Well-thought-out supplier KPIs are a cornerstone of any successful supplier management strategy. Build your understanding of their importance, and which KPIs you should be using to measure supplier performance, here.
The supply chain activities involved in the procurement process, from sourcing the right suppliers to taking delivery of materials and products, are vital to the overall health of any business. That makes the performance of suppliers in your supply chain a large factor in optimizing the effectiveness of your broader operational strategy.
Companies with an efficient and effective supplier management process are much better placed to obtain goods and materials of higher quality and at lower cost, in a more reliable and timely fashion, than those without.
For businesses in highly competitive environments, an optimized supplier management process that prioritizes supplier performance can mean the difference between success and failure. But how can supplier performance be measured?
The importance of supplier KPIs
Key performance indicators (KPIs) and supplier performance metrics can be used by businesses to evaluate the performance of their individual suppliers and by extension the effectiveness of their supply chain as a whole.
By quantifying the criteria against which supplier efficiency is judged through KPIs, businesses can facilitate strategic planning and better decision-making, provide targets, illustrate progress, and gain valuable insights into how well each of their suppliers performs.
Using supplier management software, supplier performance against these KPIs can be monitored over time. The data you get from this process can be instrumental in making decisions that will strengthen your overall supply chain performance.
With that in mind, let’s look at eight supplier KPI examples that can be used to measure how well your vendors are helping your business meet its commercial objectives.
- Defect rate
- Lead time
- Order accuracy
- Customer service
- Contract compliance
- Risk factor
1. Defect rate
The products or services ordered should always meet the agreed quality guidelines outlined in your contract or the purchase order. Receiving substandard goods or materials can leave businesses vulnerable, impacting stock levels or requiring the expense of time and resources to rectify the order. By tracking each supplier’s defect rate, businesses can identify which suppliers consistently deliver goods or services that fall short of the specified quality standards.
Metric: The number of orders containing defective products divided by the total number of orders placed.
2. Lead time
Lead time is the interval between an order being placed and that order being delivered. If orders are not fulfilled in a timely fashion, your business processes can be delayed – potentially resulting in the loss of customers who are accustomed to fast turnarounds in today’s fast-paced world. Shortening delivery lead times can create operational efficiencies, leading to the faster fulfillment of customer orders and increased customer satisfaction.
Metric: The average number of days it takes a supplier to deliver the goods after an order is placed.
Availability can be thought of as the ongoing ability of a supplier to fulfill orders as and when called upon. Suppliers being capable of fulfilling orders consistently, and to the specified timescale, is a critical component in ensuring that your business can fulfill its own orders and keep up with customer demand. Measuring supplier availability to handle orders as a KPI can help you to identify suppliers who display a pattern of unavailability, and provide insights that make it easier to formulate backup plans or source replacement suppliers where needed.
Metric: The number of times a supplier was able to fulfill an order divided by the total number of orders placed with them.
4. Order accuracy
Order accuracy is a way of measuring how accurately suppliers deliver your orders – or, in other words, how often orders are delivered with errors. If an order contains incorrect items or incorrect amounts of items, your business processes can be significantly delayed. And a consistent lack of order accuracy can lead to disputes with suppliers, resulting in further complications with supply. Measuring each of your suppliers’ order accuracy performance will help you to identify those that consistently deliver inaccurately against what was ordered, again helping you to understand where you need to consider finding backup or replacement suppliers.
Metric: The number of orders delivered with 100% accuracy divided by the total number of orders.
Minimizing costs while maintaining the standards of goods and materials improves the efficiency of procurement and increases return on investment in the department. Establishing competitiveness as a KPI attempts to measure the ability of a supplier to produce goods or services at a particular quality at the same or lower prices than rivals.
After identifying suppliers who charge above market rates, you can then negotiate with those suppliers to reduce their prices – or, alternatively, invite other suppliers to supply quotations. This may also provide an opportunity for businesses to consider the advantages of consolidating suppliers and building economies of scale.
Metric: Price of an order placed with one supplier compared to an alternative supplier.
6. Customer service
Suppliers that consistently provide poor customer service can result in a lot of wasted time resolving disputes about purchase orders, deliveries, and the accuracy of invoices, resulting in frustration and delays. In contrast, good customer service from a supplier can smooth the procurement process, making it more efficient and leading to a better working relationship between the two parties. Measuring suppliers’ customer service levels based on how many formal disputes arise in your relationship can highlight any that may be a weak link in the supply chain.
Metric: The number of disputes divided by the number of orders placed.
7. Contract compliance
Contract compliance is the extent to which contracted parties observe – or deviate from – the terms outlined in the contract. If a supplier falls short of your agreed contractual terms, the outcome can result in problems with any element of the relationship, from the timing of deliveries to the frequency of price increases. Suppliers that break the terms of their agreement may continue to present challenges in the future – so compliance with the agreed terms should be measured.
Metric: Different metrics can be used to measure contract compliance depending on the terms of the contract.
8. Risk factor
Supplier risks can come in lots of different forms. From commercial risks like substandard product quality to reputational risks like engagement in unethical business practices, they all pose a threat to your organization. By taking a more sophisticated approach to assessing the potential risks that each of your suppliers poses to your business, you can weigh up the likelihood of future harm.
Metric: Supplier risk can be measured using a variety of metrics depending on the types of risk under consideration.