The Challenges of Supplier Management

The Challenges of Supplier Management

It’s not uncommon to find that improving the performance of suppliers to a business is of interest to company leadership. However, supplier performance management requires the right approach, and all too many companies make errors in the design of their supplier performance management programs. A couple of the most important traps to avoid in designing a supplier performance management program include:

1. Establishing the correct ‘ownership’ for supplier performance.
2. Understanding the pros, cons and limitations of the various KPIs which could be used to measure performance.

Ownership

In many ways, the challenge of supplier performance has similarities with the challenge of employee performance management. After all, it’s logical for every company to want to achieve optimal performance from their employees as well as their suppliers in the service of delivering value to their customers.

If we consider employee performance; who is responsible for it? Is it just the employee’s supervisor? Is it an HR responsibility? In most modern companies it’s acknowledged that employee performance is a topic around which different groups contribute. Direct supervision is obviously concerned with employee performance, and HR often plays a support role as well.

However, many companies get the balance wrong. It’s not unheard of to see situations in which companies charge their HR groups with the responsibility to develop programs to manage employee performance. When this is tried, it’s always found that HR can’t do it in isolation. When it’s tried, it typically manifests as somebody in HR making decisions about a Supervisor’s or Manager’s employees which they simply don’t support.

With respect to supplier performance, the same challenge exists. In many companies there will be a Procurement or Supplier Management team with the responsibility to ‘get suppliers under contract’ prior to working within the company’s facilities. However, most of the suppliers will actually do work in the service of a different group in the company, whether that is the maintenance, operations or engineering groups.

There is definite logic in this approach. A maintenance manager might know what they need from a supplier, but they may not have the expertise to know what terms and conditions should be covered off in the commercial contract. Similarly, the procurement team under stands the implications of terms and conditions but lacks the full understanding of the scope of the work the supplier will be delivering.

That gives rise to an interesting question; If two teams have had a hand in brining the supplier on board, which one is responsible for the performance of the supplier? Who is responsible for identifying poor performance and acting to turn around the situation?

In those companies that have implemented successful supplier performance management programs there is clear understanding of the roles the various company representatives play in performance management. There are clear distinctions between those who provide data and play support roles and those who have ultimate decision making authority. As a result, any company that’s looking to implement a supplier performance management program is advised to contemplate the role of all participants in the program during the design phase, and then coaching all participants through the intent and execution of the program elements, tools and processes.

The KPI Challenge

These days, most businesses use KPIs and balanced scorecards to help manage their business activities. Similarly, KPIs are a logical tool to use to support supplier performance management. After all, having the right KPIs can help provide the ‘red flag’ to provide early detection of declining performance. Unfortunately, its quite common to see organizations run into problems with their use of KPIs.

The first critical thing to remember when using KPI is that the ‘I’ in KPI is ‘Indicator’. KPIs are never an absolute measure of performance. Whether the issue is supplier or even employee performance, an indicator can move due to a performance problem, or it can move due to an issue unrelated to performance. The KPI cannot tell the difference. In all too many supplier performance management programs this simple fact is lost and the KPI becomes a pass or fail litmus test.

In the best supplier performance management programs, the movement of KPIs is not seen in binary terms, it’s used as a trigger to engage in a conversation between the company and the supplier.

The second KPI challenge is that it’s easier to derive quantity data to produce KPIs, than it is to develop quality data. Consider something as simple as a contract with a training organization. It’s easy to track the number of training sessions completed, the hours of training provided and the number of attendees. It’s significantly more challenging to measure the impact of the training whic