December 07, 2022
By Taulia
By Taulia

Suppliers play an essential role in a company’s supply chain, meaning their performance affects the businesses they supply. How effectively they fulfill their role impacts the supply chain efficiency and resiliency, customer experience, and overall profitability of the businesses that buy from them.

Both supplier relationship management (SRM) and supplier information management (SIM) have at their core two primary objectives – to maximize the positive effects and minimize the negative impact of a company’s suppliers on its operations. Supplier performance management (SPM) can be regarded as the third component of an effective supplier management process.

Poor supplier performance can potentially cause significant logistical, financial, and reputational issues for the businesses that buy from them. Supplier performance management aims to pre-empt and avoid these risks while compelling suppliers to proactively improve their performance. From encouraging more timely delivery of goods to improving the ability to avoid costly risks and drive continuous efficiency improvements, supplier performance management can be the cornerstone of a healthy supply chain.

What is supplier performance management?

Supplier performance management is the process through which a business monitors and measures the performance of their suppliers against established key performance indicators (KPIs). By setting supplier KPIs and analyzing how well suppliers meet them, companies can manage their supplier base more effectively and efficiently.

Managing supplier performance not only enables businesses to get more control over their costs but also supports them in building long-lasting supplier relationships based on more fruitful collaboration. This makes it a critical factor influencing long-term supply chain health and efficiency.

Businesses can reduce or eliminate risk, drive improvements, and cut costs by identifying problematic supplier performance. In other words, they can ensure that suppliers contribute to their broader business objectives and don’t fall short of expected service levels.

Elements of a supplier performance management strategy

Monitoring supplier performance effectively can be a challenge. But by setting appropriate KPIs, it’s possible to evaluate potential supplier issues such as cost overruns, changes in pricing structures, contractual compliance issues, substandard operational performance, and possible financial health problems.

Because supplier performance is a significant contributor to overall business performance, finding ways to improve it can pay substantial dividends. As well as setting KPIs, an effective supplier performance management strategy can streamline suppliers’ onboarding and incorporate analysis, feedback systems, and new supplier selection processes.

A strong supplier performance management strategy should therefore cover the following:

  • Supplier selection: Potential suppliers should be vetted, with additional information from independent parties.
  • Supplier onboarding: The onboarding process can be simplified and accelerated through automation to start supplier relationships on the best foot.
  • Setting KPIs: To be agreed upon by both parties, supplier KPIs should clearly define the expected or required performance level.
  • Performance analysis: By examining adherence to targets, companies can identify their suppliers’ strengths and weaknesses. Individual supplier performance can be compared to industry benchmarks.
  • Feedback system: Performance, as measured against KPIs and service level agreements, can be fed back to suppliers through automatic periodic reviews.

Tips for improving supplier performance management

Analyzing and improving supplier performance is a natural priority when looking to improve overall business performance. Although diverse approaches to supplier performance management are possible, here are some of the best ways that companies can work toward encouraging supplier performance improvements:

  • Have a clear strategy: Formulating and setting out the required levels of performance expected from suppliers is an essential first step. Having the right strategy in place is a necessary precursor to success. If the performance areas under scrutiny are too broad, monitoring or analyzing all the data may prove impossible. This could lead to failures in identifying issues and remedial action, causing business damage.
  • Choose the right KPIs: Choosing the right supplier KPIs is critical in ensuring that you’re paying attention to metrics that accurately summarize supplier performance. Common KPIs include product quality rates, frequency of errors or operational shortcomings, the punctuality of deliveries, and non-compliance with the established contractual terms of the relationship.
  • Keep good data: Having a centralized and digitalized supplier information repository can make it easier to collect and maintain supplier performance data and monitor performance over time and identify trends. With a self-service supplier management system, suppliers can be encouraged to ensure that their information is current and correct and are empowered to update their details whenever necessary. This can lead to improved data accuracy and fewer errors and reduce the burden on the buyer company’s supplier management team.
  • Conduct regular analysis: The more often a business analyzes supplier performance, the more likely it is to detect performance deterioration early. Any abrupt change may indicate an imminent problem, with subtler changes potentially indicative of longer-term issues. The sooner breakdown or complete service failure is identified, the easier it is to work on rectifying them before they cause severe operational problems.
  • Maintaining strong communication: Any issues identified with supplier service should be communicated to the supplier. The stronger the lines of communication a company has with its suppliers, the better able it is to give feedback on their performance and to work collaboratively towards improvements.

Benefits of better supplier performance management

Organizations that improve the way they handle supplier performance management can expect to reap the following benefits:

  • Improved supplier performance against KPIs: Better performance management can lead to direct improvements in supplier performance as measured by KPIs, including quality, delivery time, and fulfillment rate.
  • Fewer supply chain disruptions: Monitoring supplier performance on an ongoing basis will alert a business to any weak or failing links. Businesses will be better prepared to prepare for and mitigate potential supply chain disruptions.
  • Stronger business relationships: Since supplier performance management involves a collaborative approach, it not only improves the quality of communication but also ensures that businesses and their suppliers are brought closer together and their goals more closely aligned.

For any business to be successful, it must have positive and productive relationships with its suppliers. Failing to manage suppliers positively or productively – or choosing suppliers that are not a good fit for the business – costs time and money. Businesses should therefore ensure they maintain a sharp focus on managing performance, leveraging all the tools at their disposal, including dedicated supplier management software. As a result, they can drive improvement, build robust relationships, and maximize the resilience of their supply chain.