Supplier Performance Management: Key Steps and Tools

Supplier performance management, or SPM, plays a crucial role in various aspects of procurement, from supplier onboarding and supply chain management to overall risk management. Yet only about a fifth of companies have a “proactive” approach to analyzing and managing supplier performance. And even though vendor disruptions can cause significant financial, logistical, and reputational losses, 30% of companies don’t even bother to investigate these disruptions.

You’re only setting yourself up for these incidents if you don’t start focusing on global supplier performance management and implementing continuous improvement. Automated procurement software can help your business achieve its SPM and purchasing goals. 

What Is Supplier Performance Management? 

Supplier performance management (SPM) is the process of tracking and analyzing the performance of suppliers a business works with. Managing their performance can help control costs and support compliance and long-lasting relationships. 

Let’s get into a basic rundown of what effective supplier performance management entails. 

SPM encompasses all the tools and practices a business uses to evaluate supplier performance. The intention is to understand vendor relationships so that the business can:

• Manage supplier risk 
• Lower procurement costs
• Encourage positive partnerships
• Resolve any issues
• Look for opportunities to improve

Companies today don’t operate alone; they purchase raw materials, goods, and professional services from third-party suppliers regularly. Supplier performance management when applied out in the field is a lot more complicated than this definition would suggest. While a vendor might send out your orders promptly, ensuring on-time delivery, and invoice you the correct amounts every time, how can you be sure that you’re getting the best deal available to you? Can you get better quality deliverables in a more price-efficient transaction for more value and cost savings?

How Does It Contrast With Supplier Relationship Management?

Supplier performance management and supplier relationship management are separate concepts, and it’s important to know the subtle distinction between the two terms even though they are entwined in a way.

Relationship management is mainly an internal business process where the company goes through its list of contracts with suppliers and picks up any insights it can learn from its own partnerships. Performance management can happen either internally or externally and, as mentioned, mainly focuses on reducing potential risks through identification and mitigation strategies and managing cost.

Confusing SPM and SRM is understandable since supplier performance directly affects supplier relationships and vice versa. There’s quite a bit of overlap between the two, and both share similar goals. Still, we’re going to be focusing on the former in this article.

Why You Need To Start Focusing on SPM

Suppliers are the lifeblood of most companies. Manufacturing facilities need a consistent stream of quality raw materials to produce their products, and almost all companies rely on third-party professional services like consultants, logistics, accounting, project management, content marketing, and various others. 

Businesses must ensure quality from suppliers, know expected lead times, and track on-time deliveries from their vendors as part of the supplier performance management process. 

If you aren’t in control of your supplier performance, then you risk hurting your whole supply chain and potentially cutting into your bottom line. It doesn’t matter if you’re a supply chain manager, an accountant, or a sales team member; the strength of your vendors’ performance impacts what you do.

On top of vendor risk management improvements and monetary benefit, supplier performance management bolsters the integrity of the supply chain, especially the sourcing portion of it. Supply chain teams can use contract management practices to assess if vendor contracts are properly met. Through SPM, any vendors that fail to meet expectations are removed from the list of approved vendors before they cause problems.

The Benefits of SPM

SPM is a form of risk management, so pursuing its practices means being able to spot supplier-related performance issues early on and implementing corrective actions before they become serious issues. A focus on SPM also offers a variety of other tangible advantages.

• Avoiding supply chain disruptions: The primary risk related to vendors is disruption in the goods and services provided. Without the raw materials and resources your business needs, you can expect daily operations to grind to a halt. SPM aims to identify the risk of disruptions from key suppliers and address it before it impacts you.
• Reducing unnecessary costs: SPM naturally requires you to learn more about your suppliers and track key performance indicators regarding their services. That information can help you find new opportunities to save that you wouldn’t have noticed before.
• Segmenting your suppliers: The procurement department benefits greatly from supplier performance management. With data collection on how well each vendor is adhering to requirements and meeting expectations, these teams can make more informed business decisions regarding where to spend the budget.
• Protecting brand reputation: If a supplier makes a mistake on its end, that mistake can translate into problems in your own products and services that you sell to your customers. Customers will blame you for supplier issues like defect rates from poor quality standards. Therefore, analyzing vendor performance directly improves your own performance and customer satisfaction.
• Improving business relationships: SPM gives you knowledge that you can use to form more productive relationships with your suppliers. For instance, new contracts can be designed with past performance based on supplier performance data in mind. You can communicate more effectively with vendors during negotiations as well.

And, of course, supplier performance management is a key component in any procurement function or supplier management program as a whole. The significant benefits of supplier performance management you achieve will ripple throughout your organization.

The Challenges To Overcome

The efforts made to manage supplier performance will largely go to overcoming a few challenges that procurement and supply chain teams often run into. These include:

• Collecting real-time supplier data and analyzing them into understandable reports
• Facilitating clear, 2-way communication between yourself and your suppliers
• Getting upper management on board with your efforts
• Lack of risk analysis capabilities

Read on to learn about examples, how to measure supplier performance management, and our tips and strategies for implementing a productive supplier performance management initiative into your workflows.

Examples of Supplier Performance Management

Examples of supplier performance management are:

• Lead time
• On-time delivery  
• Defect rate 
• Quality standards compliance
• Order accuracy and invoice accuracy
• Contract compliance
• Cost performance 
• Responsiveness 

Generally, businesses use more supplier performance management measures than are included in this list. Explanations of these supplier performance management metrics follow. 

Lead Time

Lead time is the expected time to receive orders from the supplier. 

On-time Delivery

On-time delivery indicates the percentage of orders received by the promised delivery date. 

Defect Rate

Defect rate is a quality measure that indicates the percentage of defective items. 

Quality Standards Compliance

Quality standards compliance measures the supplier’s adherence to regulatory standards required for its product. 

Order Accuracy and Invoice Accuracy

Order accuracy and invoice accuracy are two separate metrics. 

Contract Compliance

Contract compliance measures the supplier’s score for following contract (or purchase order) terms, including pricing, delivery, and payment terms. 

Cost Performance

Cost performance is a score for the supplier keeping costs low. 

Responsiveness

Responsiveness can be used as a measure of how quickly the supplier responds to communications or answers and submits RFQs (requests for quote). 

How Do You Measure Supplier Performance?

Businesses measure supplier performance by establishing a scorecard with each supplier’s metrics trends, including several elements of supplier performance, such as lead time, on-time delivery, and defect rate. Supplier performance measurements are a type of internal audit that should result in actions to improve supplier base quality. 

Businesses evaluate each supplier’s performance to determine which suppliers should be retained and which suppliers should be replaced to achieve more value and timelier delivery. 

Some procurement software provides turnkey vendor performance measurement KPI metrics and statistics as part of a performance management solution. They may indicate industry benchmarks for comparison. 

Achieving Effective Supplier Performance Management

The following steps will help you get started on SPM so your company can reap the benefits of stronger vendor performance. We’ll include some basic metrics and key performance indicators (KPIs) to track throughout your journey to measure supplier performance.

Have a Clear Strategy in Mind

Much like any business practice, supplier performance management must be conducted with clear goals, or you will find yourself directionless in your efforts. Ensure the policies you set in place align with the organization’s overall spending strategy.

The plans must also be specific with the key objectives outlined in quantifiable terms so that measuring your progress is non-ambiguous. Designate key persons responsible for the program’s success early on.

Keep in mind also that you can never entirely eliminate risk from any vendor. SPM is all about monitoring supplier performance periodically and mitigating the supplier risks the best you can.

And finally, be proactive in your approach. Don’t just wait for changes in demand to adjust your supply chain. Predict what your needs will be and ensure that your suppliers are up to meet those demands.

Decide on a Framework

Supplier performance can be seen through various lenses. These frameworks are the guidelines that allow you to remaster vendor relationships and get more value out of your partnerships.

• Operational performance: This framework looks at how the vendor contributes directly to your internal operations. Does its past performance look in-line with your predefined expectations? And are the transactions you’ve made with it acceptable under your standards?
• Relational performance: As its name suggests, a relational framework finds ways to nurture and develop the buyer-vendor relationship. Unlike operational performance, this one looks at present performance and gets teams from both sides to agree on common objectives and goals.
• Transformational performance: What does the future of your relationship with this supplier look like? This framework requires you to work cohesively with your suppliers to develop innovative solutions and policies to enforce transformational changes.

Use all of these frameworks to some extent when managing the supplier list. Any combination of these mindsets will result in tangible improvements to procurement processes.

Prioritize the Vendor List

Think about the vendors that you purchase from the most. These particularly strategic suppliers offer your business the most value but also contribute to the greatest amount of risk. Any disruption in a key supplier can have devastating effects on your supply chain.

For this reason, have the SPM program focus on vendor management and apply as much effort as proportional to the vendor’s importance to your business.

Know What Metrics and KPIs To Track

A performance analysis covering supplier capabilities relies heavily on data analytics for the supplier performance review. The decision of which metrics to focus on as procurement analytics depends on your primary goals with this initiative. Some popular examples to get you started are listed below.

• Payment and contract terms
• Price changes
• Quality of the deliverables
• Delivery time
• Service level and service quality
• Financial health
• Openness to communication
• Sustainability (if your business has sustainability goals)

We refer to performance metrics as key performance indicators, as these figures are meant to be monitored over time and analyzed alongside policy changes and corrective actions.

Master the Supplier Performance Scorecard

Supplier scorecards, popular tools used in SPM operations, track various metrics of each supplier’s performance:

• Quality of the deliverables
• Timely delivery
• Price efficiency
• Responsiveness to communication

A quick look at a data management scorecard will tell you the supplier’s general financial stability, operational efficiency, past prices, and general compliance with your performance requirements. For instance, if a vendor is known to have poor customer service or often sends you defective products, then those details will be immediately visible to your procurement teams.

Your business should mitigate using risky suppliers by replacing them with high-quality suppliers whenever possible. 

Communicate Regularly with Suppliers

Don’t make supplier performance management a purely internal task. As part of supplier enablement, communicate with your suppliers regularly about your plans. By agreeing on a common set of metrics and goals, your vendors will understand what you want and can modify their goals and objectives around your expectations.

Deal with Disruptions Productively

Whether we’re talking about critical shortages of raw materials or service disruptions that cut off deliverables from third parties, a large part of supplier performance management is knowing how to handle these problems properly and promptly.

When an incident arises, be ready to diagnose the root cause. And from there, develop corrective actions to address those causes. Data analytics is powerful but useless if you don’t turn it into action.

Hold Up Your End of the Deal

With all the considerations you must consider during supplier performance management, it’s fairly easy to forget that you have your own role in promoting positive procurement. Business deals can only work out when both parties involved are willing to work together, so remember to:

• Place orders early enough so that you receive them when you need them. Don’t give your vendor too little time for delivery and know their expected lead time.
• Set your purchases in stone after submitting them. Don’t change them too often afterwards.
• Keep track of payment terms and follow them accordingly.
• Ensure contract compliance on your end as well.

Accountability extends to both parties when it comes to developing positive supplier-buyer relationships. This way, you give the vendor a chance to perform well.

Keep Up with the Latest Developments in Tools and Technologies

As technology and the Internet play a larger role in our home and business lives, it’s no surprise that cloud platforms have arisen to help us handle B2B communication. Supplier performance management software is no exception here.

One emerging technology with wider applications to keep an eye on is artificial intelligence, particularly its ability to generate data-driven insights quickly and efficiently. Not only can it help with the tedious data-entry tasks commonly found in SPM, but it can evaluate and run analytics on individual vendors much faster than ever before.

Stepping back for a bit, think about platforms that help the procurement team directly. Let software handle once notoriously time-consuming tasks like purchase order management, approval workflows, supplier onboarding, and SPM-related activities.

Leveraging Automation for Enhanced Supplier Management

Procurement software, including Procurement from Tipalti, helps your company achieve its supplier management goals. Tipalti Procurement efficiently handles supplier onboarding, supplier enablement, and business process automation for the PR intake and approval to automatic purchase order creation processes. It lets your stakeholders view related electronic contracts and document data related to procurement.

Read the white paper to learn more about how to streamline supplier onboarding on your business journey to improve supplier performance management.