Supplier performance management (SPM) is a key enabler for transforming into a mature purchasing organization. Measuring supplier performance is critical to ensure service level agreements, minimize risk, develop suppliers and reduce cost. Most privately held companies have been measuring supplier performance for a long time and often have refined processes and supplier scorecards. However, from Capgemini’s experience, many public sector organizations have underdeveloped SPM programs. But, these organizations are becoming increasingly aware of the benefits that SPM could provide. Therefore, establishing joint processes for SPM is a key enabler for public purchasing organizations to transform into effective modern procurement organizations.

Establishing effective SPM requires more than introducing a supplier scorecard

The main objective of SPM is to improve performance of both the supplier and the buying organization. By establishing supplier performance metrics a company can ensure that suppliers deliver according to contract agreements and market norms.  However, it is important not to think of SPM only as establishing supplier scorecards but also as establishing effective business processes. There are five main areas that need to be considered when establishing effective SPM:

  • Supplier segmentation – define how different supplier segments should be engaged
  • Supplier management – establish supplier management teams, structure the relationship with the supplier through supplier meetings and define internal roles and responsibilities
  • Supplier scorecard – identify critical success factors (CSF)s, define KPIs and develop mechanisms for data gathering
  • Supplier development – establish method for supplier development and continuous improvement
  • Supplier evaluation – define how to use suppler performance data when evaluating suppliers for new contracts

Common pitfalls when establishing SPM are:

  • Lack of internal resources e.g. supplier managers
  • Lack of supplier commitment
  • Lack of involvement from other, non-purchasing, parts of the organization
  • Lack of subject matter expertise when deploying integrated IT systems to support SPM processes

Public procurement laws are considered to be a challenge within public sector

Why is the public sector underdeveloped when it comes to SPM?  Some argue that it is the lack of profit maximization focus and little potential for income generation. However, another possible reason is legal / legislative obligations. Public organizations within the European Union must comply with public procurement laws which set boundaries when it comes to SPM. A common misunderstanding is that historical performance cannot be used when evaluating suppliers for new contracts. However, supplier performance can be utilized as internal credentials in public procurement if the following are considered:

  • Internal credentials are equivalent to external credentials e.g. if the supplier does not have internal credentials the same measures could be provided by external parties
  • It is apparent from the RFP that the client intends to consider internal experience
  • The internal credentials are related to the same product or service as the one that is being purchased
  • The evaluation method is clearly defined

Align SPM processes across business units

Another experience from Capgemini’s customers in both public and private sector is the lack of joint processes across different business units. Companies tend to use different supplier KPIs and processes for the same supplier and suppliers within the same segment; this applies specially within decentralized purchasing organizations. There are many reasons why joint processes for SPM are preferred:

  • Comparison between different supplier performances
  • One joint supplier scorecard per supplier is possible
  • Joint communication and training
  • Shared IT system
  • Process efficiency through continuous improvement

Calculate the true value of SPM

Supplier performance management is a natural part of purchasing, and it can provide clear value to the organization. However, calculating the ROI for implementing supplier performance management is often hard. When building a business case for implementing SPM, one approach is to estimate the avoidable costs associated with poor supplier quality or late delivery. This approach provides management a rough idea of the potential ROI for establishing SPM. Regardless, whether it is a public or private organization, SPM remains a key enabler to develop both suppliers and the internal organization and thereby providing value through:

  • Increased supply quality
  • Reduced cost
  • Reduced supply risk