Supplier performance measurement and strong supplier relationships are central to any successful procurement strategy. Whether it’s reducing costs, improving quality, or enhancing stakeholder experience, the role of suppliers cannot be understated. As noted in Paystream Advisors’ ‘2024 Procure-to-Pay for Indirect Spend’ report, cost control and supplier negotiations are the biggest areas for improvement in procurement.

Furthermore, the 2024 Hackett report, ‘The CPO Agenda: Keeping Pace With and Enabling Enterprise-Level Digital Transformation,’ highlights that the top strategic priority for CPOs is improving the stakeholder experience, with one of the key drivers being enhanced supplier outcomes.

In this comprehensive blog, we’ll delve into how you can effectively measure supplier performance, segment your suppliers for maximum efficiency, and ensure that your procurement process remains streamlined and robust.

Supplier Performance Measurement – What to Measure?

The famous saying by Galileo, “Measure what can be measured and make measurable what cannot be,” holds particularly true for procurement. In the realm of supplier performance measurement, there are both quantitative and qualitative metrics to consider.

Quantitative Measures:

• On-time delivery: How often are your suppliers delivering goods and services as promised?
• Quality: Metrics such as rejected goods, defects, or returns due to poor quality.
• Price: Is the supplier maintaining agreed-upon pricing or continuously increasing costs?
• Cost reduction: How much is the supplier contributing to reducing your procurement spend?

These metrics are usually easy to track through your existing ERP or Procure-to-Pay software. Generating scorecards out of multiple factors can provide a comprehensive overview of supplier performance.

Qualitative Measures:

While numbers can tell one part of the story, qualitative assessments give deeper insight into your supplier’s value. Procurement teams should directly collect this data by engaging with teams who work with suppliers regularly. Some qualitative metrics include:

• Problem resolution: How well do suppliers resolve issues when they arise?
• Technical support: Does the supplier offer robust technical support when needed?
• Innovation: Are they continuously innovating or developing new products that benefit your business?

To streamline the supplier evaluation process, it’s important to balance both quantitative and qualitative factors. For more insights, read our Supplier Performance Evaluation Checklist.

Segment Suppliers Because One Size Doesn’t Fit All

A common mistake in procurement is treating all suppliers the same. A typical organization may have hundreds of suppliers, but only a handful account for a significant portion of the spend. This is where the Pareto Principle, or the 80:20 rule, comes into play: 20% of your suppliers likely account for 80% of your procurement budget.

Prioritizing Supplier Management:

For suppliers contributing the most to your spending, it’s important to plan for regular performance reviews. These reviews should include written action items, timelines, and follow-ups to ensure continuous improvement. For less critical suppliers, basic metrics like on-time delivery and price suffices.

Would you spend the same amount of time evaluating a strategic supplier as you would on a small office supply vendor? The answer should be no. Focusing your resources on high-impact suppliers will lead to performance improvements that reflect on the larger part of your procurement spend.

KISS – Keep It Simple, Stupid

When managing supplier performance, the simpler your system, the better. There is no need to track every possible metric just because it exists. Instead, focus on the KPIs that have the most significant impact on your business. Once those are under control, you can move on to less critical metrics.

Centralize Your Data:

Maintaining a central repository of supplier performance data is essential for time-series analysis. This will allow you to assess whether your suppliers are improving over time or if their performance is deteriorating. A centralized system also ensures that multiple team members can access this information anytime.

Measuring Value Through Innovation

For strategic suppliers, one key indicator of long-term value is their commitment to innovation. Suppliers that continuously innovate and collaborate with your organization on new products or cost-saving initiatives should be viewed as valuable partners.

Indicators of Strategic Suppliers:

• New Product Development: Are your suppliers contributing to your organization’s new product launches? If so, their long-term partnership may be worth the investment.
• Financial Health: Monitoring the financial health of your suppliers is crucial. Suppliers struggling financially are more likely to experience disruptions in delivery or quality.
• Expansion Support: If your organization is expanding geographically, a supplier that supports this expansion is valuable. Having the same supplier manage your needs across multiple regions streamlines operations and reduces complexity.

Supplier innovation may not be easy to measure, but it’s worth incorporating into your supplier performance management strategy. You can start small by tracking new products or cost-saving initiatives that your suppliers introduce.

Automating Supplier Performance Management with Zycus

Manual tracking of supplier performance can be labor-intensive and inefficient. This is where technology can play a significant role. Modern procurement software, like Zycus iPerform, automates the tracking of KPIs, enabling real-time collaboration on supplier development programs and corrective actions.

Why Automation Matters:

Automation not only reduces the manual workload but also ensures accuracy and consistency in tracking supplier performance over time. This means you can focus more on strategic decision-making rather than sifting through spreadsheets.

By integrating automation into your supplier performance management, you can gain real-time insights into your suppliers’ strengths and weaknesses, helping you mitigate risks before they impact your supply chain.

Conclusion: The Path to a Resilient Supply Chain

In today’s fast-paced procurement environment, supplier performance measurement is not just a nice-to-have; it’s a necessity. By focusing on the right metrics, segmenting suppliers effectively, and leveraging technology to automate performance tracking, organizations can build stronger supplier relationships and improve overall procurement outcomes.

For more information on how Zycus can help you with supplier performance management, visit our Supplier Management Software page or schedule a demo with our experts today.

Related Reads

1. Blog – Supplier Relationship Management: A Comprehensive Guide
2. Solution: Supplier Management Software
3. Blog – Supplier Performance Evaluation – A Quick Checklist
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5. Download Whitepaper – Supplier Risk And Performance Management: Best Practices For KPI Creation
6. Download Whitepaper – Supplier Performance Evaluation for Better Results
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9. Whitepaper: Essential Components of a World-Class Supplier Performance Management Tool : A MENA Perspective