3 Practical Metrics for Supplier Performance Evaluation

For many organisations, the reality of supplier performance management is that time and opportunity to track and react to dozens of complex KPIs simply doesn’t exist. Regardless of advances in business analytics therefore, I still advocate a measured approach to measurement (pun intended), by way of a carefully chosen handful of KPIs which are meaningful and actionable.

If your organisation is struggling with unreliable inbound supply, one of the first things to examine is the effectiveness of your supplier performance evaluation process. In this post, I’ll share some insights into why supplier performance evaluation is vital and three practical metrics you can use to evaluate it. I’ll also reveal why, to be effective, your evaluation methodology should involve more than tracking a suite of operational performance KPIs.

When to Evaluate Supplier Performance

Perhaps it may seem obvious that supplier performance evaluation is an ongoing process. However, based on observations made in the course of our inventory consulting work, many organisations perceive it as a purely remedial or punitive exercise.

For example, companies often make the mistake of ramping up performance evaluation only when one of their vendors begins to let them down.

Why is this a mistake? Once your vendor is failing to meet delivery schedules or provide a reliable service, supplier performance evaluation becomes little more than a big stick with which to beat the offender. It’s probable that the supplier is already well aware of its failings and is either not in a position to improve or doesn’t value your custom enough to respond to threats or demands for improvement.

Another mistake commonly made is to overlook the need for evaluating prospective suppliers’ performance.

If you’re serious about managing supplier performance, you should ascertain how well a new supplier is positioned to meet your company’s needs—before you start placing orders. By doing so, you can reduce the need for supplier micro-management and avoid situations where reaction is the only option.

So to summarise the “when” of supplier performance evaluation, it’s a process that should start before the business relationship begins and then run continuously, for better or for worse, until circumstances do you part.

Why Continuous Supplier Performance Evaluation?

Why evaluate supplier performance at all, and why should it be done on a continuous basis?

Well, the answer to the second part of the question becomes self-evident once you understand the first part. So we’ll begin by exploring what supplier performance evaluation does for your supply chain operation.

There are at least six primary benefits to be attained from maintaining a supplier performance evaluation system:

• By measuring supplier performance, you create the opportunity to influence it.
• Supplier performance evaluation can help to protect your own operation from supply chain risks.
• Supplier performance evaluation enables waste and cost drivers to be identified and addressed.
• Most suppliers tend to focus on performance improvement when they are monitored and evaluated.
• When you are on top of supplier performance, you can make procurement and purchasing decisions which are better informed.
• By understanding suppliers’ strengths and weaknesses, you can help them to improve performance. This in turn makes it easier to strengthen inventory management, cycle time optimisation and other elements of your supply chain.

None of the aforementioned supplier performance evaluation benefits can be gained through sporadic or one-off exercises. Only a continuous approach will provide the data necessary to cultivate positive supplier relationships and encourage collaboration.

Similarly, continuous evaluation is the only way to determine which suppliers can become strategic partners with your organisation, which ones you can work with on a limited basis to improve supply chain performance, and which ones you might be better off parting company with altogether.

Supplier Performance Metrics for Every Organisation

In this section, you’ll find some suggested metrics for supplier performance evaluation and management. These KPIs should all be applicable to your supply chain operation, subject to some tweaking to reflect the precise characteristics of your inbound logistics and purchasing functions.

You should be able to realistically track these three KPIs, whether your procurement or inbound logistics functions use sophisticated analytics software or visualise data via less advanced means.

1. Quantity Ordered versus Quantity Received

This measurement will require data from the purchase orders placed by your buyers, and that from your receiving operation. The most usual method is to record the percentage of the ordered quantity which was actually received. The measurement is typically taken over a given time period (often monthly).

Example: Purchase order quantity in current month = 200,000 units. Quantity received = 199,880 units. Supplier performance = 99.94%.

You would need to decide whether to include or exclude quantity differences which the supplier advised you of in advance. Alternatively, you could have two metrics, one for advised variations and one for variations discovered upon goods receipt.

2. ASN Accuracy

For suppliers that provide your company with advanced shipment notifications, it’s a good idea to monitor the accuracy of the data provided. This ties in with metric 1 above, since an ASN would serve as advanced notification of variance between ordered quantities and quantities dispatched by the supplier.

Rather than monitoring this KPI using received/ordered unit quantities, ASN accuracy is typically measured on the basis of the quantity of ASNs, and how many of those were accurate.

Example: ASNs received (current month) = 17. ASNs which are 100% matched to physical goods receipts (current month) = 16. Supplier performance = 94%.

3. Delivery On-Time

Just as you should measure your own outbound delivery on-time performance, so you should keep your suppliers on their toes by tracking the percentage of inbound deliveries received on time. Although the criteria to classify a delivery as “on time” can differ from one organisation to the next, the measurement usually follows the typical percentage formula (percentage of deliveries received at their promised arrival time).

Example: Inbound deliveries received (current month) = 8. Inbound deliveries checked in at security within 5 minutes of promised arrival time (current month) = 7. Supplier delivery on-time performance = 87.5%.

Depending on the set-up of your warehouse operation and agreements with suppliers, you might use the arrival time promised by your supplier, time of delivery arrival, delivery book-in time or perhaps even time windows (for example, delivery between 8.00 a.m. and 9.00 a.m.) as the baseline against which to measure supplier performance.

Other Supplier Performance Metrics

The above-mentioned are metrics that you can use as key performance indicators to evaluate supplier performance. However, there are other metrics within supply chain management that you can use, like:

• Ordered price versus invoiced price
• Percentage of units failing inspection vs. total inspected units
• Returns rate metrics
• Order fill rate metrics
• Lead-time variance metrics

None of these KPIs require sophisticated analytics capability and most can be managed even without enterprise business software. Of course it helps if the necessary data can be captured automatically and displayed in a digital dashboard, but if that’s not possible, some spreadsheets will do.

What Is Total Supplier Performance Evaluation?

If you want to get it right, performance evaluation criteria should cover more elements than you might have anticipated. In addition to monitoring operational metrics, effective supplier performance evaluation also takes into account financial health, process and practice, culture and strategy, and supply chain risk factors (which requires intelligence about your suppliers’ suppliers).

Financial Evaluation of Suppliers

It’s probably unnecessary to evaluate the financial circumstances of all your suppliers, but for those which are of strategic importance to your supply chain, doing so is a must. Similarly, you may not need to monitor financial health on a continuous basis, beyond keeping an eye open for any news relating to your suppliers.

However, a financial health check should certainly be performed when selecting a new strategic supplier or when a supplier undergoes a major organisational change, and perhaps also on an annual or biannual basis, as part of an in-depth supplier review.

Evaluating Suppliers’ Operational Performance

Operational performance measurement is the one aspect of supplier evaluation which should be constant, not only because it has the most immediate and direct impact on your own operation, but also because changes in performance can often be early signs of issues elsewhere, such as financial stability problems.

For example, say one of your key suppliers suddenly improved its rate of “on time” deliveries to your plants/DCs?

That’s a good sign, right? But hold on … what if it’s because the supplier has just lost one (or more) of its biggest customers and therefore has increased logistics resource availability? The recent run of perfectly timed deliveries might be close to coming to an abrupt end, as a result of your supplier’s financial demise and closure of operations.

Sudden service improvements, as well as degradation, can be well worth a root-cause analysis; just to be sure the change is not symptomatic of a problem.

In general though, operational performance evaluation will guide you as to where planned improvements should be sought, in order to drive heightened performance in your supply chain.

Evaluating Process and Practices

Operational performance evaluation can highlight what your supplier does well and what it doesn’t, but it can’t show you why. As the earlier example illustrated, fluctuations in performance might not always have obvious causes. By seeking to understand how your suppliers operate, you can lay the foundations for collaborative efforts to drive performance improvement (or prevent future problems).

Process and practice evaluation can be resource-intensive, requiring the development of surveys and questionnaires, or perhaps physical inspections/audits of suppliers’ facilities. On the other side of the coin though, it can be a highly effective way to incentivise and drive performance improvement from key suppliers.

Evaluation of Supplier Culture/Strategy

If you have twenty suppliers, it probably won’t matter much that 16 of them are not aligned with your own business culture and strategy. But for the three or four upon which you depend the most, relationships are likely to be more fruitful for your business if they have similar visions and strategic objectives to your own.

Is your company on a lean supply chain journey, for example? If so, your progress will probably be more straightforward if your most important suppliers are also pursuing lean.

Supplier culture and strategy evaluation will be most valuable when selecting new partners to work with. However, if you are experiencing performance problems with existing suppliers, it’s worth talking with them about your cultural and strategic expectations and investigating their own. If they value your business, they may be prepared to make adjustments, especially if they can see some mutual benefits to be gained from alignment.

Risks Uncovered, Opportunities Revealed

When you employ a complete system of supplier performance evaluation; one which takes into account financial health, operational performance, process and practice, and culture/strategy, the majority of risk factors presented by your supplier base should fall into sharper focus.

However, it’s also critical to look beyond the performance of your first-tier suppliers, particularly the ones with which you wish to pursue strategic relationships. At the very least, you should expect your suppliers to disclose their own sources to you, so you can determine if there are risk factors which bear closer examination.

Whilst such in-depth supplier performance evaluation can be labour-intensive, or may even require some technology investments and external help, it will help you greatly in mitigating supply chain risks and revealing opportunities to exploit—opportunities to decrease uncertainty and improve inbound supply reliability.

Even if your company does have the latest and greatest in analytics, going overboard with supplier performance KPIs and metrics can easily lead to confusion and “paralysis by analysis”, so some combination of the range of metrics described in this post should be more than sufficient to aid you in effectively managing suppliers.