Measuring performance to select and evaluate suppliers
Contributed by Patricia Guarnieri
When we consider, in a supply chain environment there are two or more independent companies working jointly to align their processes, in order to create more value to end- customers and stakeholders, we realize it only works if companies involved act as a single entity, which means that companies must collaborate intensively. Actually, companies involved in the supply chain agree that joint decision makes it preferable to enhance profitability for all partners. However, it is important to point out when companies collaborate, they need to share responsibilities and benefits to create sustainable competitive advantage.
Although we know that trust and information exchange between manufacturers and suppliers, mainly regarding information about demand, are essential factors in the supply chain, making it is possible to perceive a large disparity between the potentials and the practice. In many cases there is bargaining power which does not allow both partners to reach the existing benefits. Informing the suppliers in real time about the demand, makes possible the fast requests of raw material, without delaying production and avoiding stock-outs, but this is possible only if the members of the supply chain have the similar culture about collaboration, which means that partners should cooperate intensively.
Continuous replenishment programs have been used as a solution to achieve collaboration among companies through intense information exchange. One successful example is the Procter & Gamble case, which controls the stock management for its retailers and receives information about retailer inventory levels and demand conditions in real time. Moreover, through this higher visibility of customer demand, Procter & Gamble experienced a five percentage point increase in perfect orders, less variability in retailer orders, and reduced delivery expenses by being able to utilize cube space in transit. At the same time, its retailers obtained benefits such as an increase of over 100 per cent in inventory turns, inventory levels were significantly reduced, service levels increased, retail sales went up 2 per cent, and storage and handling costs were reduced.
Another successful example is the Zara case, a fashion retailer which synchronized its global production networks with customer requirements in order to give a quick response to the changing tastes of fashion customers. You can imagine how this is important in this market segment. Therefore, as we can perceive through this examples, it is possible to truly collaborate in the supply chain in order to reach mutual benefits.
Nevertheless, many managers could ask: How can I trust suppliers while sharing strategic information with them? How can I choose the appropriate partners to share information? The answer is in the main factor pointed out in this article, which is: the importance of selecting and evaluating appropriate suppliers in supply chain management. To begin, it is important to consider, before you choose the right partner to collaborate, it is necessary companies define criteria to measure the individual partners and overall supply chain performance and, during this process it is essential there is continuous feedback to improve these indicators.
Through these indicators it is possible to monitor partners and implement improvements in various aspects, including reducing costs by eliminating wastes, continuously improving quality to achieve zero defects, improving flexibility to meet end-customer needs, reducing lead time at different stages of the supply chain, implement strategic partnerships… and so on. Indeed, manufacturers prefer to manage suppliers via different methods such as supplier development, supplier evaluation, supplier selection, supplier coordination, in order to forecast customer demand precisely. More and more, there is a growing importance of cross-functional team involvement in supplier selection and evaluation, because this process influences overall company performance.
Moreover, collaborative performance metrics are required to guide members of the supply chain in evaluating whether or not their actions are truly contributing to the global goal. These indicators consist of a set of metrics that identifies how the progress of collaboration is going.
It is important emphasize, during the criteria formulation process to select and evaluate suppliers, the main task for companies is assessing the key competitive factors in their segment to translate these factors adequately into a strategy. There is no ‘success formula’ to choose the appropriate criteria, for this reason, companies must study carefully which criteria to select to represent their competitive strategies.
I have researched some articles published over past years regarding the main criteria used to select and evaluate suppliers and I organized it below, in crescent order according to their utilization:
1) Price; 2) Quality; 3)Delivery; 4)Warranties and claims; 5)After-sale service; 6)Lead-time; 7) technical support; 8)Net price; 9)Training aids; 10) Attitude; 11) Performance history; 12) Financial Position; 13)Geographical location; 14) Management and Organization; 15) Labor relations; 16) Communication systems; 17) Response to consumer requests; 18) e-commerce capability; 19) JIT capability; 20) Technical capability; 21) Production facilities and capacity; 22) Storage transport; 23) Operational controls; 24) Ease-of-use; 25) Maintainability; 26) Amount of past business; 27) Reputation and position in industry; 28) Reciprocal arrangements; 29) Product development; 30) Flexibility; 31) Environmentally friendly products; 32) Product appearance; 33) Catalog technology; 34) Environmental responsibility; 35) Company size; 36) Packaging ability.
Of course, there are many other criteria that could be quoted here and we should consider the applicability of these criteria depends on the product or service offered and the market for which it is targeted. The companies in the supply chain should monitor supporting metrics in order to measure the individual and overall performance of the supply chain continuously.
To conclude, I want to emphasize: Performance metrics support managers in the decision making process and help partners in the supply chain to have uniformity. As a result, if the manufacturer/retailer wants fast delivery of certain products, the supplier will be able to fulfill this request. At the same time, downstream suppliers can require upstream suppliers to provide a similar service.
The consequence of this uniformity will be the overall improvement of supply chain performance and best responses to end-customers.