supplier assessment and performance measurement

Supplier Assessment and Performance Measurement

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OBJECTIVESParticipants attending the program will:• Benefit from hearing the practices and experiences of others.• Cover the many steps in a proper supplier evaluation.• Gain insights into supplier segmentation.• Develop performance weightings.• Learn how to use performance results for improvement.• Explore various rating systems.• Discuss methods of collection and reporting data.• Be presented with assessment forms.• Understand how to prepare scorecards.


Supplier Assessment and Performance Measurement

Supplier evaluation/Assesment is a term used in business and refers to the process of evaluating and approving potential suppliers by quantitative assessment. The purpose of supplier evaluation is to ensure a portfolio of best in class suppliers is available for use. Supplier evaluation is also a process applied to current suppliers in order to measure and monitor their performance for the purposes of reducing costs, mitigating risk and driving continuous improvement.


Process• Supplier evaluation is a continual process

within purchasing departments and forms part of the pre-qualification step within the purchasing process although in many organizations it includes the participation and input of other departments and stakeholders.

• Most experts or firms experienced in collecting supplier evaluation information prefer doing so using five-step processes for determining which to approve. Their processes often take the form of either a questionnaire or interview, sometimes even a site visit, and includes appraisals of various aspects of the supplier's business including capacity, financials, quality assurance, organizational structure and processes and performance.


Benefits and Drawbacks

There are various benefits associated with an effective supplier evaluation process such as mitigation against poor supplier performance or performance failures. The benefits typically include sourcing from suppliers that provide high standards of product and service levels whilst offering sufficient capacity and business stability. Supplier evaluation can help customers and suppliers identify and remove hidden cost drivers in the supply chain. The process of evaluating performance can motivate suppliers to improve their performance.


Associated challenges with supplier evaluation include resource and cost commitments in establishing and maintaining a robust and effective system, challenges with specifying and gathering meaningful and relevant information, data integrity, scorecards that do not get at the root causes of supplier problems, and subjective or inconsistent scoring which may result in inaccurate assessment.


ToolsSome of the challenges associated with supplier

evaluation may be mitigated by the use of appropriate tools. For simple projects a spreadsheet can be used. But as evaluations become more complex or more frequent data management and data integrity issues become significant. Web Electronic RFP / Tendering systems are often used for initial selection projects. Some products provide functionality for combining both initial selection and ongoing evaluation and benchmarking


Measure Performance


"We want to change the competitive landscape by being not just better than our competitors, but by taking quality to a whole new level.” – Jack Welch

Performance measures should aim at the long-term and should be forward-thinking initiative designed to fundamentally change the way corporations do business. It is not a post-mortem of what happened but a step towards how we do better in the future.


http://1000ventures.com/business_guide/crosscuttings/cs_leadership_welch.html

Why measure performance?Objectives for for-profit organizations:

– Measure changes to stakeholders wealth; put in simple terms, the value of a firm.– Reward an employee for contributing to increase in firm value

Issue: How would a firm measure an individual’s contribution to value creation and what purposedoes it serve?


The value concept(Results control)

• The performance measurement concept indicates that employees can increase the value of the firm by– Increasing the size of a firm’s future cash flows,– By accelerating the receipt of those cash flows, or– By making them more certain or less risky.

If you are a CEO or CFO, how would you increase the cash flows?


Measure the right things• An ideal performance management system is one

that energizes the people in an organization to focus effort on

• Improving things that really matter – • One that gives people the information and freedom

that they need to realize• Their potential within their own roles and that aligns

their contribution with the success of the enterprise.


Then, why do performance measures fail?

• Root cause: complexity - details, details, details• Staff who collect data get frustrated.• Follow: What has to be done" (WHTBD).


Measure What Matters• Easy to say but difficult to do.• Find out what is valued both by customers and

stakeholders• Examples: process: new product• development, measure: time to market.• process: customer service, measure: customer

retention.process: treasury management, measure: cost of service vs. value created.


Keep it simplePerformance Measures must be • simple to operate• simple to understand• simple to action Ex: If a sales person spends too much time on call reporting, they have less time for making calls.


Let us now examine how real world firms measure performance and we will, later, find out whether these measures conform to the concepts we just discussed.

Most organization measure performance using accounting measures – Net profits, gross margin, ROA, ROE, etc.


Why do organizations choose accounting data as measures of performance?

• Accounting profits and returns can be measured on a timely basis relatively precisely and objectively.

• Because they are timely, precise, and objective, employees would react positively.

• The short term measures keep employees on check.


Why accounting measures of performanceare not adequate?

• Accounting measures are lagged indicators.• Dependent on the choice of measurement

method.


Accounting can create management myopia

• Accounting is short term earnings or returns. • Why focusing on the short term is inappropriate?• Why would this short-term focus affect long-term

relationships?


Competitive Bidding Process


Definition - What does Competitive Bid Process mean?

A competitive bid process is mostly used in the procurement of goods and services. The process entails submitting a sealed envelope detailing the price and terms of an offer. The recipient of the offer then selects the competitive bidder that has delivered the lowest price or best terms. While not practiced regularly, a competitive bid process can be done with a company sale whereby the investment banker would skip the traditional M&A process, and immediately solicit letters of intent (LOI) be delivered confidentially from all potential buyers by a certain date.


Explains Competitive Bid Process

Companies undertaking a competitive bid process usually command valuation premiums over their peers. They typically operate in an industry where they have developed a significant competitive advantage and operate as a price leader. Buyers seldom like to get involved in a competitive bid process, unless the target company clearly provides post-transaction advantages that can be readily quantified and pose little risk to be realized.


Total Quality ManagementIntroductionTQM is the way of managing for the future, and is far wider in its application than just assuring product or service quality – it is a way of managing people and business processes to ensure complete customer satisfaction at every stage, internally and externally. TQM, combined with effective leadership, results in anorganization doing the right things right, first time.


The core of TQM is the customer-supplier interfaces, both externally and internally, and at each interface lie a number of processes. This core must be surrounded by commitment to quality, communication of the quality message, and recognition of the need to change the culture of the organization to create total quality. These are the foundations of TQM, and they are supported by the key management functions of people, processes and systems in the organization.


What is quality?A frequently used definition of quality is

“Delighting the customer by fully meeting their needs and expectations”.

These may include performance, appearance, availability, delivery, reliability, maintainability, cost effectiveness and price. It is, therefore, imperative that the organization knows what these needs and expectations are. In addition, having identified them, the organization must understand them, and measureits own ability to meet them.


Suppliers (internal and external)Who are my internal suppliers?• What are my true needs and expectations?• How do I communicate my needs and expectations to my suppliers?• Do my suppliers have the capability to measure and meet these needs and expectations?• How do I inform them of changes in my needs and expectations?As well as being fully aware of customers’ needs and expectations, each person must respect the needs and expectations of their suppliers. The ideal situation is an open partnership style relationship, where both parties share and benefit.


The building blocks of TQM: processes, people, management systems and performance

measurement

Everything we do is a Process, which is the transformation of a set of inputs, which can include action, methods and operations, into the desired outputs, which satisfy the customers’ needs and expectations.

In each area or function within an organization there will be many processes taking place, and each can be analyzed by an examination of the inputs and outputs to determine the action necessary to improve quality.


In every organization there are some very large processes, which are groups of smaller processes, called key or core business processes. These must be carried out well if an organization is to achieve its mission and objectives.

The section on Processes discusses processes and how to improve them, and Implementation covers how to priorities and select the right process for improvement.


Developing the Qualification Process

Qualification Process:Method by which entities, goods,

and materials are examined to ascertain if they meet the required specifications (qualifying criteria) to be identified as qualified.


INTRODUCTION

The primary purpose of the New Qualification Process (NQP) is to ensure that the organization is able to develop and gain approval for high quality qualifications. The process aims to ensure that new qualifications are developed and marketed effectively and efficiently making the best use of resources including staff time and therefore ensuring that the product will provide maximum benefit for learners and centers.


There are four stages in the process: • Scoping proposals for qualification development • Internal Approval • Qualification Development • Submission and post-accreditation activity.

Within each stage there are a number of key steps which are explained in this document. This document should be read in conjunction with the accompanying flow chart – Appendix 5.


The process aims to ensure that any decisions taken about the development of new qualifications are clear, transparent and based on accurate and reliable market research and business cases including conclusive evidence about the product and the potential market for it. Most new developments will also meet the specific priorities as set out in the Key Priorities Action Plan (KPAP).


The responsibility for developing the specific qualification submission for regulatory body approval, assessments and support materials, qualification guide, marketing information and any briefings for staff will be allocated as part of the process but ultimately responsibility lies with the Director of Business Development.


ABC Analysis


The ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. Policies based on ABC analysis:• A ITEMS: very tight control and accurate records.• B ITEMS: less tightly controlled and good records.• C ITEMS: simplest controls possible and minimal records.• The ABC analysis provides a mechanism for identifying items

that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.


The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.• 'A' items are very important for an organization. Because of

the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.

• 'B' items are important, but of course less important than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items.

• 'C' items are marginally important.


ABC Analysis CategoriesThere are no fixed threshold for each class, different proportion can be

applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items.Example of ABC class are• ‘A’ items – 20% of the items accounts for 70% of the annual consumption value of

the items.• ‘B’ items - 30% of the items accounts for 25% of the annual consumption value of

the items.• ‘C’ items - 50% of the items accounts for 5% of the annual consumption value of

the items.Another recommended breakdown of ABC classes:

– "A" approximately 10% of items or 66.6% of value– "B" approximately 20% of items or 23.3% of value– "C" approximately 70% of items or 10.1% of value


Example of the Application of Weighed Operation based on ABC class


Conducting Risk AssessmentRisk assessment is the determination

of quantitative or qualitative value of risk related to a concrete situation and a recognized threat (also called hazard). Quantitative risk assessment requires calculations of two components of risk (R):, the magnitude of the potential loss (L), and the probability (p) that the loss will occur. Acceptable risk is a risk that is understood and tolerated usually because the cost or difficulty of implementing an effective countermeasure for the associated vulnerability exceeds the expectation of loss.


Conducting Risk Assessment

Regardless of the size or scope of the issues to be assessed, or the length of time available, the process of assessing risk involves the same basic key steps:• identifying• categorizing/rating• managing and• reviewing risk.

Each of the key steps is outlined below with guidance on how you can address this within your own organization, linking to additional supporting tools where appropriate.


1. Identify the risk.Refer back to the definition of risk and ask yourself,

"Where is there uncertainty surrounding events or outcomes that could impact on our operational performance, ability to achieve our aims and objectives or our ability to meet the expectations of stakeholders?"Examples: • Do you face a risk of fire in your premises?• Are you at risk of losing key staff members?• Is there a risk of internal fraud or theft?• Is there a risk of serious damage to the organization's

reputation (e.g. child abuse allegations within a playgroup project)?

• Is there a risk that funding streams could be terminated?


2. Categories/rate the riskYou now need to work out which of these risks you really

need to worry about. You can do this by categorizing each risk according to:

– likelihood (ie whether or not it is reasonable to expect an event or outcome to happen);and

– impact (ie even if something did happen what would be the impact on the organization and its work?)

There are many different ways of categorizing risks - they can be given a numerical value (e.g. ranging from 1-5 according to seriousness in each category) or they can simply be rated as High, Medium or Low risks.


3. Managing the risksHaving identified and categorized the risks, you now need

to work out what you can do about the most significant of these risks. For each, you should consider four options:• a) Avoid the riskShould you avoid the risk altogether by not entering into the activity or providing the service? (e.g. youth group decides not to engage in water sports on its residentials)• b) Control the risk

Can you manage the activity so that the risk will be less likely to occur and less damaging if it does occur? This is the most common approach. Risks can be controlled through application of good practice, clear policies and procedures, staff training, clear record keeping, regular reporting etc.


• c) Finance the riskShould you simply accept that the risk is likely to occur and provide

resources to meet the liabilities when they happen?(e.g. an organization with a high number of female staff faces a risk of being unable to meet it's obligations with regard to maternity pay. They therefore set aside a fund annually for this purpose which they can dip into when necessary.)• d) Transfer the risk

Can you have a third party perform the risky activity or transfer the consequences of the risk to another person or organization? This can be through insurance, indemnity, exemption from liability or by contracting another organization to carry out the activity.(e.g. In the past, some Health Trusts cooked meals in hospital kitchens which were then delivered by volunteers. However due to the risks of food poisoning if meals are not served at the correct temperature, they now contract out this service, ensuring that a 3rd party is entirely responsible for the process.)


• 4. Review the levels of Risk

At the end of this process you need to go back and review how these risks should be categorized. Given the measures that you have put in place to eliminate or mitigate (reduce) these risks, do they still constitute major risks?


Example of reviewed risk:Risk: Organization working with disabled persons identifies risk of losing current premises.Category:• High likelihood (local council has provided for

minimum rent for 5 years, but current lease is up and council is under pressure to generate rental income).

• High impact (not aware of other premises with suitable access available locally, currently lacks resources to pay full rent).


Risk management:• Organization implements the following actions:• Enters into dialogue with Council to establish facts of situation• Researches and identifies alternative premises locally• Launches a fundraising appeal to raise money to enable them to

afford to pay for their accommodation, whether with the Council or elsewhere

• Raise the profile of their situation in the media to gain public support.

Reviewed risk category:• Medium likelihood (still a risk that they could lose the current

premises, but this has been reduced through mitigating actions).• Low impact (have now got alternative options which means that

the organization is cushioned from negative impact if the risk does occur).


What next?Risk assessment should become an integral part of

how you manage the organization, its resources and its activities. It is now the Management Committee's responsibility to confirm that they are happy with this assessment of the risks faced by the organization and are willing to accept the level of risk that remains.

The risk assessment should then feed into your overall and ongoing strategy for managing risk and should become an integral part of how you manage the organization, its resources and its activities.


ISO 9000 Quality Standards


ISO 9000 is a series of standards, developed and published by the International Organization for Standardization (ISO), that define, establish, and maintain an effective quality assurance system for manufacturing and service industries. The standards are available through national standards bodies. ISO 9000 deals with the fundamentals of quality management systems, including the eight management principles upon which the family of standards is based. ISO 9001 deals with the requirements that organizations wishing to meet the standard must fulfill.


Third-party certification bodies provide independent confirmation that organizations meet the requirements of ISO 9001. Over a million organizations worldwide are independently certified, making ISO 9001 one of the most widely used management tools in the world today. Despite widespread use, the ISO certification process has been criticized as being wasteful and not being useful for all organizations.


Reasons For UseThe global adoption of ISO 9001 may be attributable to a

number of factors. A number of major purchasers require their suppliers to hold ISO 9001 certification. In addition to several stakeholders' benefits, a number of studies have identified significant financial benefits for organizations certified to ISO 9001, with a 2011 survey from the British Assessment Bureau showing 44% of their certified clients had won new business. Corbett et al. showed that certified organizations achieved superior return on assets compared to otherwise similar organizations without certification. Heras et al. found similarly superior performance and demonstrated that this was statistically significant and not a function of organization size


The Supplier Evaluation Forms

Check the attachment


Supplier Performance


INTRODUCTION

• Good performance of suppliers is vital to the efficiency and success of the public procurement sector and contributes to the best value of money spent by any organization.

• Supplier performance is one of the supply chain performance measures that involve cost, quality, time and customer satisfaction. In order to assess supplier performance there should be a systematic way of measuring performance which establishes what to measure, methods and systems to collect information and use of measurement data.


Introduction Cont..

• Unfortunately many organizations in the public sector have not instituted formal procedures for measuring supplier performance as result no records to support their views on supplier performance.

• This paper has attempted to view best practices of measuring supplier performance and the practical experiences of the public sector on supplier performance basing on various reports, authors experience in public procurement and publications in Tanzania


Introduction Cont..

• The author has tried to limit the scope of discussion by focusing on suppliers for goods and service providers for non consultant services. Public sector in this context refers to Procuring entities in Tanzania


GENERAL ASPECTS OF SUPPLIER PERFORMANCE

• Once a supplier is selected the focus shifts from evaluation to the continuous measurement of supplier performance.

• To improve performance and manage costs, quality and delivery time an organization must be able not only to select the right supplier, but also to monitor and manage performance of supplier over time.

• Measuring supplier performance is among the ways of measuring supply chain performance.

• Some measures asses supply base, others assess the purchasing department, while still others may be used to monitor the interfaces between purchasing and other internal functions.


• The most effective performance systems will asses performance across the entire length of the firms supply chain, from suppliers through internal process to customers.

• Major categories of Supply chain performance measurement are illustrated in the figure bellow:-


Figure 1: Categories of performance measurement

SUPPLY CHAIN PERFORMANCE

MEASURES

COST QUALITY TIME SUPPLIER PERFORMANC

E

CUSTOMER SATISFACTIO

N


• The most important factors used to measure supplier performance are quality, delivery and price. Other factors include quality management, partnering, Customer services, vendor co-operation and problem resolution ability.

• Some of these factors are quantitative and some qualitative.


• Measuring supplier performance is an important tool that is very useful to improve supplier performance, improve supplier communication, and recognize exceptional performance and identify suppliers with developmental needs.


Supplier performance measurement• Supplier Performance Measurement is the process of

measuring, analyzing and managing supplier performance for the purpose of reducing costs, mitigating risks and driving continuous improvements in value and operations.

• A supplier in this context refers to a party that supplies goods or services, and may be distinguished from a contractor or sub-contractor/manufacturer who commonly adds specialized input to deliverables also called vender.


• Supplier performance measurement includes the methods and systems to collect and provide information to measure, rate, or rank supplier performance on a continuous basis. Measurement of supplier performance should be done on each delivery and routine reporting of supplier performance usually occurs monthly or quarterly

• Buyers are advised to meet with suppliers at least once per annum to review performance results. However a buyer should never delay reporting a supplier’s poor performance, particularly when it affects day-to-day operations.


• What to measure? • The most important factors that should be used to

measure supplier performance fall into two main categories namely Quantitative (objective) and Qualitative (subjective). Most of the objective, quantitative variables lie within the following three parameters:-

Delivery Performance• Orders or material request sent to a supplier have a

quantity and material due date commitment. • Quantity, Lead-time requirements and due date

compliance help define a suppliers delivery performance.


• Measuring supplier on time delivery can take different ways and some of the important factors to consider are:-

Should all orders be measured?Should on time delivery be based on shipment date

or receipt date?What window should be used, (Allowable time of

tolerance -days or Hours?)What calculation method should be used?


Quality Performance• Quality Performance is critical component to any supplier

measurement system.• There are a number of ways to measure supplier’s quality

performance;• some of those are number of deviation (substitutes,

similarity) request, accuracy of paperwork, field campaigns and suppliers cost of quality inspection data and warranty data are used for measuring supplier performance.

• The inspection measures are based on the number of rejects versus lines/Quantity inspected. e.g If 100 items are inspected and 4 are rejected the reject rate is 4%


Supplier cost reduction/supplier value performance

• Buyers often rely on suppliers for cost – reduction assistance.

• A buyer looks at a total acquisition cost not just price. Total acquisition cost considers all costs, freight, handling, quality and administrative.

• cost reductions such as cycle time reduction, inventory reduction, Electronic data interchange (EDI) transactions are to be considered.


• One common method is to track a suppliers real cost after adjustment for inflation.

• Another way is to compare a suppliers cost against other suppliers within the same industry.

• Buyers can also use a number of qualitative factors to assess supplier performance.


• Possible Qualitative service factors include the following:-

Factor Description

Problem resolution ability Supplier attentiveness to problem solution

Technical ability Suppliers manufacturing ability compared with other industry supplier

On going progress reporting Suppliers on going report of existing problems or recognizing and communicating a potential problem

Correction action response Suppliers solutions and timely response to request for corrective actions including suppliers response to engineering change request

Suppliers cost reduction ideas Suppliers willingness to help a buyer find ways to reduce purchase cost

Supplier new product support

Supplier ability to help a buying firm reduce new product development cycle time or to help with product design.

Buyer /seller compatibility Subjective rating concerning how well a buying firm and supplier work together.

Type of Supplier Measurement Techniques• Organizations may use one of three supplier

measurement techniques or systems.• These systems differ in their ease of use, level of

decision subjectivity required resources to use the system and implementation costs.

• These three systems are categorical system, weighted point system and cost based system.


Categorical system• This system requires the assignment of rating to each

selected performance category.• Examples of possible ratings include excellent, good,

fair or poor. Internal users often provide input when determining the rating.

• Receiving personnel may provide input about suppliers’ delivery performance while quality personnel provide input about quality performance.


Weighted Point system• A weighted-Point system weighs and quantifies scores

across different performance categories.• This approach to supplier measurement usually

features higher reliability and moderate implementation costs.

Cost-based system• This approach qualifies the total cost of doing

business with a supplier.• The lowest purchase price is not always the lowest

total cost for an item or service.


• Other non performance cost elements include late deliveries, returns to supplier, scrap labour costs, rework costs etc.


Measurement of Service Providers Performance• Service delivery is distinguished from supplies delivery

and the approach of control and performance measurement is quite different.

• The scope of service industry is broad and diversified. The author focuses on non- consultant services such as cleaning, security, catering, security etc, which are common to public bodies.

• Services of that nature are characterized by:-SimultaneityPerishabilityHeterogenity and Intangibility


• Simultaneity- production and consumption of many services are simultaneous.

• For example;catering services;serving meals is accompanied with the manner in which it is served,language used etc.

• Most services,therefore can not be counted,measured,inspected,tested or verified.

• Perishability-If service cannot be stored they are perishable.

• This perisharibility removes the aspect of future verification/testing (eg.cleaning)


• Heterogeneity-Many services have high labor content.

• Consequently the standard of service may vary, the service outputs are heterogeneous.

• This places particular pressure on the measurement and control systems to try to ensure consistent quality from the same employee from day to day and to get comparability of performance between employees (service providers)

• Intangibility-Most service outputs unlike supplies are intangible and some mix of tangible goods and intangible services.


• Identifying what to measure from the mix of tangible goods and intangible services makes the process of measuring performance difficult.

• Despite the complexity of measuring performance of services providers as compared to suppliers the common approach of measuring services providers of that nature is by setting Service Level Agreement/ Standards under which actual performance should be benchmarked.


LEGAL ASPECTS ON SUPPLIERS’ PERFORMANCE• The Public Procurement (Goods, works, Non-

Consultant Services and Disposal of Public Assets by Tender) Regulations, 2005, requires the Accounting officer to appoint a goods inspection and acceptance committee whose duties shall be to ascertain that delivered goods are of required quality and quantity as stipulated in the contract document.

• The condition of contract, however, explains in detail how the inspection shall be conducted and it provides for rejection of the supplied goods in case they fall short of the requirements.


• The conditions of contract further captures important information with regard to timely and safe delivery of goods failure of which shall attract liquidated damages from the supplier or forfeiture of performance bond, timely payment by the PEs and resolution of disputes.

• It also provides for warranty on the delivered goods.


PUBLIC SECTOR EXPERIENCE ON SUPPLIERS’ PERFORMANCE

• Public sector is part of the National economy concerned with providing basic government services.

• In this context the public sector comprises of Procuring entities which are MDAs,LGAs, parastatal organizations, anybody corporate or statutory body or authority established for the purpose of the Government, and according to PPRA records the number of registered PEs is about 380.


• On the other hand supplier has been defined by the PPA No.21 of 2004 as a company, corporation, organization, partnership or individual person supplying goods or services, hiring equipment or providing transport services and who is according to the contract a potential party to a procurement contract with the procuring entity.

• A supplier in this context refers to a part that supplies goods and services and may be distinguished from a contractor or subcontractor /manufacturer who commonly adds specialized inputs to deliverables also called vendor.


Supplier performance follow-up• One important aspect of supplier performance is to

comply with terms and conditions as stipulated in the contract.

• Follow up on the state of what has been bought has been delivered, to ensure that the procuring entity is satisfied.

• The extent of the follow-up may vary depending on the contract value or the commodity involved.

• Responsible procuring entity staff should establish any expected delivery follow-up requirements at the time the contract is being set up.


• In many cases problems arise during implementation because mitigating measures were not taken into account during the preparation of the bidding documents and contract.

• It is normally required to deal with report of unsatisfactory delivery immediately.

• Decision must be made on a supplier who has not delivered goods of the expected quality or who has not delivered on time on whether it should be considered as in contract default and what steps should be taken.


• Supplier performance follow-up is also responsible for dealing with suppliers whose goods, during the warranty period, become defective or fail to meet contract requirements as a result of faulty manufacture, material or workmanship.

• The scope of the public sector is large and diversified, thus becoming difficult to assess all performance factors. The most common factors used to assess supplier performance are:-

Quality performance• Experience from the public sector has shown the

following on quality performance;


Lack of knowledge on technical specifications • Although renderers agree to comply with technical

specifications at a tendering stage and signing the contract, upon Supply of technical goods such as IT equipment and other accessories of sophisticated nature most of deliveries do not conform to the specifications, as result the whole consignment or part of it is rejected causing unnecessary delays and add costs to the operations of the organization.


Poor Performance of the service providers • Most of the service providers have no capacity to

provide services as per contracts, for instance collection of solid wastes (SW) in cities and Municipality is critical problem as a result the amount of solid wastes in big cities and municipalities threatens the public health.

• This was revealed in the report of the Controller and auditor general for the year ending 30th, June 2009 on big cities and Municipal councils of Tanzania.


• The performance Audit revealed that most of the community based organizations (CBOs) which are procured abandon their work after a short time or for those who keep on working are under performing.

• Most of them, small or newly established companies have limited financial resources or they consist of small groups of people with no or little experience in the field.


Delivery performanceGoods Procured and paid for but not delivered• The law provides that where receipts of goods is

delayed or seems likely to be delayed beyond the time for delivery stated in the contract, the procuring entity shall seek reports and explanations from the suppliers or their agents and may institute liquidated damages/changes as may be provided (PRR, 122 (2) Goods, non-consultant services and disposal of public assets by tender).

• It is revealed in practice that some suppliers have been paid but no delivery has been made.


Supplier cost reduction performance• Most of suppliers for routine items are SMEs whose

capital base is small to run the business. Lack of initial capital for procurement usually compels suppliers to request advance payment to facilitate procurement of supplies, make partial deliveries or fail to deliver

Other factors affecting supplier performanceLimitation on product information• Many SMEs have limited access to information as

regard to new products and supply market trends as such no update information or advice can be provided


Language Barrier• English language used in tendering process and other

procurement transactions hinder common understanding on some important issues during contract implementation.

• A critical scenario is when the goods are supplied from countries whose languages are not common e.g Chinese, Japanese etc. This poses a challenge in communication between the two parties


CONCLUSION• Public sector views on supplier performance are not

supported by statistics, the author is of opinion that supplier performance should be measured systematically and use records for improvement

• Since SMEs form big part of the public sector supplier base, It is therefore important to develop capacity building strategy to improve their performance.

• The experiences on supplier performance highlighted may not be exhaustive .It is however the expectation of the author that delegates of this conference may have more to share from their own experience.


Collecting, Rating and Reporting Supplier Performance


Collecting the Data

Depends on the services of the company.Need some information about the company.


Rating Methods - Basic Points• Add linkContractor SupplierPerformanceEvaluationReport.pdf


Establishing Performance Based Service Contracts


PERFORMANCE BASED CONTRACTING

PBC – First, a procurement METHOD… then a resulting TYPE of contract

How is it a procurement METHOD?• All aspects of the procurement are geared toward the

PURPOSE of the contract, not the HOW the contract will be performed.– Encourages supplier to bring new approaches at a reasonable

price by giving suppliers latitude in determining HOW to achieve contract purpose and providing incentives for suppliers to achieve purpose cheaper, faster.

– PBC looks to the supplier to best organize resources to achieve contract purpose.

– Not described as a procurement method in the VPPA.– Requires clear, specific, objective contract requirements and

measurable outcomes.


PBC? What is it? Why? • DEFINITION: Method of contracting where Customer defines the results it is seeking,

rather than the process by which those results are attained. Also included are the standards against which contractor performance will be measured, and positive and/or negative incentives.

• BENEFITS:– ® Better prices and performance;– ® The customer is released from having to develop detailed specifications and

define the process;– ® The contractor has more flexibility on how to achieve the desired results;– ® Less day-to-day surveillance is required; and– ® Contractors are motivated to be innovative and to save money (we must

evaluate cost vs. benefit!).• What’s So New About This? NOTHING, in the commercial world. They long ago

realized they do not have the expertise to tell their suppliers how to do the work.). • The burden is on the contractor to accomplish the required results. He measures his

own performance by developing and implementing a Quality Assurance (QA) plan, plus the customer measures his performance against standards established in the contract.


PERFORMANCE BASED CONTRACTING Key attributes of PBC:

– Outcome oriented– Clearly defined objectives– Clearly defined timeframes– Performance incentives– Performance monitoring

PBC Objectives:– Maximize performance – supplier delivers based on best practices and

customer’s desired outcome.– Maximize competition and innovation – encourage innovation using performance

requirements.– Minimize burdensome reporting and reduce use of contract provisions that tie

supplier’s hands.– Shift risk to suppliers so they are responsible for achieving contract objectives

through their own best practices and processes.– Achieve cost savings through performance requirements.


PERFORMANCE BASED CONTRACTING • Elements of a PBC

– SOW or other document describing requirements and customer expectations in terms of measurable outcomes rather than by means of prescriptive methods.

– Measurable Performance Standards – written definition of what is considered acceptable performance to determine whether contract outcomes are met.

– Quality Control Plan (QCP) – written document describing how supplier’s performance will be monitored and measured against contractually established performance standards.

– Incentives – • Written procedures addressing how met and unmet contractual

performance standards will be resolved, escalated, remediated and/or remunerated.

• Incentives may be linked to price or fee adjustments.• Incentives can be used, where appropriate, to encourage

performance that will exceed the established performance standards.


• In a PBC, the contract MUST include:• Everything buying or covered by the contract;• Volume assumptions for services (particularly if there are large variable

costs involved.)• Reliability, availability and performance (RAP) requirements, methods of

dealing with operational issues (escalation, help desk, hot line and severity levels) and conditions of use or change of use conditions/restrictions.

• Dates/deadlines where specific deliverables are due at initial switch on, ramp up, ramp down or upgrade of service; e.g. year end, implementation dates, legislation changes.

• Method of delivery (paper/fax/hand, means/source or object code.)• Time after which deliverables must be consumed or tested and still

supported (obsolescence limits).• Documentation/manual and standards.• Definition of what is considered a service failure and what is considered an

“enhancement” to the service.


PERFORMANCE BASED CONTRACTING

Critical Success Factors in designing a PBC:• Define agency baseline and what level of performance is expected.• Include provisions for flexibility and incentives• Craft a performance based contract or SOW that:

– Includes mechanisms for measurement, reporting, monitoring and supplier feedback

– Defines a system for revisions and reconciling deviations in expected performance

– Considers a transition period – use “hold harmless” clause during period.– Monitors performance with regular reporting requirements– Can be adjusted when needed.

• Identify factors that might impact performance• Devise corrective action plan for performance deviations• Benchmark and compare.• Revise performance targets to continue to achieve progress.• Provide comparative performance data for suppliers – create a “race to the

top” culture.• Communicate and reward success.


PERFORMANCE BASED CONTRACTING Make SMART Performance Measures/Incentives Part of the

Contract:• Specific• Measurable• Accountable• Results oriented• Time-bound

Before Contract: - AQL Customer must determine acceptable quality level (AQL) so that the

supplier can be measured and evaluated against this pre-established level during the contract.

AQL establishes minimum allowable variation or error rate from the standard. AQL must be reasonable and determinable.*During negotiations, customer may allow supplier opportunity to propose

different target levels of standards of service along with the appropriate price adjustment.


PERFORMANCE BASED CONTRACTING PBC Performance Measures Should Measure What’s

Important:

• TCO – Total Cost of Ownership• Quality of Goods/Services• Proposed technical performance• Financial stability• Cost of Training• Qualifications of Individuals employed/utilized by supplier• Risk Assessment• Availability and cost of technical support• Cost/Price


Performance Incentives• Cost-based - Relate profit/fee to results achieved by the

supplier in relation to identified cost-based targets. • Award fee - Allows suppliers to earn a portion (if not all) of an

award fee pool established at start of an evaluation period.

• Share-in-savings - Supplier pays for developing an end item and is compensated from the savings it generates. Established baseline of costs is extremely important.

• Share-in-revenue - Generates additional revenue enhancements; compensation based on sharing formula.

• Balanced scorecard -Used when performance is less tangible, i.e., quality of lead personnel or communication and resolution of issues.

• Non-performance Incentives - Specified procedures for reductions in payment when services are not performed or do not meet contract requirements.


Payment Strategies

A payment strategy is not limited to incentive or award fees, but may include payments tied to performance and acceptance. For instance, a payment incentive schedule may include 100% payment for on-time deliveries that are validated to exceed or conform to performance requirements; while delinquent deliveries or those with diminished performance may have payment reductions based on calculated increments or percentages tied to % of service levels not being met.


Non-$ IncentivesNon-Monetary• Revised schedule• Reduced oversight• Positive performance evaluation• Automatic extension of contract term or option exercise • More frequent payments• Lengthened contract term (award term contracting) or purchase of extra

items (award purchase)• Publish article(s) in agency newsletter or speak at agency seminars• Letters of appreciation to individual employees may translate to bonuses• Use trade space for licensing, access to agency officials, etc.


PBCs and SLAs Service level agreements (SLAs) are contracts which specify in measurable

terms the services to be provided, the standards to be attained in the execution of those services and the consequences that occur in the event the standards are not met.

SLAs often include: • Percent of time services should be available • Number of users to be supported • Performance benchmarks • Schedule for advanced notification of system changes, upgrades, downtime • Response time • Usage statistics


Service Level AgreementsIn developing and negotiating a successful SLA, the following should be considered

and included: • Definition of the agency’s business goals, requirements and scope of services

being procured. • A detailed service description, duration of services, installation timetable,

payment terms, ts and cs and legal issues (i.e. warranties, indemnities and limitations of liability.)

• A repeatable process, with solid and accurate metrics’ capture and analysis, to measure the supplier’s progress and monitor performance.

• A documented reporting process that includes type, amount, format and a schedule of information to be reported by the service provider and procedures for how customer will oversee the agreement and ensure performance measures are met.

• Agreed upon procedures for non-performance in case of unforeseen circumstances.

• Detailed service expectations, performance levels, positive and negative incentive structure, escalation procedures and legal ramifications; i.e., breach and default.

• An executed contract that binds the agency and the service provider; the SLA will be a part of the contract.


EXAMPLE – PBC- Software Development

Desired Outcomes Required Service Performance Standard Monitoring Method Incentives/Disincentives for meeting/not meeting Performance Standards

What do we want to accomplish with this contract?

What task must be accomplished to give desired result?

What should the standards for completeness, reliability, accuracy, timelines, quality and/or cost be?

How will we determine that success has been achieved?

What carrot/stick will best reward good performance or punish poor performance?

Enterprise Architecture standards will be met, along with functional requirements.

All functional requirements shall be met; software delivered shall comply with enterprise architecture standards including security

All architectural requirements shall be met. Functional requirements shall be prioritized to allow for not more than 1% deviation for each requirement.

Review test results/analyses to ensure required functionality provided. Obtain and analyze user feedback.

Full payment for 100% compliance. Payment less than 100% may be made for less than full compliance if less than full functionality is accepted.

User guides and documentation are accurate, complete

Documentation shall meet agency requirements for accuracy, completeness and ease of use

95% of documentation provided meets the stated standards.

Review documentation with IV&V to ensure functions and operations properly documented.

For each % > 95, supplier shall receive an extension of the software support agreement for an additional 3 month period.


Example – cont’d

Desired Outcomes Required Service Performance Standard Monitoring Method Incentives/Disincentives for meeting/not meeting Performance Standards

Interfaces with all system components and full functional to user.

Software full compatible with existing LAN and software suite.

100% compliance required for customer satisfaction, performance and utility.

Review system admin. Logs, noting service interruptions, conduct IV&V, tests using commercial performance tests.

Full payment made for 100% compliance. Additional fees may be awarded if supplier successfully reengineers interfaces and improves baseline performance.

Software can perform requisite functions, delivered in accordance with the stated schedule, including shorter-term milestones.

Delivery dates in contract are met or exceeded.

Stated delivery date shall be met unless new completion date agreed to.

100% inspection For each week ahead of schedule the documentation is delivered, contractor shall receive additional fee of .5%. No additional fee paid for non-conforming deliverables.

All users shall receive training appropriate for their intended use of the new software.

Data in existing files shall be transferred to the new system with minimal loss of productivity and data.

95% of data transferred to new system suffers no conversion errors and is usable when new systems are made available.

Review user complaints, trouble tracking, noting errors due to data conversion, improper software function, programming problems.

+/- .5% of total monthly price for each variance of +/- .5% variance from standard.


• Practical Example about the company same as• EXAMPLE – PBC- Software Development


Supplier Performance“How to Measure It, Communicate

It and Improve it”


“Great Suppliers are managed not found.”

- Debra Powell-Schaeffer 1996


Meet DanDan is a Sr. Buyer. Recently his department, ACME, experienced a change in management. A new Director has come on board and one of her first questions was related to Supplier Performance. In a nutshell, she wanted to know what ACME was doing to measure it, communicate it and improve it. Some recent high profile, missed deliveries have only added fuel to an already hot fire.

Dan’s Boss assigns him the task of creating an effective Supplier Performance Plan.

Dan decides that the first thing to do is to create a Supplier Scorecard. After all he

thinks to himself…I can’t fix a problem until I know how bad it is…

What would be the primary metrics that Dan should report on his Supplier Scorecard?


Creating a Supplier ScorecardHere are the Key Metrics which Dan used:• I. Quality Performance (35% of total score)

• Supplier Quality on a PPM Basis

• Certified Ship to Stock % (of all parts supplied by Supplier)

• II. Delivery (25% of total score)

• On Time Delivery Performance per Measurement Period

• III. Pricing (10% of total score)

• IV. Cost Reductions (10% of total score)

• V. Service (20% of total score)

• Communication

• Capabilities

• Reliability (honors commitments)

• Inside Sales Support

• Outside Sales Support

• Engineering Support

• Quality Support

• VI. Continuous Improvement (additional points possible)

• Certifications

• Measurable Improvement over previous Scorecard

• Participation in Six Sigma or LEAN Events


Dan’s Scorecard

Dan creates his scorecard and begins reviewing

supplier performance data to fill out his first scorecard.

SUPPLIER NAME

I. Quality Score for Quarter <80 81-85 86-90 91-95 95-98 1000 1 2 3 4 5

Current ScoreTotal Points for Quality 0 0 0 0 0 0 0

II. Delivery Score for Quarter <80 81-85 86-90 91-95 95-98 1000 1 2 3 4 5


III. & IV. Price Support Score for Quarter0 1 2 3 4 5


V. Service Score for Quarter0 1 2 3 4 5


0

ACME PURCHASING REPRESENTATIVE 0DATE Current QTR SCORE

CURRENT QTR. NOTES

Supplier's Price Support in relation to Industry and Competitors (0 = Very Poor, 5 = Best in Class)

Supplier's Service Support in relation to Industry and Competitors (0 = Very Poor, 5 = Best in Class)

VI. Extra CreditSupplier's may receive 1, 2, 3, 4, or 5 Extra Points for Certif ications,

Outstanding Performance in the Quarter, Improvement Over Previous Quarter, Etc. at Purchasing's Discretion.

ACME Office Supplies Division711 N. Elm

St. Louis, MO 63119


Dan’s First Scorecard

Dan first scorecard goes out to Abby Works.

Abby Works is a long-time supplier with some recent quality issues that affected

their quality score this quarter.

A final score of 73 is not very good…

SUPPLIER NAME

ABBY Works 2011 2nd QTR

I. Quality Score for Quarter <80 81-85 86-90 91-95 95-98 1000 1 2 3 4 5

Current Score 3Total Points for Quality 0 0 0 21 0 0 21

II. Delivery Score for Quarter <80 81-85 86-90 91-95 95-98 1000 1 2 3 4 5


III. & IV. Price Support Score for Quarter0 1 2 3 4 5


V. Service Score for Quarter0 1 2 3 4 5


0

ACME PURCHASING REPRESENTATIVE 73

Janice HallJuly 5th,

2011

VI. Extra CreditSupplier's may receive 1, 2, 3, 4, or 5 Extra Points for Certif ications,

Outstanding Performance in the Quarter, Improvement Over Previous Quarter, Etc. at Purchasing's Discretion.

CURRENT QTR. NOTES

Qualit rejects on leaf springs up 25% this quarter.

Supplier's Price Support in relation to Industry and Competitors (0 = Very Poor, 5 = Best in Class)

Supplier's Service Support in relation to Industry and Competitors (0 = Very Poor, 5 = Best in Class)

DATE Current QTR SCORE

ACME Office Supplies Division711 N. Elm

St. Louis, MO 63119


What’s Next

After reviewing scorecards, with his boss, Dan realized that ACME really has some significant supplier performance issues. In fact, almost none of ACME’s top suppliers scored above an 85. ON-Time Delivery and Quality

Scores were simply not high enough for the majority of their suppliers.

Clearly ACME’s expectations for performance were not being adequately communicated…

What should Dan do?


Communicating Supplier Performance

Dan decides to call one of his ISM colleagues to see what he should do to effectively communicate Supplier Performance.

His friend recommends that Dan that establish a routine schedule for providing scorecards to the participating Suppliers and following that up with quarterly face to face reviews.


Dan’s PlanDan decides that he needs to establish a routine Supplier Performance Process in order to ensure that his Suppliers are actively engaged in meeting ACME’s expectations for Supplier Performance.

ACME Supplier Performance Process• Purchasing will provide Supplier On-Time Delivery Data at the end

of each month.• Quality will provide PPM data at the end of each month.• This data would be summed each quarter and provided to the

respective suppliers in a Quarterly Scorecard, which Purchasing will submit.

• Individual Buyers will also be responsible for managing the subjective elements of the scorecard for their specific Suppliers.

• Any Supplier with a score below 85 would be required to attend a face to face meeting at ACME to create an improvement plan to improve the scores in whichever area was deficient. And this improvement or lack thereof would be documented in the Supplier’s next Quarterly Scorecard.

What else might Dan consider?


Improving Performance

What actions should Dan consider?

At this point, Dan has effectively measured and communicated ACME’s critical Supplier Performance Metrics…but a quick check of his email shows some critical missed deliveries and ongoing quality problems.

Simply documenting and communicating requirements was not necessarily go to ensure compliance…frustrated Dan wondered what tools or actions he could take that would ensure Supplier’s were meeting the required performance metrics.


Some Tools for Success…• Dan decided that he needed some key tools to utilize in order to foster continued

Supplier Performance Improvement.– 1. Working together with ACME’s other departments, Dan creates a Supplier

Partnership Manual which clearly documents all the required performance activities and metrics for servicing ACME.

– 2. Dan creates a Supplier Continuous Improvement Progress (CIMP) form, which is provided quarterly to suppliers in addition to their Scorecard. This CIMP records all deficient performance metrics and documents on a quarterly basis the Supplier’s actions to improve, correct or eliminate the root cause of their deficiencies. It is a living document that is referred to throughout the year and at all face to face meetings to ensure Supplier Performance Improvement.

– 3. Value Analysis Study – Dan decides to conduct and utilize Value Analysis Studies of key components purchased from his key Suppliers to determine areas for cost, quality and performance improvements with ideas generated by these same Suppliers.


Supplier Partnership ManualACME’s Supplier Partnership Manual contains the following:• Quality Requirements

• Delivery Performance Requirements

• An Explanation and Example of the Supplier Scorecard Process

• Cost Reduction Expectations

• Process Improvement Expectations

• Communication Requirements

• Accounting Requirements

• Credit Application Information

• Billing and Shipping Addresses for all Locations

• Key Contact Information for all Locations

• Shipping and Packaging Requirements

• Transportation Routing Instructions/Bulletins

• Intellectual Property Protection/Non-Disclosure Agreement Requirements


Supplier Continuous Improvement Progress (CIMP) page 1


Supplier Continuous Improvement Progress (CIMP) page 2


Value Analysis Study

Part# and Description: Buyer:

Current Manufacturer: Date Submitted: Manufacturer Part#:Estimated Annual Usage:Class Code:Buyer Code:

QUESTIONS YES NO RECOMMENDATIONS

Could Costs be reduced by relaxing Tolerances?Could Costs be reduced by relaxing Finishes?Could Costs be reduced by relaxing Testing?

Could Costs be reduced by material changes?Could Costs be reduced by volumes purchased?Could Costs be reduced by different mfg. Processes?

Can the part be simplified?Is there a similar part in form, fit, and function that is more cost effective?

Are any of the current specifications creating additional cost burden?Other Suggestions?

Supplier: Date:Address:Signature: Title:

SUPPLIER CHECKLIST FOR VALUE ANALYSIS STUDY


What did Dan learn?

Over the course of the next year, Dan was able to accurately measure Supplier Performance and communicate it to his respective Suppliers. Managing improved performance proved to be more difficult, but he discovered that maintaining a continuous improvement process with each Supplier generated huge benefits in terms of improved Supplier Performance, much to the satisfaction of Dan’s Boss and to Dan’s relief…


Benefits from Measuring and Analyzing Supplier Performance


• Supplier Performance Management is the process of measuring, analyzing, and managing supplier performance for the purposes of reducing costs, mitigating risk, and driving continuous improvements in value and operations.

• Many companies that have implemented supplier performance management programs have been able to significantly improve the efficiency and effectiveness of their supply chain. Key benefits these companies have realized include:


• Identify and address weak links, as well as reward strong performers in the supply chain using the Key Performance Indicators (KPIs) to help ensure a well functioning and competitive supply chain.

• Reduce supply risk by gaining visibility into metrics that serve as an early warning system for potential supply interruption, quality issues, or price fluctuations.


• Develop a scorecard on how well a supplier is doing against its contract terms and, as a result, get a mechanism to implement contract compliance.

• Increase organization-wide alignment on key operational objectives, because, in the process by setting KPS for measuring a supplier they are able to identify the business objective that is most important when evaluating that supplier among such things as:


• a) reducing component costs, b) improving component quality, c) increasing component delivery flexibility, d) accelerating volume ramp-ups, etc.

• Build a strong foundation for implementing continuous improvement programs to identify future cost savings, improve quality, increase flexibility, improve delivery metrics, etc.


• For example, our customers use KPI’s to benchmark a supplier against its peers to compare their cost, on-time delivery, quality, support and responsiveness to issues, and then use the information to set future process improvement goals for the supplier.

• Gain a mechanism to evaluate the capabilities of a supplier, which can serve as an input into future sourcing decisions.


• For example, if a company is looking to expand their supply base in anticipation of higher demand, they can use this information to select a supplier that has the best record for both delivery flexibility, as well as an ability to scale rapidly.


Framework for successful supplier performance management initiative

Step 1: Identify metrics, thresholds and targets:

• The first step is to capture key performance metrics in the supplier’s contracts. This validates key terms and measures to help ensure contract compliance are visible.


• Secondly, gather input from key relationship managers to understand their supplier performance objectives and use the information to establish metrics and validate that they are aligned with overall strategy.

• These metrics and targets should be shared with suppliers and mutually agreed to, so both the company and suppliers can create the right performance management program.


• Step 2: Collect data through various mechanisms:

• On a consistent and frequent basis, the company should collect information to calculate current values on an agreed upon set of metrics, thresholds and targets. Various methods that can be used to gather this data include supplier assessment surveys, information from Enterprise Resource Planning (ERP) systems, homegrown operational systems, instant supplier feedback, etc.


• Step 3: View and analyze aggregated information:

• Once data is collected, it should be aggregated to report on performance versus plan. While spreadsheets and other tools can be used for analysis, supplier performance management systems significantly improve the ability to analyze the information. For example KPI’s allow companies to monitor the progress of their suppliers helping ensure they get early warnings if suppliers are under-performing.


• KPI scores can be compared with contract terms to help ensure contract compliance. Scorecards further aggregate this information and provide companies the ability to view supplier performance at a moment in time or monitor trends over a certain period. They allow the purchasing organization to compare the performance of a supplier to those of their peers.


• Alerts let companies know when their suppliers are operating outside pre-established tolerances. Color-coded status buttons quickly flag potential areas for the company to focus on.


• Step 4: Identify gaps, prioritize and communicate:

• Scorecards, trend reports and alerts help identify gaps between target and actual performance for virtually every supplier. The purchasing organization should use this information to review the impact of performance gaps on their business in order to prioritize them and then communicate the priorities of the gaps that need to be addressed with the supplier and ask for a remediation plan.


• The use of collaborative supplier portals that provides this information to suppliers, along with the ability to set priorities helps ensure that nothing falls between the cracks and both parties are on the same page with respect to what is working well and what needs improvement.


• Step 5: Implement continuous tracking: • Supplier performance management is not a one

time process. Performance should be tracked on an ongoing basis - both to help ensure that previously identified gaps were remediated and also to keep the focus on continuous benchmarking and improvement.


• A supplier performance management initiative needs to be sustainable since it provides a core foundation for measuring, analyzing and improving supplier performance. Hence it must be implemented using a technology platform, so it is repeatable and consistent, scalable to support growth, and transportable to other geographic regions in which the company operates.


• History teaches us that an organization will generally only enjoy limited benefits from such an initiative if it is implemented using spreadsheets and manual methods and not using enabling technology.


• A supplier performance management initiative provides a critical foundation for improving operational performance, reducing supplier risk, reducing component costs and improving supply chain efficiency. It is not about completing a one-time review with suppliers. To be successful, it must be sustained on an ongoing basis using enabling technology – and ideally implemented globally. With these elements in place, a company’s supplier performance management initiative can significantly improve operational performance and competitive advantage.


• Many Companies are seeking to establish excellent, long-term working relationships with suppliers

• through mutual performance expectations and measures, performance feedback, and

• performance improvement plans to ensure continuous progress. Agilent uses TQRDCE supplier

• expectations and performance feedback, where T, Q, R, D, C and E represent Technology,


• Quality, Responsiveness, Delivery, Cost, and Environmental and Social Responsibilities.

• Supplier performance expectations are applicable to supplier relationships throughout the

• worldwide supply chain.• The success of this program is shared with our

suppliers who specifically contribute to our• commitment to excellence. Successful supplier

performance in the areas of TQRDCE offers• rewards of repeat business, increased sales and

profitable growth.


T: Technology• Agilent Technologies delivers best in class

products and new technologies to our customers in

• breakthrough time. We expect our suppliers to be on-going technological leaders with technology

• a core competency in their respective fields of design and manufacturing. Suppliers are expected

• to support Agilent with their products throughout the lifecycle of Agilent Technologies products.�


• Support for Agilent product changes is expected through participation in collaborative engineering

• to enable timely introductions; to support continuous technology, quality and cost improvements;

• and to support worldwide product regulation requirements.


Q: Quality • Quality Policy must be exist to earn customer

loyalty by providing products and• services of the highest quality and greatest value.

To achieve this commitment to our customers,• The companies expects that all materials are fit

for use, and defect free for electrical, mechanical, cosmetic reasons, …etc.


• The companies expect notification from suppliers for all discontinuances, obsolescence's, and material or process changes that affect form, fit or function, with sufficient notice to allow Agilent to make a thorough evaluation.

• Quality and reliability are expected to be achieved through superior design, process control and continuous process improvements, in accordance with Agilent Technologies’ Supplier Quality System Requirements.


R: Responsiveness

• Companies can achieve growth through well-implemented new product introductions.

• The companies’ success is contingent upon delivering new products in breakthrough time and ahead of our competition, while also exceeding customer expectations for all product delivery.


• Companies better to be dependent upon rapid turn-around time of prototypes from suppliers to support new product introductions.

• Suppliers are expected to be responsive and flexible when responding to swings in demand, and design and manufacturing changes. Suppliers must provide excellent and timely communication, service, and issue resolution.


D: Delivery • Companies better to focused on shortening the

overall product delivery cycle time from customer order to product delivery. Agilent expects supplier deliveries to be 100% on-time, and in alignment with the requirements of the delivery model (PO, SMI, SOI, DTL & JIT) used by their associated

• Agilent business. Lead times must be short by industry standards, reliable and decreasing over

• time.


C: Cost • Normally, companies are focused on achieving

Total Cost Leadership. The expect to drive continuous improvement in cost reductions. Their suppliers must be accountable for offering effective low cost alternatives aimed at providing both supply chain flexibility and best value on a total cost basis.


E: Environmental and Social Responsibility

• Many companies are aimed to recognize their obligation to be an economic, intellectual and social asset in each nation and community in which they do business. Companies must conduct its operations in such a manner that respects basic international principles relating to labor standards, and protects the environmental quality of these countries and communities.


• The suppliers are an integral part of this effort; therefore, suppliers are expected to adhere to environmental and social responsibility principles that are similar to those valued at their companies


Sharing the Information• Data sharing may be a requirement contained in the

distributorship agreement. This clause, for example, is excerpted from a distributor’s agreement:

• Information Collection. Upon Supplier’s request, Distributor shall provide Supplier with information regarding the Supplier’s Product sales, service and inventory levels, information about the other activities of Distributor under this Agreement, and information about Distributor’s market with respect to Supplier’s Products and other similar products.


• There can be risks to a wholesaler-distributor who shares its sales data with a supplier, especially where the data sought includes sales of other suppliers’ products. These risks are best addressed by the parties at the outset with a clearly-worded written data sharing agreement, covering the following key issues.


• Ownership of the Data – The agreement should specify who owns the data the wholesaler-distributor is providing to the supplier. For example, the agreement could state that the data remains the property of the wholesaler-distributor and the supplier has a license to use the data as specified in the license agreement while the agreement is in effect. The license can be non-exclusive, non-transferable and subject to termination as specified in the agreement.


• Whose Data Will Be Shared – Will the data-sharing with a supplier be limited to sales of the supplier’s products or will it include the wholesaler-distributor’s sales of similar products?

• Level of Detail – What level of detail will the shared data be provided to the supplier? The data can be aggregated as a total for the wholesaler-distributor’s assigned territory or Primary Area of Responsibility, or refined to the specific customer/location level, or by county, ZIP code, etc.


• License Fee – Will the supplier pay a license fee to the wholesaler-distributor for the right to use the data? A license fee, even a nominal amount, will provide the legal consideration necessary to make the agreement enforceable.

• Use of Data – What are the authorized uses a supplier may make of the data? The agreement will typically prohibit the supplier from sharing or transferring the data to another party, including any competing wholesaler-distributors. A nondisclosure provision in the agreement applicable to the supplier is also prudent.


• Warranty – The agreement should address what warranty, if any, the wholesaler-distributor makes with respect to the accuracy and completeness of the data provided to the supplier. A warranty disclaimer and liability limitation language in the agreement should be considered.


• Term and Termination – The term of the license needs to be specified as well as the conditions allowing a party to terminate the agreement. The supplier’s post-termination obligations (e.g., return of all copies of the data, removal of the data from the supplier’s database, etc.) should be spelled out in the agreement.


• Data sharing has definite benefits for the supplier and its wholesaler-distributor who is willing to share point-of-sales data. As with any mutually beneficial relationship (i.e., a contract), both parties will be better served by reaching a clear written understanding of the arrangement at its outset.


Supplier Management andSupplier Development


Preliminaries

• The goal of supplier management and supplier development is a world-class supplier base

• Supplier management involves– Supplier Performance Measurement– Supply Base Optimization– Buyers accepting some responsibility for supplier

performance• Supplier management is a pre-requisite to Supplier

development


Preliminaries• Supplier development is defined as a buyer firm infusing

– Suggestions and ideas, and/or– Human resources, and/or– Training, and/or– Financial capital, and/or– Technologyinto a supplier to – Improve his capabilities– Improve his performanceIn order to meet the buyer firm’s short-term and long-term

supply needs


Supplier Evaluation (Ch 7) in comparison to Supplier Performance Measurement (Ch 8)

• Supplier Evaluation is an event to– Pre-qualify suppliers– To award contracts– To pursue improvement opportunities

• Supplier Performance Measurement is a continuing process


Supplier Performance Measurement

• Cost reductions• Quality performance• Delivery performance• Contract Deficiency Notices (CDNs)

Quantitative Variables



• ETDBW• Responsiveness• Problem resolution ability• New Product Development Support• Technical ability• Commitment to R&D• Trust levels

Qualitative Variables



• Regular reports to the commodity buyer• Buyers meet with suppliers• Carrots and Sticks

Reporting and using the information


Supplier Management Techniques

• Categorical system• Weighted point system• Cost Index


Categorical System

Performance Category

Score

E G F P

1. Meets Delivery Requirements

2. Customer focused3. Fair pricing4. Problem resolution

capabilities5. An innovative supplier6. Communication and trust

levels


Weighted Point System

A weighted average of scores across a number of categories


Cost Index: Quantifies total cost of doing business with a supplier

Price Purchase TotalCosts anceNonperform Price Purchase Total SPI

The Supplier Performance Index:

Nonperformance costs are generally per incident standard costs for late delivery, order shipped incomplete, quality problems and are based upon such things as rework costs, a line shutdown, lost customer sale, inspection and return costs, etc.



2.1 SPI $15,000$3000 $15,000

The Supplier Performance Index example:



2.1 SPI $15,000$3000 $15,000


02.1 SPI $150,000$3000 $150,000



Price Purchase Total X Costs anceNonperform Price Purchase Total Q SPI

The Supplier Performance Index with the Q adjustment:

Where Q is

suppliers allfor material oflot a of Price Averagesupplier for this materialfor lot a of Price Average


Cost Index: Let’s adjust with the Q assuming $150,000 is the average price of a lot from all

suppliers

2.1 SPI $15,000$3000 $15,000


02.1 SPI $150,000$3000 $150,000


Cost Index: Let’s adjust with the Q = $15,000/$150,000 = .10

02.1 SPI $15,000.10 X $3000 $15,000


02.1 SPI $150,000$3000 $150,000


Supply Base Optimization

• Rationalizing versus Optimizing• Implementation: First phase is to eliminate

marginal and perhaps very low volume suppliers• “Optimization” is a continuous process


Advantages of an optimized Supply Base

• Reduced cost• Having a World-Class Supply Base

– Suppliers that generate fewer problems– Buyers re-direct their time to value-adding

activities– Access to suppliers’ engineering, design and

other capabilities


Risks of a Reduced Supplier Base

• Absence of competition may generate complacency and price increases

• Risk of supply disruption


Formal Approaches to Supply Base Reduction

• The Pareto Rule (20/80)• “Improve or Else”• Triage Approach• Competency Stair Case Approach

Stair Case ExampleStep 1. Internal Information and Management Processes

Step 2. Quality Standards

Step 3. Production Capabilities

Step 4. Logistics Performance© www.asia-masters.com

Supplier Development

Supplier development is defined as a buyer firm infusing– Suggestions and ideas, and/or– Human resources, and/or– Training, and/or– Financial capital, and/or– TechnologyInto a supplier to – Improve his capabilities– Improve his performanceIn order to meet the buyer firm’s short-term and long-term

supply needs



Step 1. Identify candidates for supplier development– Is the supplier essential? Or– Does this supplier meet minimum

requirements and show great potential? AND– Is this product or service a source or potential

source for competitive advantage?


Supplier DevelopmentStep 2. Form a CFTStep 3. Meet with supplier’s top management

– Discuss your supplier development plan– Seek a commitment on Kaizen– Sense if “alignment” and trust develop



Step 3. Meet with supplier’s top management (continued)– Talk about resource commitments, roles

of each party and potential rewards– Develop agreement on specific measures that

will indicate success


Why Supplier Development?

• Suppliers’ capabilities are not high enough to meet current requirements or future expectations– Switching costs may be high– Supplier has great potential

• Joint efforts may accelerate supplier improvement

• Mutual benefits


Example of Supplier Development Results

Criteria

Before Supplier Development

After Supplier Development

Incoming defects

11.65 %

5.45 %

% on-time delivery

79.85 %

91.02 %

Cycle time (from order placement to receipt, inclusively)

35.74 days

23.44 days

% orders received complete

85.47 %

93.33 %


The Major Obstacles to Supplier Development

• Too overwhelming– Solution: Dichotomize, standardize, rationalize

• Lack of senior executive support– Solution: Demonstrate the potential gains

• Issues of trust– Solution: Nondisclosure agreements, exclusivity

agreements, ombudsmen• Supplier doesn’t have the vision of the concept

– Solution: Supplier Evaluation Reports, incentives, training sessions, designating Supplier Champions


The End
