often have too little knowledge relating to many important day-to-day service-related elements. In situations like that, Service Quality can be a valuable tool to buyers in determining the performance of vendors.
In many cases buyers only see one side of a supplier's response to the needs of a company. Buyers located in corporate headquarters may receive "special attention" from suppliers that does not reflect the type of attention given to remote end user locations. Service Quality equalizes any such distortions.
Below are some examples of how firms have used Service Quality to measure supplier performance and action steps taken from the corresponding feedback.
The thrust behind using Service Quality for evaluating suppliers' performances is not merely to involve customers, but to identify the levels of accomplishment they expect vendors to achieve. Traditional analyses, while giving customers some opportunities for input, are oriented more towards the buyers' view of suppliers. While this type of feedback has its merits, it is too often based on second-hand data. Service Quality goes to the source, the actual users of the products or services, for data.
Service Quality is concerned more with evaluating service-related dimensions than manufacturing components. Purchasing personnel can often provide feedback on manufacturing issues, while the customers can give meaningful information on such service factors as the reliability of equipment, frequency of repairs, and skills of support and maintenance personnel associated with suppliers.
With the greater emphasis on Quality in today's business environment, service Quality can be a tremendous source for evaluating the effectiveness of Quality programs undertaken by suppliers that are meant to enhance their relationships with customers. The rhetoric behind the popular movement of "strategic partnerships" can be quantified by employing the Service Quality method in measuring suppliers' promises. The Service Quality approach to evaluating suppliers' performances has its pitfalls, but the benefits, particularly related to soliciting customer input, are too vital to overlook.