Using supplier scorecards to align performance
As we noted in our recent post on KPIs and metrics, a strong metrics framework is needed to manage supply chain processes on a daily, weekly and monthly basis. Here we look at best practices in outsource supply chain governance, with some thoughts around supplier scorecards.
Supplier scorecards are a useful mechanism to engage with suppliers on performance over time, to compare suppliers within the same product or service category on areas beyond cost, or to communicate expectations and influence behaviours. They elevate the focus and conversation from the detail of daily operational metrics to trends on a limited number of product and service areas on a periodic basis – typically quarterly.
Not every supplier warrants the effort of a formal scorecard. If you are segmenting suppliers by spend or influence, focus on those suppliers or categories that are critical to your business. One of the benefits of scorecards is the ability to compare performance across similar suppliers in a category. This allows you to make decisions on business allocation on factors beyond just cost.
While there may be dozens of individual metrics managed daily, scorecards are usually looking at performance across a handful of areas (typically between 5 and 10) within the business over a longer timeframe.
Scorecard categories may include:
- Operational performance (feeding from daily metrics but focused on reliability over time)
- Cost performance (inputs on cost per unit / order / delivery – or proactive cost initiatives)
- Customer service (responsiveness on queries, management of specific deliveries)
- Quality or technical performance (customer complaints, defects per million)
- Innovation (proactive initiatives to improve quality, cost, service)
- Sustainability (align with specific sustainability objectives)
- Financial (invoice accuracy, timeliness, automation)
The categories that you choose for your business should be determined to align with your supply chain objectives, and in consultation with broader stakeholders within the business. It is a great way to capture mindshare on longer-term objectives that are critical for success. We frequently come across situations where warehouse and logistics suppliers perform well on receiving, storage and shipping, but are frustrating their clients when it comes to customer service, reporting and inventory accuracy.
Weighting of categories:
The weighting of categories allows you to communicate the relative importance of elements of performance in your assessment of suppliers. Operational performance, cost, and quality will generally score highly, but if suppliers see a 20% or 30% weighting attached to a category such as sustainability, it sends a message that this is an element of service that cannot be ignored.
Changes in your supply chain priorities can be reflected in periodic changes to the weighting within supplier scorecards. To be effective however it is recommended that you provide some stability to allow suppliers to see progress over time.
Calculating supplier scores:
The method to calculate scores in each category should be reasonably transparent, although it is quite common to have a mix of calculated and subjective scores within a scorecard.
For example, in calculating a score for operational performance for a warehouse operation weighted at 20% in an overall scorecard, a calculation might look something like the following example:
Pick, pack and ship performance is allocated 15 of the 20 marks within the scorecard for operational performance. With a daily on time shipping performance of 99%, the metric might read like the following:
- Target met 100% days within the quarter 15
- Target met 95% – 100% days 12
- Target met 90% – 95% days 7
- Target met 80% – 90% days) 5
- Target met < 80% days 1
This recognises that in the real world, there may be times when daily metrics are not achieved. Perfect performance is rewarded, and level of tolerance issues is reflected in how quickly the score drops with missed KPIs.
Reporting and administration might be allocated the remaining 5 marks within the operational performance. This could be a subjective ranking from the supplier manager, supported by examples for higher or lower scores.
The actual score within a supplier scorecard is less important than the comparison with their peers and the trends over time. What is powerful is being able to show a supplier an anonymised chart of how they are performing against 5 other suppliers in their same category, or their trend on critical objectives for your business over the last four quarters.
Like KPIs, scorecards are effective if they become an integral part of how you manage supplier interactions. If they are simply another form to be completed, suppliers will quickly see through that and they will lose their impact.
- Show suppliers how they rank within their category and make efforts to reward top performing suppliers with increased business opportunities. Equally, those that consistently perform below expectations should see risk to existing business.
- Celebrate successes and recognise individual and team performances when results meet certain thresholds. Supply chains are run by people and such recognition can improve the motivation and working relationship between teams.
- Consider benefits for suppliers that achieve over a certain threshold for 3 or 4 quarters in a row. Some companies look at supplier awards or certification levels that includes public recognition.
Contact us at any stage if you are interested in a discussion on how supplier scorecards can impact your supplier performance.
Next month we plan to continue this topic on outsourced supply chain governance, with a post on pricing renewal discussions with existing suppliers.
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