Performance Metrics and Vendor Evaluation

October 29, 2008 by Sundar Chandrasekaran

Your car is in the garage, but the mechanic cannot fix it on time because they are still waiting for parts to arrive from the manufacturer. For you, the situation is frustrating. For your mechanic and their supplier, it is a loss of business and a tarnished reputation. This classic example of supply chain inefficiency illustrates the negative impact of poor vendor performance. It affects not only the consumer, but everyone involved at any stage of the chain.

In any industry, unavailable parts are often the result of constant changes to inventory and insufficient communication and information exchanges between companies. As a company procuring goods from an outside vendor, you need to maintain communication channels with your suppliers, evaluate their performance, and provide feedback on a regular basis. This is particularly significant in industries that deal with aftermarket parts, such as the automotive, aerospace, and high-tech industries.

Typical challenges faced in aftermarket industries

  • Often, purchasing is centralized to save production costs. However, centralized purchasing departments tend to focus on production, sometimes neglecting the constant revenue streams and high profit margins potentially available in an aftermarket-oriented business.
  • Supplier integration has been a buzzword for a while, but many companies have failed to walk the talk. Processes are still built around technologies rather than vice-versa.
  • Not all suppliers are at the same technological level and companies have to use different data collection methods for different suppliers.
  • Many customer-supplier interactions suffer from the lack of a “single source of truth.” They need one reliable source of information that all parties use.

Free flow of information

But where to begin? Close collaboration with suppliers is a good starting point. The free flow of information along the supply chain can help players work in unison. The collaboration should extend beyond the regular purchase orders. Sharing demand and forecasting data helps suppliers handle sudden fluctuations in demand. Gaining complete visibility makes it possible to spot fluctuations further in advance. Companies can therefore alert suppliers ahead of time, enabling them to mitigate the impact across their own supply chains.

Same level of technology

The technology in place at supplier companies varies, so the channels used for exchanging information need to be flexible and interoperable enough to communicate with Web portals, EDI, e-mail notifications, and any other common formats. While multiple data views can be provided to suppliers, it is important that they are all based on a single database for data consistency and accuracy.

Using the right metrics

Many aftermarket companies evaluate suppliers based on overall metrics – a common practice in other industries. Given the specific nature of the aftermarket business, however, companies would be better served if they identified the five to 10 metrics that have the biggest impact on them. In the aftermarket industry, for example, availability is a key metric. Such important, detailed performance indicators risk being overshadowed if they are only incorporated into more general metrics.

Companies therefore need to determine which metrics are most crucial to their business. For example, a company may need to measure the timeliness and accuracy of its suppliers’ advance shipping notifications. Another one may focus on how reliably suppliers fulfill their commitments and whether parts are delivered early, on time, or late. For any metric, the key is to make the evaluation process as quantitative as possible. Qualitative non-compliance issues can be converted to a corresponding quantitative value.

Metrics should be scalable and adaptable. That way, companies can assess different suppliers on different sets of metrics tailored to the nature of business they do together. The metric “shipping discrepancy”, for example, could be based on a combination of supplier and location information to assess the shipping discrepancy performance of suppliers for different parts across various locations.

Such performance metrics can provide the single source of quantitative truth that can be viewed by all parties in real time. This can help facilitate complete data visibility, reduce disputes over the reported metrics, and enable suppliers to assess their own performances. Manual interventions can be captured in audit logs to expedite the resolution process. Metrics reports should be automated and downloadable, with drill-down details and features such as automatic alert notifications when performance falls below a defined threshold.

Data visibility can enable strategic supplier decisions

SAP offers a configurable Supplier Delivery Performance Rating tool as part of the SAP Service and Asset Management solution. The tool has attributes that can help address the requirements of the aftermarket industry: Companies can define customized metrics for individual suppliers and call up a consolidated scorecard for a specified reporting period, and a weighted point distribution enables their internal analysts to use the ratings and make strategic supplier decisions. Also, the standard reports provide visibility to the overall scorecard calculation and detailed reports. Finally, internal analysts and suppliers’ users can access the same information.

Tags:

Leave a Reply