Purchasing
Measuring Supplier Performance
Written by Andrew Goldman for Gaebler Ventures
How well are suppliers perform has a tremendous impact on our own performance. Make sure you're measuring and tracking your supplier's performance.
It's easy to get wrapped up in the day to day activities that make up our business routine.
Small business owners tend to focus on financial and big picture issues. What often gets lost is the need to measure how our suppliers are performing.
Most successful businesses have metrics in place to measure certain variables. Unfortunately, supplier performance does not always make the list. Make sure you measure your supplier's performance so you understand what you're spending your money on.
Sometimes it's difficult to fully comprehend the impact our suppliers have on our performance. If our supplier delivers a product later than promised, our entire production line could be held up. This can result in astronomical costs and late deliveries to our customer.
A poor supplier can wind up turning a business from profitable to unprofitable. In addition, we can lose customers and future sales because of poor suppliers.
In addition to late deliveries, the quality of the supplier's parts can have an adverse effect on our final product. Poor materials can lead to defective final products, extra scrapped materials or additional labor to make the material work. These added costs can easily outweigh the benefit of a low-cost supplier. If a supplier is delivering less than the promised amount of material, we can be short products for final delivery.
These are all major issues that happen regularly in the small business environment. The problem is that many small companies do not have systems in place to track and identify these issues. As a result, the problems are not communicated to the proper departments and the supplier's poor performance is allowed to repeat itself.
By setting up a system that measures the performance of our suppliers, we can track their reliability and communicate these issues back to the supplier.
A supplier performance measurement system should include several items. First, the percentage of on-time deliveries should be tracked. You may have a target acceptable percentage or another bottom line that helps raise a red flag. In general, if your supplier promises a delivery date, they should be able to meet that date.
Second, you'll want to track the quality of the product. Usually, you should have a sample inspection upon receipt, but your production team should relay feedback if there are issues on the production line. The quality of your supplier's product is incredibly important. Once you've established your supplier delivers reliable, consistent quality, you can spend less time on incoming inspections.
Third, you'll want to measure your supplier's flexibility and responsiveness. Do you supplier's respond to your needs? Are they flexible when issues arise in your operation? This is often a forgotten metric, but it is critical to the success of the supplier-customer relationship.
Finally, you'll want to note any other issues that may crop up. Are the supplier's delivering the correct quantity of goods? Is their customer service department helpful? Are their prices in-line with competitors? These issues should all be addressed.
While we are measuring our suppliers, it is important to ask our suppliers how we are performing as a customer. The information may surprise us.
If we're not being good customers, it may impact the way we're treated by our suppliers. We should aim to fulfill our end of the bargain as well.
Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.
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