One of the essential mechanisms of Supply Management and Performance is a Supplier Rating Program, where you will collect, analyze, and use data to optimize supplier performance.
There are five questions that need to be answered when planning a supplier rating program:
Which suppliers will you rate?
What personnel in your organization will participate in the rating process?
What performance measurements will you use?
How will you collect performance data?
How will you utilize performance data?
Let us focus on questions 1 to 3.
Question 1: Which suppliers will you rate?
It is probably not practical to rate all suppliers, especially if you have thousands. You should rate those suppliers who earn a significant percentage of your spending. If the 80-20 rule applies and 20% of your suppliers comprise 80% of your procurement dollars, rate that 20%. Simply list your suppliers from most expenses to least and select the ones at the top so that 80% of your expenses are accounted for. You should also seek those suppliers who have a major impact on your operations. While most of these suppliers also will fall into the 80% of your expensed group, there may be some suppliers with whom you spend less whose poor quality or late deliveries could shut a production line down or otherwise cause your organization’s failure to meet the expectations of your customers.
The Power of Laser Focusing
The 4-50 rule is a powerful variation of the 80-20 rule that enables procurement departments to laser-focus their competencies, assets, and resources. The 4-50 notes that 4% of your suppliers comprise about 50% of your procurement dollars. The set of suppliers that fall into the 4-50 spectrum can be your primary focus group, with the 80-20 spectrum as your secondary focus group.
Question 2: What personnel in your organization will participate in the Rating Process?
Obviously, anyone serving on a commodity team should also be a part of the supplier rating process. However, any stakeholder whose function is directly affected by supplier performance should have the opportunity to submit input into the supplier rating program.
Question 3: What performance measurements will you use?
Performance measurements will differ from organization to organization based on your unique requirements. However, most performance measurements fall into four categories:
Cost performance measurements relate to the direct financial impact of a supplier’s performance and can include price, payment terms, shipping charges, savings from process improvements, and so forth.
Delivery performance measurements relate to a supplier’s ability to support your scheduling requirements and can include on-time delivery of goods, on-time completion of services, stock availability, or anything related to the time between order and receipt.
Service performance measurements relate to the personal and electronic interaction between the buyer and seller and can include responsiveness, resolution of problems, the technology used to provide customer service, and so forth.
Quality performance measurements related to the conformance of a product or service to requirements and can include rejection rates, warranty claims, the technology used to improve products and services, and other metrics related to the durability, reliability, and consistency of a product or service. Each performance measurement that you ultimately select should be specific and measurable.
For example, on-time delivery is specific (a delivery is either made by a certain date or it is not) and it is measurable (a delivery was three days late). When deciding on performance measurements, do not try to measure everything!
Focus on the most important characteristics of supplier performance. One or two measurements for each of the four categories is plenty. Limiting your performance measurements to the vital few, rather than the trivial many, will make your supplier rating program easier to implement and more successful at improving supplier performance.
Examples of Performance Measurements
Here is an example of a simple, but effective, list of performance measurements:
The annual value of cost reductions
Percentage of on-time deliveries
Number of service complaints from internal customers as a percentage of orders
Warranty claims as a percentage of orders
Some advice that applies to ALL measurements, not just those related to supplier performance…
Never measure anything without targeted goals!
If you measure something without a target goal, you will know the measurement, but you would not know whether it is good, bad, or useless. In terms of supplier performance, what could be excellent performance in the eyes of your supplier may be a sub-par performance to you. Therefore, you must develop and communicate targets to your supplier for every attribute you measure.
A supplier may think that 90% on-time delivery is great – perhaps better than they have done for any customer, ever. However, those late deliveries may have caused your production line to shut down.
Is 90% on-time delivery good or bad, then? Well, it is neither because you did not communicate a performance target to your supplier!
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