Supplier Performance Management (SPM) – Why You Need a Robust Program

Many small to mid-size manufacturing companies believe that collecting basic supplier information equates to having an effective supplier performance management system. Unfortunately, this action alone is not sufficient to effectively evaluate your company’s relationship with your suppliers or the risk they may pose to your operation.

Based on a study conducted by MIT’s Sloan School of Management, 77% of the companies surveyed said two out of the top three major procurement risk factors were related to suppliers – specifically “dependency on supplier” and “supplier quality problems.” Lost in the headlines of supplier dependency and supplier quality are the cost factors of not tracking supplier performance management and the increased risk to the business when there is a lack of real-time, accurate supplier information.

Synergy’s Manufacturing Center of Excellence found that the risk factor significantly increases for small and mid-size manufacturers, many of which do not have or feel the urgency to have a Supplier Performance Management program in place.

Today, all manufacturers, big, small, or mid-size, must track supplier performance to ensure a continuous supply of product, on-time, to your customers. An effective SPM program provides the framework for manufactures to manage cost, realize savings, and establish a single source of truth to monitor critical KPI’s like; Supplier on-time delivery, Supplier quality, material cost, and gross profit. This framework is made up of four primary areas.

• Supplier Qualification: Qualification goes beyond an audit to closely exam a supplier’s capability and capacity to consistently deliver quality material, at a competitive price, on-time, every time. The qualification process leads to an assigned level that the supplier is qualified for in terms of supporting the company’s needs. An example of a set of supplier level would include conditional, qualified, preferred, certified, disqualified.
• Supplier Risk Assessment: Risk assessment is an in-depth analysis of the suppliers’ risk to the business based on the supplier’s classification. An example a supplier classification would be critical, strategic, or standard. By default, a sole supplier or single source supplier, depending on several major factors, would likely be a critical supplier.
• Supplier Performance Monitoring: Performance monitoring relates to KPI’s, metrics and supplier scorecards. Real-time data form a single data source is essential to properly monitor a supplier’s risk to the business based on a set of documented performance criteria.
• Supplier Certification: The ultimate objective of the SPM is to progressively transition your suppliers through the qualification process to achieve certification. To become certified a supplier must consistently demonstrate excellent levels of quality, cost, and delivery performance. The supplier should also have robust business systems in place to sustain its performance level.

Aberdeen’s benchmark study on supplier performance management indicated that implementing standard metrics and procedures for measuring supplier performance, increased supplier performance by more than 26% on average.

Synergy’s Manufacturing Center of Excellence has seen similar results while helping customers develop and deploy an effective supplier performance management program. Additionally, we have found that by deploying best-practice business processes, utilizing an optimized ERP solution, and leveraging a technology-based solution for performance reporting and supplier collaboration, manufacturers of all sizes, big to small, can achieve a standardized and automated approach that reduces risk and increases performance and profit.

In fact, what we have witnessed when an SPM is properly implemented, showed substantial improvement in the areas of process efficiency, supplier collaboration, quality, on-time delivery, lead times, and the all-important and sometimes overlooked increase in employee satisfaction. This proves once and for all that a supplier performance management program is in fact a significant value-added activity for any organization.

Want to learn more?
Watch our webinar replay “Deploying an Effective Supplier Performance Program” to learn the value of having this foundational program in place.