No enterprise is an island. Negotiating a great contract, conducting successful reverse auctions, and creating a great e-procurement infrastructure are all important, but they will all be for naught if the supplier fails to perform.
Never before have companies been so dependent on the performance of their suppliers. We have become so lean, fast, and outsourced that monitoring and responding quickly to deal with and continually improve suppliers' performance has become a key determinant of success or failure. In this article we look at some of the best practices for managing and improving supplier performance used at a large high-tech manufacturer and systems integrator, which we will refer to in this report as "HighTech, Inc.," as well as a bit on Dell's approach to rating and managing supplier performance.
Managing Suppliers in a Diversified Multi-Division Company
Managing supplier performance across a diversified and divisionalized company presents its own unique challenges. How can you balance the need for a common supplier performance measurement system across the enterprise with the unique needs of each division? HighTech, Inc.'s global supplier scorecard system solves this by implementing three levels of performance criteria. Levels 1 and 2 are binding on a global basis (measurements are the same company-wide) while level 3 is unique to individual business units. This allows suppliers to be measured across divisions, while providing the flexibility to add unique KPIs by business unit. It also allows different KPIs by type of commodity. For example, a supplier of power generators will be measured completely differently than a supplier of mobile phones.
Automatic Initiation of Corrective Action Workflows
KPIs are fed into HighTech, Inc.'s performance monitoring system primarily using data from their ERP system. The KPIs are continually monitored against the actual Service Level Agreements (SLA) in the contracts. Corrective action workflow processes are initiated as soon as a KPI crosses the agreed threshold. These corrective actions are the critical key to performance improvement. To help buyers decide the best course of action, HighTech, Inc. has created a best practice database. This system enables their buyers to look up the corrective actions and the corresponding outcomes that other buyers have implemented over the past 15 years.
Regularly Rating Suppliers
In addition to continually monitoring performance, HighTech, Inc. periodically rates their Class A and Class B suppliers. Quantitative ratings come from their ERP system and qualitative ratings come from buyers, quality, logistics, and R&D engineers. Rating a large diversified supplier is a major effort because the supplier could have 60 or 70 distinct operations supplying HighTech, Inc. globally. The results of these ratings are given directly to the supplier's CEO who understands the importance of continued high-quality performance to their continued business relationship. Regular ratings and dialog between senior executives are key to maintaining top performance of your most important suppliers.
To rate their own performance in the sourcing cycle, HighTech, Inc. uses a "reverse rating" program to solicit feedback from their A suppliers. This is something very few companies do. This constructive criticism is actively sought by HighTech, Inc. to gain insights in order to drive improvements in the relationship and their own operations. (This concept is similar to the "Virtual Enterprise Scorecard" that we have advocated at ChainLink since our inception.) Reverse rating enables suppliers to provide feedback so that buyers can improve their performance.
Scorecards with "Teeth" - the Rating Approach at Dell
Dell is another company that has a good supplier scorecard. It includes cost, quality, delivery, and a technology rating that measures the degree of advancement in the supplier's technology. Dell takes this scorecard seriously. They have quarterly business reviews with their thirty largest suppliers at a senior executive level. Together, they set continual improvement targets for the next quarter in cost, quality, and other areas. Dell often shows a supplier how that supplier's performance compares with the rest of Dell's suppliers. The scores of other suppliers are presented anonymously - e.g. Supplier A, Supplier B, etc. This can be an effective motivator for improvements. Suppliers take the scorecard seriously, because they understand that it is a major part of Dell's decision process for ongoing business. The lesson here - a scorecard is only valuable if it has teeth (is used to make business decisions) and is communicated regularly to the suppliers as part of the overall relationship.
In Part 2 of this article, we explore a case study on how a diversified multinational company has created an Integrated Supplier Managed System.
Parts of this report were excerpted from our Report Series on Managing Supplier Performance.
Read also Supplier Performance Management - Part 2
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