This series includes articles dedicated to Procurement Skills of a Sourcing Hero, Data Challenges, Innovation, Looking Beyond Cost, Market Intelligence, Maverick Spend, Supply Chain Disruption, and Transparency.
The most seemingly perfect architectural masterpieces would crumble and fall without adequate reinforcements.
Take the Eiffel Tower, for example. When architects and engineers began work on this iconic Parisian landmark in 1884, they couldn’t have known the structure would attract over seven million tourists every year. What they did know, however, was that without the 2,500,000 rivets used during its construction, the Eiffel Tower’s heavy materials would have fallen apart.
A procurement-supplier relationship with no KPIs is like a beautiful building with no reinforcements. It might look good at first glance, but it will surely crumble over time.
The benefits of supplier KPIs
Procurement teams use key performance indicators (KPIs) to ensure vendors comply with (and hopefully exceed) the obligations outlined in a contract. They help us better understand suppliers’ performance, measure their output over a long period of time, and identify areas where improvement is needed.
Put simply, it’s good business sense to make sure you’re actually getting what you’ve paid for. This might be as straightforward as confirming a product or service is delivered on time, which means the KPIs you need to use will be minimal and basic. In other circumstances, your contract will be much more complex with your expectations changing and evolving over time. In this case, KPIs will be more thorough and the data you collect will provide important insights.
Either way, a set of KPIs should be easily understood and provide a range of qualitative and quantitative data to help with your overall analysis.
Here are my seven suggested supplier KPIs you should be measuring.
Quality control is an important part of any buyer-supplier relationship. Supplier defect rate is used to measure and record the number of faulty or damaged products a supplier delivers, giving a clear indication of their reliability and trustworthiness. Defect rate, which is often measured as defects per million, can be further broken down into different types of faults and the time it takes for a supplier to rework the product(s).
In the age of Amazon Prime, we’ve all become accustomed to receiving a reliable and fast delivery service, and, for procurement professionals, that expectation is no different. Supplier lead time is defined as the period of time between a supplier receiving an order and the time that order is shipped. This KPI measures the lead time (typically in days) and also compare the quoted time with actual delivery time, the frequency of late deliveries, and how significantly this impacts your business or production.
A contract compliance KPI simply means confirming that your supplier is delivering what they promised to deliver during your negotiations. Have they honored your agreements on pricing and price increases? Are they adhering to delivery times? Is the level of service you are receiving up to scratch? When it comes to supplier contract compliance, procurement should be striving for 100%.
Including a KPI that focuses on evaluating your ROI is an opportunity to analyze your overall budget against the cost savings you’ve made by using that supplier. While this gives an indication of how cost-effective a supplier is, it’s important to remember that short-term savings don’t automatically equal long-term profitability.
Working closely alongside suppliers provides a unique opportunity for procurement to drive innovation. It’s a tricky KPI to measure, but an “innovation KPI” can be used to keep supplier prices from rising by requiring them to innovate in terms of improvements to product design, the use of alternative material or components (which might reduce costs or improve sustainability), or increased efficiency.
Risk and transparency
Every Sourcing Hero wants the reassurance that their supplier is financially stable and complying with all government regulations and laws. This KPI requires suppliers to provide proof that they are compliant and stable to protect your organization’s brand reputation. It’s also important to require suppliers to implement sufficient cyber-security measures. Don’t just take your suppliers’ word for it – there are plenty of third-party services that track factors such as supplier credit risk.
This KPI is an opportunity for procurement professionals to rate the overall experience of working with a supplier. Was the customer service up to scratch? Were complaints and issues handled professionally and efficiently, and were they easy to communicate with? Do you have a single point of contact or multiple people to deal with within that organization? Keep in mind that customer service goes both ways. Survey your suppliers to find out how easy you (as a customer) are to work with, and how the relationship can be improved.
A newly implemented contract presents all sorts of uncertainty and risk that will naturally compel you to be diligent with your supplier KPIs. But as time goes on, it’s easier to grow complacent with the monitoring and upholding of your suppliers’ performance - and it’s your responsibility to not let that happen.
After all, a long-standing building could still collapse if it’s not regularly surveyed and properly maintained.
Want to learn more about managing suppliers and getting the most out of your supplier relationships? Get in touch with the team at Una today.
Read more from The Sourcing Hero's Field Guide to Procurement: