What is my own role in the performance of my suppliers?

Assessing suppliers can be very useful and effective. However, it is important that you do this with discernment and avoid a few pitfalls. In this article we look at the purpose of supplier assessment, how you can present the results to your supplier, the quality of your own data, but above all, what role do you actually play in the performance of your supplier?

Five blogs about vendor rating are in the making, this is part 1.

Why should you assess your suppliers?

Organizations tend to get bigger and bigger. This may be through organic growth, or through mergers or takeovers. This does not only apply to the own organization, but also to the suppliers.

Assortments are also growing. First we had a white and a black variant, now it is also available in blue, yellow and purple, with and without adhesive strip, packaged in five, ten, fifty or a hundred packs. However, stocks must remain small, delivery times shorter, so orders must be placed more often.

If you combine all these developments, you will see the number of transactions and interactions with suppliers increase drastically. However, this also increases chances that something goes wrong. If you have ten suppliers, it’s still manageable, but if you have more than a hundred suppliers, it becomes quite difficult to keep track of things.

Moreover, people often do not realize that, on average, 70% of their own performance towards the increasingly critical customer is determined by the performance of the suppliers.

Strangely enough, the purchasing and logistics departments do not usually grow at the same pace as the number of supplier interactions. You just have to do it more efficiently. Of course, you can’t react to every incident, but if you don’t pay attention for a moment, you’ll be putting our fires everywhere.  “…and again I have not been able to do what I had planned today…”.

A good way to deal with this is an automated vendor rating system. It provides an excellent overview of where things are going well with which suppliers and where improvements are needed. And if you successfully feed the system with your existing IT data, such a system requires little or no maintenance. If necessary, the system can be expanded with subjective data based on automated internal surveys. It’s as if the department has an employee who does nothing more than follow and chart the behavior of suppliers. The department becomes more efficient and effective.

I have results, and now what?

A vendor rating solution is nice, and having the data and results available is even nicer, but how you use it is a completely different story. In part two of this series, we will talk about the all possibilities you all have with these results. But now I want to talk about the way you present them to your supplier.

Before you do that, of course, you have to be well aware of the power balance between you and the supplier. (If you order three screws and one bolt a year, your reports will obviously not be impressive.) But if you decide to share your results with your supplier, there are many ways to do so. I have seen examples ranging from “I don’t trust our own data, so we only use the system internally” to “you score a 5, that’s not enough, so we have to end the relationship”. Let us consider these two extremes for a moment.

I do not trust our own data

In large organizations with many employees and large systems, the data is never perfect. Where people work, mistakes are made. That is almost always the case.  Yes, it can happen that goods are delivered before they are ordered. Or that an order has been placed on 1-1-1900. Is that a bad thing? Or is that a reason not to share the data and results with your supplier? It is often not necessary to be so reluctant to share this. There are three reasons for this:

• As long as data that is ‘inconsistent’, and is usually automatically rejected by the supplier assessment system, is less than 10%, there is not so much to worry about. Out of the 90% that is good, a lot can already be distilled. And the data that you do work with has already been cleaned up to a large extent.
• Well, we know that the data is not perfect and that there are errors in it. But we do apply these errors consistently. In the end, it’s not so much about the absolute figure (you score a 5), but about the movement (you have risen from a 5 to a 6, which is an improvement of 20%).
• Thirdly, with a good supplier assessment system, it is possible to measure certain things, but not to judge the supplier on them. Example: you can quite easily create an assessment criterion ‘does the supplier confirm my orders (yes/no)’. But you also know that, when it is very busy, not all confirmations that come in one day are actually entered into the IT system. In that case, the supplier scores poorly, even though he always confirms them properly. In a good supplier assessment system, you can then choose to give the score for ‘confirm or not confirm’ a weighting of 0. He will then be measured, but the supplier’s overall score will not be affected by this.

Well, we know that the data is not perfect and that there are mistakes in it. But we apply these errors consistently. In the end, it’s not so much about the absolute number (you score a 5), but about the movement (you have risen from a 5 to a 6, which is an improvement of 20%).

Thirdly, with a good supplier assessment system, it is possible to measure certain things, but not to judge the supplier on them. Example: you can quite easily create an assessment criterion `confirm my orders (yes/no)’. But you also know that, when it is very busy, not all confirmations that come in one day are actually entered into the IT system. In that case, the supplier scores poorly, even though he always confirms them properly. In a good supplier assessment system, you can then choose to give the score for ‘confirm or not confirm’ a weighting of 0. He will then be measured, but the supplier’s overall score will not be affected by this.

You’re fired

The other extreme, where you present the results of the supplier assessment system as the only truth, is not good either. It will almost always end in a discussion in which the supplier claims to have completely different figures. This is also logical, because the chance of him measuring and assessing his own performance in exactly the same way as this one customer is virtually zero. Discussing the scores should therefore be the start of a dialogue, not a Do-It-Yourself trial. In such a dialogue, it is likely that it is not only the supplier who has his shortcomings. That is not a bad thing at all, because we are in any case working together to improve performance.

Something also seems to be going wrong with us.

Here are some examples:

• The supplier recently issued a standard delivery time of three weeks. Why is there still the old standard delivery time of two weeks in the IT system? The stock is tuned to this (too low) and the planning of the orders is tuned to this (too small and too short).
• The supplier has issued a standard delivery time of three weeks. So why does it say on every order that it has to be delivered tomorrow? No wonder the supplier scores so low on ‘delivery reliability/accuracy’.
• Their own figures show that the supplier structurally delivers too late. The supplier, on the other hand, says that deliveries are always made exactly on the day requested. After some investigative work, it appears that the goods always catch dust for a few days when they are received before they are entered in the system.
• And the aforementioned order confirmations. If you are going to measure whether the supplier sends them consistently, you need to be sure that most of them are also registered in the supplier’s own IT system.

The above four examples can be measured with a good supplier assessment system, and are therefore easy to solve. Do not only measure the behavior of your supplier, but certainly also your own behavior:

• Measure the difference between the standard delivery date and the actual one. If there is a substantial difference, then it is time to agree on a different standard delivery time.
• Measure the difference between the standard delivery date and the requested delivery date. If there is a substantial difference, then it is time to have a good conversation with the orders. What reasons do they give for not having to stick to the standard delivery time? Or are they simply undisciplined?
• Some organizations manage to record the time of arrival of the goods and the time of booking. If that is the case, look at how big the difference is and how long goods remain on average when they arrive. One solution could be to occupy this department better or more easily, to apply some coulance in the assessment: anything that is delivered up to two days late, for example, still gets the maximum score of 10 points from us. This masks your own shortcomings.
• Find out how many percent on average of all order confirmations do not end up in the IT system. If it is more than 40%, you should consider not measuring this component at all. Incidentally, this does not mean that you can still look at the quality of the confirmation and the quantity of confirmations per order. After all, a supplier who sends a new confirmation every day is of no use to you. Is the percentage somewhere between twenty and forty percent? Then, as explained above, you can consider measuring it, but not taking it into account.

Transparency

The above shows that it is actually impossible to judge suppliers without also looking at their own behavior. Buyers generally do not like too many supplier changes and, in principle, strive for long-term partnerships. These can only arise if there is mutual respect. If you want to use a supplier assessment system properly and meaningfully, you cannot avoid measuring and, above all, sharing your own performance. Your transparency will lead to significant improvements in your own quality in the longer term. On the one hand because it forces you to scrutinize and improve your own performance, and on the other hand because the quality of the supplier improves, so that performance towards your own customer will automatically improve as well.

This was part 1 of a series of five on supplier evaluation:

1. Your own role in the performance of your suppliers
2. What can I use supplier evaluation for?
3. What system can I use for supplier assessment?
4. What data can I use for supplier assessment?
5. Procurement performance measurement based on supplier assessment

Jan-Paul Plieger

E-mail for questions or the ‘Calculation model Error Costs’ to: j.maas@buynamics.com