Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Supplier Performance Management KPIs — The Ultimate Guide for Procurement Professionals
Key take-aways
- Supplier performance management KPIs are quantitative measurements that track and assess a supplier’s performance in relation to predetermined objectives and benchmarks.
- Supplier performance management KPIs can help align your suppliers with your business goals, communicate expectations, and provide feedback.
- Selecting KPIs for supplier performance management does not have a one-size-fits-all approach.
Supplier Performance is a very crucial indicator of how well your organization’s procurement and supply chain performs. A key element of business practice is to manage your supplier’s performance and one effective way to do this is to implement and set KPIs to track down and monitor your supplier’s operations and performance.
For this article, we will discuss Supplier Performance Management KPIs. Additionally, we will also take a look at the overall concept of Supplier Performance management as well as some KPIs to set for managing supplier performance.
After reading this article, you will better understand Supplier Performance Management KPIs and the benefits of setting them to evaluate supplier performance.
But before you proceed to read the whole article, I have created a free-to-download editable procurement benchmarking template. It’s a PowerPoint file you can use to analyze the effectiveness of the different processes in your procurement. I even created a video where I’ll explain how you can use this template.
What is Supplier Performance Management?
Supplier Performance Management (SPM) is a business practice that involves actively monitoring, measuring, and managing the performance of a company’s suppliers to ensure they meet the required quality, cost, delivery, and other performance expectations. As performance by suppliers can directly affect the overall efficiency, quality of products, and customer satisfaction of an organization, SPM is an important part of procurement and supply chain management.
Managing and optimizing supplier performance is both critical and challenging. It’s not all about the price. You may receive invoices from suppliers following the agreed price, but unless a service or product meets your expectations it is unlikely that you can achieve this savings target. That’s why setting metrics or Key Performance indicators will help smoothen Supplier Performance Management.
Additionally, regular supplier performance evaluations can assist you in spotting possible supply chain and procurement risks early on so that they can be fixed before they become serious issues. SPM can assist in ensuring that your goods and services adhere to the highest standards of quality. SPM can also help you prepare a contingency plan in case of disruption, for example, if the main supplier were to go out of business.
What is Supplier Performance Management KPIs?
Evaluating the performance of your suppliers is an important element in supplier management, providing you with a view to monitoring and enhancing their quality, efficiency, and reliability. But how are you measuring the performance of your supplier objectively and in a consistent way? The use of Key Performance Indicators is one of the best ways to do this.
KPIs are quantitative measurements that track and assess a supplier’s performance in relation to predetermined objectives and benchmarks. They can be used to gauge a supplier’s performance in a number of areas, including delivery, quality, cost, innovation, and compliance. KPIs can assist you in determining the advantages and disadvantages of your suppliers, contrasting them with one another, and establishing goals and rewards for progress. KPIs can also assist you in coordinating your suppliers with your business goals and strategies and in communicating your expectations and feedback to them.
As a result, these KPIs give you a comprehensive overview of your suppliers’ competence and the amount spent on them, as well as their performance in meeting firm requirements. You may use this knowledge to adopt corrective measures when you find an anomaly instead of waiting for it to get worse.
How Do You Choose KPIs for Supplier Performance Management?
While we provided some of the most useful KPIs, it still depends on the organization. There is no one-size-fits-all method for selecting KPIs for supplier evaluation because different suppliers may have various roles and responsibilities within your supply chain.
There are, however, some broad guidelines and procedures that you can follow. Establish your supplier evaluation criteria and objectives first, together with the crucial success elements and hazards associated with each. Then, choose, validate, and rank the KPIs that capture the important success factors and hazards. Think about the KPIs’ applicability, accuracy, measurement simplicity, significance, and impact.
Finally, choose the number of KPIs you require to have a thorough and accurate understanding of your supplier performance.
Supplier Performance Management KPIs
To develop strategic relations, reduce costs, and improve the quality of your procurement process, here are a number of useful Supplier Key Performance Indicators:
1. Leadtime
The lead time is between placing an order and having it delivered. Your business procedures may be delayed if orders are not filled promptly, which may lead to the loss of clients who are used to quick turnarounds in today’s fast-paced society. Operational improvements brought about by reducing delivery lead times can hasten order fulfillment and boost customer satisfaction.
Metric: The average number of days it takes a supplier to deliver the goods after an order is placed.
2. Defect Rates
The requested goods or services must always adhere to the quality standards stipulated in your contract or the purchase order. Receiving inferior products or materials can put companies at risk, affecting stock levels or necessitating the expenditure of time and resources to correct the order. Businesses can determine whether suppliers routinely supply products or services that fall short of the required quality standards by monitoring each supplier’s defect rate.
Metric: Divide the total number of orders by the number of orders that contain damaged goods.
3. Compliance
Supplier relationshipsare strengthened when they abide by the agreements and rules of your business. You can learn more about how effectively a supplier meets the agreed-upon business needs by monitoring the compliance rate. Delivery time, lead time, discounts, turnaround time for delays, and payment arrangements are taken into account.
Metric: Depending on the specifics of the contract, many indicators can be used to assess compliance.
4. Customer Service
Procurement professionals have the chance to evaluate the complete experience of dealing with a supplier using this KPI. Was the level of customer service satisfactory? Were issues and complaints handled effectively and professionally, and was it simple to get in touch with them? Do you deal with a single person or a number of persons within that organization?
Metric: The number of disputes which are separated by the number of orders issued.
5. Risk and Transparency
This KPI assesses the supplier’s capacity to control and reduce operational risks, including those related to geopolitics, supply chain disruptions, and natural disasters.
Metric: Depending on the types of risk being considered, a range of measures can be used to evaluate supplier risk.
6. On-time delivery
It’s critical to provide goods and services on time if you want to keep customers happy and loyal. You can evaluate the supplier’s adherence to the specified delivery dates using this KPI.
Metric: Divide the number of deliveries made on the agreed deadline by the total number of their deliveries, multiplied by 100. As a result, you get the percentage of products delivered on time.
7. Order Accuracy
Order accuracy measures how precisely providers fulfill your orders, or, put another way, how frequently items are delivered incorrectly. Your business operations may be considerably slowed down if an order contains the wrong goods or the wrong quantities of the right items.
The number of orders that were delivered accurately to 100%, divided by the total number of orders.
8. Return on investment
This is an opportunity to compare the cost reductions you achieved by working with that provider to your overall budget.
Metric: Procurement Cost savings divided by costs is the usual way to measure this KPI. However, it still depends on your organization’s approach.
How to Utilize KPIs?
The first step in evaluating your suppliers is to choose the appropriate KPIs. You must set up precise and realistic targets and benchmarks for each KPI in order to properly monitor and enhance your supplier performance and relationship. It’s crucial to keep your suppliers informed, align the KPIs with them, and provide them with regular praise and constructive criticism.
Additionally, you should routinely and routinely assess and evaluate the KPIs, track and report the KPIs’ outcomes and analyze and interpret the KPIs’ patterns and trends. You may then utilize the KPIs to motivate ongoing innovation and performance improvement by identifying and addressing any gaps and problems in your supplier’s performance and relationship.
Conclusion
Assessing supplier performance is a necessary step in improving your company’s buying potential. Your team will have more data-driven insights than ever before thanks to these KPIs. You will be able to add new value to your company while also monitoring progress, reducing costs, and boosting profitability as a result of tracking supplier KPIs.
The process of putting new contracts into effect can seem unpredictable and dangerous. Naturally, you could feel pressured to monitor your supplier KPIs carefully. But as time passes, it becomes simpler to get complacent. Overall, you’re now poised to have a dramatic impact on your company’s performance.
Frequentlyasked questions
What is Supplier Performance Management?
Supplier Performance Management (SPM) is a business practice that involves actively monitoring, measuring, and managing the performance of a company’s suppliers to ensure they meet the required quality, cost, delivery, and other performance expectations.
What is Supplier Performance Management KPIs?
KPIs are quantitative measurements that track and assess a supplier’s performance in relation to predetermined objectives and benchmarks. They can be used to gauge a supplier’s performance in a number of areas, including delivery, quality, cost, innovation, and compliance.
How do you choose KPIs for Supplier Performance Management?
There is no one-size-fits-all method for selecting KPIs for supplier evaluation because different suppliers may have various roles and responsibilities within your supply chain. There are, however, some broad guidelines and procedures that you can follow.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
