4 Tips for Effective Supplier Performance Management

Supplier performance is critical to business success, yet it remains one of the most challenging aspects of supply chain management. Can you really manage supplier performance, or are you limited to simply monitoring and hoping for the best?

The reality is that effective supplier management is achievable through strategic planning and consistent execution. Here are four proven approaches that will help your company maximise value from suppliers, vendors, and service providers:

 

1. Base Agreements on More Than a Handshake

Effective supplier performance management begins before you place your first order with a new supplier. If you want to ensure a supplier meets your expectations, you must make those expectations the basis for a formal agreement — one that’s made in writing, clearly shows that the supplier understands what you need, and documents how performance will be measured and managed.

While making such agreements can be onerous, especially if you are running a smaller company, the effort is more than worthwhile.

While a handshake can demonstrate the best of intentions, a written agreement is the only way to enforce accountability after verbal promises have faded from memory and those that made them have moved on.

2. Take a Partnership Approach

There is no big stick in the arsenals of companies which excel in supplier performance management. Instead, these companies take a partnership approach, recognising that supplier management is all about relationships.

The following three principles, if followed, will help your company graduate toward best-in-class supplier performance management.

• When selecting suppliers, ask not only what they can do for you, but also how realistic it will be to work with them for mutual benefit.
• After relationships have begun, look for mutually beneficial ways to reduce total supply chain cost or maximise profitability.
• By all means, agree penalties to discourage lacklustre supplier performance, but reserve their application for when collaborative efforts fail. Even then, you should be sure your own organisation is not at fault before leaning on suppliers with charge-backs or other penalties.

3. Be a Good Customer

Leave the “customer is always right” mentality to consumers. If you want to enjoy the best supplier performance possible, your company must take accountability for its role in the relationship. Don’t expect to get the most from your supplier if your organisation:

• Consistently places orders requiring emergency handling
• Fails to meet the supplier’s payment terms
• Delays handling of inbound deliveries
• Makes unilateral changes to payment terms
• Frequently changes orders after initially placing them
• Makes regular demands for price reductions and discounts

Your enterprise may be large and have considerable clout, but that doesn’t excuse behaviours which limit your suppliers’ willingness — and even their ability — to maximise performance. Instead, be prepared to take accountability and eliminate hurdles arising from your company’s role in the buyer/supplier relationship.

4. Incentivise and Penalise

Sadly, even formal agreements can’t be made solely on the basis of trust. You should agree mechanisms with your suppliers by which to incentivise supplier performance improvement and (as already mentioned) to penalise them for falling below agreed standards.

However, too many companies still weight the balance in favour of penalties, which merely support the maintenance of performance levels.

Supplier performance management should be about raising standards, not just maintaining them. To that end, your supplier agreements should place equal emphasis on rewarding great performance as on penalising shortcomings.

If you want some more advice, check out this video with Trent Morris that goes into more detail:

Three Ways to Address Poor Supplier Performance

Action 1: Determine the Root Causes

When suppliers consistently underperform, many organisations fall into a passive pattern — firefighting daily problems, making excuses, or complaining internally whilst avoiding direct confrontation. This inaction inevitably leads to:

• Degraded operational performance and increased costs
• Ongoing supply chain inefficiencies
• Rushed supplier transitions when relationships finally break down
• Potential quality and pricing impacts from hasty supplier changes
• Missed opportunities to improve existing relationships

The solution begins with a thorough root-cause analysis. Before confronting your supplier, investigate whether the problems originate within your own organisation. This investigation should:

• Examine your internal processes and systems
• Review communication patterns and expectations
• Document specific performance issues with data
• Identify any operational bottlenecks on your side

Once causes are identified, you can begin addressing problems through either:

• Direct improvements within your organisation if issues are internal
• Collaborative problem-solving with suppliers if issues are external

This approach ensures accountability on both sides and creates a foundation for meaningful improvement rather than simply applying pressure.

Action 2: Supplier Performance Improvement

But what if the supplier doesn’t want to collaborate or even share plans for performance improvement? Suppliers aren’t always prepared to play ball, so the first thing is to find out if yours will. Set up a meeting with your problem supplier to share and integrate action plans for performance improvement.

In many cases, suppliers willingly collaborate in action planning and performance improves as a result. Even so, you should be wary about increasing order levels on the basis of good behaviour.

Give the supplier a few months to demonstrate sustained improvement. If improvements are sustained, you might want to consider elevating the relationship to a strategic one, because clearly:

• The supplier saw the problems as opportunities to improve service.
• The supplier considers you to be a priority customer.

If performance doesn’t improve despite the supplier’s willingness to address problems, you have at least two possible courses of action. For example, you might seek an alternative primary supplier and use the problem one as a back-up only (giving the problem supplier an incentive to improve and regain its primary position), or you may decide to exit the relationship altogether.

If a supplier does little more than promise improvements, and/or is recalcitrant towards your attempts to get involved with its operation, parting company is really your most realistic option.

In this case, your own action plan will include the necessary timeline and steps to secure a new supply source and to formally end any agreements with the incumbent supplier.

Action 3: Review Supplier Management Processes

Even if poor supplier performance was in no way attributable to your own organisation, somehow you reached a point where you had to react. Addressing poor performance is, of course, an important aspect of supplier management, but prevention is even more so.

Review your company’s supplier performance evaluation and management process. Ask yourself the following questions:

• Was the poor performance addressed early enough?
• Do you have sufficient visibility into supplier performance?
• Do you have the right metrics in place to measure supplier performance?
• Are you continuously evaluating supplier performance?
• Did the supplier have sufficient knowledge of your company’s expectations?
• If you’re unsure where to start, working with an experienced procurement consultant can help you audit your current processes and close the gaps.

Supplier Performance CAN Be Managed

You don’t have to have direct control over something in order to manage it, especially when that something is a team of people. Good people management is all about teamwork, leadership, persuasion, and influence. All of those qualities can be applied to supplier performance management.

You just need to lay foundations via clear agreements, set great examples (by being a good customer), maintain collaborative rather than adversarial relationships, measure performance objectively, and make judicious use of penalties and incentives.

Let’s face it, none of us has direct control over people, but many of us manage people extremely well using teamwork, leadership, persuasion, and influence. Suppliers are people too — need I say more?