The failure to track and manage supplier performance can cause many business issues, especially for companies with large amounts of raw materials and SKU complexity in a global supply chain network. But the frequency and magnitude of supply chain problems can be reduced through the use of supplier scorecards. Results include lower cost, improved on-time delivery, higher quality, tighter supplier relationships and greater overall resilience.
Companies that neglect to track supplier performance face multiple risks. They might overlook signs that a vendor is having systemic or recurrent issues, such as sending off-quality product, and continue awarding contracts to that vendor. The supplier’s fulfillment schedule might seem like a mystery. Product could be coming at the wrong time, leading to production slowdowns, misaligned labor expenditures, delayed deliveries and customer penalties. Suppliers, too, can suffer if they don’t manage their relationships with buyers properly, resulting in the loss of preferred-supplier status or imposition of fines.
Without a strategic approach to resolving supplier performance issues, companies can get stuck in the tactical mode of constantly putting out fires. If it can’t be tracked, it can’t be managed and improved.
Using a supplier scorecard, organizations can cultivate more collaborative relationships with suppliers, including greater visibility and clearer expectations about product quality and delivery. Companies can also improve decision-making ability when setting terms for receivables, and more quickly respond to emerging needs and challenges.
Following are four steps that organizations without an existing scorecard system can take to generate their own procedures.
Assess vendor relationships. Not every vendor needs the same level of oversight. Effective supplier management involves a significant investment of resources, and it can become unwieldy if not conducted strategically.
The first step is to identify the core suppliers to the business. The most critical, or A-level vendors, are those that are most significant based on criteria such as spend or centrality to production. For these vendors, the scorecard process should be conducted quarterly, or even monthly, with additional, in-depth annual reviews. B- or C-level vendors, which are likely to be smaller with lower impact to the business, might need only a semiannual or annual review.
Seek stakeholder feedback to establish key metrics. With the vendors categorized, companies can begin the process of scorecard development. A cross-functional team that includes procurement, production, planning and scheduling, quality, and engineering specialists should come together to discuss what’s working well with each supplier, and what’s not. The engagement of a cross-functional team can help verify that vendors are being assessed appropriately, according to what’s most important to key stakeholders.
Baseline criteria for evaluating most vendors should address the supplier’s adherence to basic timeliness and quality standards, including whether deliveries are made on time or if the quality of goods is as expected.
For strategic vendors, companies might add certain considerations to a supplier scorecard for the evaluation process, including the following:
- Vendor communication and responsiveness,
- Cost savings opportunities,
- Ideas for improvement,
- Working capital terms,
- Incoterms,
- Upside flexibility in case of a surge in demand,
- Single-source suppliers,
- Upstream supplier management,
- Approach to remediation in case of quality issues, and
- Who bears the financial burden if problems arise.
Evaluate data sources. With scorecard metrics established, the team can begin to evaluate existing sources of data to be used for tracking. After establishing and defining a concrete metric such as acknowledgment date, for example, the team might determine how it will be tracked. Some supplier performance data will require manual effort to gather, but the data should be readily available.
Review scorecard with suppliers. Finally, once the scorecard has been fully developed, a best practice is to solicit feedback from suppliers. The goal is to have a healthy and collaborative relationship, and by involving suppliers in the scorecard development process, companies can verify that the criteria being tracked are sound, the tracking cadence is realistic, and that issues will be resolved.
An important consideration in scorecard development is supplier leverage. How companies engage with their suppliers depends on the vendor market. For a particular input, for example, does the company have one vendor to choose from or 10? In a competitive market for a supplied item, the purchasing company obviously has more leverage.
For a leverageable vendor, companies can be tougher in their supplier management approach, with more aggressive negotiation on pricing and other terms. Fewer vendor options limit the company’s leverage.
Still, even in a smaller market, companies need not view themselves as being at the mercy of a dominant supplier. Perhaps the end product can be engineered differently to reduce dependence on that one supplier or input. Perhaps the vendor could become an acquisition target, or companies could invest in the development of additional suppliers to help expand the market and create room for competitors. If these options aren’t available, it might be necessary to think creatively about how to improve collaboration with the supplier.
Supply chain challenges that arose during the COVID-19 pandemic highlighted the ripple effects on markets that can result from supplier disruptions and inefficiencies. They also reinforced the importance of building greater resiliency in supply chains.
Companies today have greater awareness about the need to talk to vendors — especially strategic ones — about their upstream suppliers, and to ask questions such as:
- Does the supplier have dual sourcing?
- If not, what plans are in place to move to dual sourcing, given the existing geopolitical risks?
- What are the supplier’s capabilities outside of its primary location?
Companies are more inclined to take a proactive approach in working with vendors to expand their operations outside of higher-risk regions. Whereas cost reduction used to be the dominant driver of supplier selection, many supply bases that were previously single-source have found they can justify a slightly higher landed cost per widget to have dual suppliers. Companies might also consider working with a supplier located in an area with less geopolitical risk.
In short, resiliency and versatility in the supply chain should be added to the list of required measures — like pricing, quality, and on-time delivery — that suppliers are scored on.
Vendor management can benefit all parties. Misalignment between suppliers and customers can threaten not only their relationship with one another, but also their mutual success. However, by working together collaboratively, all parties can succeed together.
Wil Knibloe III is managing principal, supply chain consulting, and Stephen Wiley is principal, consulting, with Crowe.