In today’s highly competitive business environment, maintaining a strong relationship with suppliers is crucial for a company’s success. Businesses that depend on a steady flow of goods and services being delivered must have a reliable and efficient system to track and manage supplier performance. Delayed deliveries, low product quality, or subpar services can negatively impact both the business itself as well as the customers. Therefore, efficient supplier performance management is crucial for businesses to achieve their business goals.
This article will explore why supplier performance management matters and ways to improve supplier performance and maintain success. We will discuss the importance of supplier performance management, five best practices to improve supplier performance, and how automation can help with supplier performance management.
Importance of Supplier Performance Management
Efficient supplier performance management is crucial for smooth business operations, reduced risk, and overall performance. Supplier performance management involves analyzing the effectiveness and delivery performance of goods and services provided by vendors. It plays a critical role in measuring supplier performance as well as assessing overall business performance and expenditure.
Procurement processes and supply chain management are constantly under scrutiny, particularly during times of economic pressures such as high inflation, a recession, or budget constraints. Any issues within the value or supply chain can cause strain on relationships. Therefore, businesses must know how to improve supplier relationship management performance to sustain their competitive advantage and improve their operations and profitability.
5 Best Practices to Improve Supplier Performance
There are several ways in which businesses can review supplier performance to get the best out of a working relationship and keep the wheels of the supply chain well-oiled and running smoothly. The following are five best practices that businesses can adopt to further supplier improvement, help enhance their relationships with vendors, and keep their supply chains running smoothly.
1. Collect Data
Information is essential, so actively collecting data is crucial for making better, data-based decisions. Data comes from various locations and departments, including procurement, accounts payable, and cybersecurity. It’s important to collate it into one system for proper analysis on a regular basis.
Collecting data helps businesses to have a better understanding of supplier performance and identify areas where improvements are needed. By collecting data, businesses can compare suppliers as well as goods and services received. This allows cost-cutting decisions to be made without affecting overall business performance.
2. Set and Measure Against Key Performance Indicators (KPIs)
When measuring supplier performance, it’s important to outline the targets that need to be met. Setting KPIs is crucial for measuring and improving supplier performance and should be outlined when cementing new supplier relationships. They should also be referred back to at regular intervals. Standard KPIs include on-time deliveries, number of delays, time to fulfill purchase orders, customer service levels, security, or environmental targets.
KPIs provide a benchmark for supplier performance. By measuring supplier performance against KPIs, businesses can identify areas where improvements are needed and take proactive measures to address any issues.
3. Update Service-Level Agreements (SLAs)
If the KPIs set out above aren’t being met on a consistent basis by poorly performing suppliers, it may be time to review and update service-level agreements. Mismatched expectations between actual (supplier) performance metrics and expectations can significantly impact the quality of working relationships and hinder peak performance.
To avoid such scenarios, it’s important to monitor supplier performance. This helps to ensure ongoing clarity, and it’s recommended to update supplier service-level agreements on a regular basis. Reviewing SLAs at least once a year is a good cadence but may be necessary to do it more frequently during high growth phases or involving new markets.
4. Communication
Proper communication of the results of the supplier performance review is crucial to avoid any uncomfortable conversations and establish plans for future growth. This is true both internally to the business and externally to the vendor. While stakeholders may lack the day-to-day knowledge of the procurement or accounts payable department, they are invested in and will be interested in the benefits and efficiency of any supplier improvement strategies or decisions made. Having a transparent and honest conversation with key suppliers could help to foster long-term partnerships or remedy problematic situations.
5. Adopt Better Technology
Ensuring that all the data is centrally located and correct can help to streamline the process of collecting and analyzing data. If this is currently not the case, then it may be time to review various aspects of your tech stack and adopt better technology or software solutions.
For example, if your procurement team is spending hours to pull supplier performance data and reports, it might be time to look into automated tools that can do it faster and with more accuracy. Plugged into the Accounts Payable (AP) process, you can also gain easy access to real-time information to inform stakeholders whenever relevant information is needed.
How Automation Can Help With Supplier Performance Management
Automation can significantly improve supplier performance management in several ways. Here are a few examples:
1. Data Collection and Analysis
With the help of automation tools, businesses can collect data from various sources and centralize it into one system. This not only saves time but also ensures accuracy and consistency in data analysis. By automating the data collection and analysis process, businesses can gain real-time insights into supplier performance and take proactive measures to address any issues.
2. Setting and Measuring KPIs
Automation technology can also assist in setting and measuring key performance indicators for a company’s suppliers. By integrating data from various sources and systems, businesses can identify critical KPIs and track supplier performance against them. This helps in identifying potential issues early on and in addressing them before they impact the supply chain.
3. Updating SLAs
By monitoring actual supplier performance against KPIs and SLAs, businesses can use technology to improve performance and provide insights that help identify areas where improvements are needed and to negotiate better terms with suppliers.
4. Communication
Automation tools can help in communication between businesses and suppliers. For example, by automating the supplier performance review process, businesses can provide real-time feedback to suppliers and collaborate on continuous improvement strategies. This helps in fostering long-term partnerships with suppliers and improving overall supply chain performance.
5. Streamlining Procurement Processes
Automation can help in streamlining procurement processes and business processes by eliminating manual tasks and reducing any risk of errors. For example, when it comes to supplier’s operations, by automating invoice processing and payment approvals, businesses can ensure timely payments to suppliers and avoid delays in the supply chain.
Overall, automation can help organizations to improve their supplier performance management by providing real-time insights into supplier performance, streamlining procurement processes, minimizing risk, and fostering better communication and collaboration with suppliers.
Conclusion
Supplier performance management is crucial for businesses to achieve their business goals. Efficient supplier performance management is crucial for smooth business operations, reduced risk, and overall performance. By implementing best practices and adopting better technology and automation, businesses can improve supplier performance and maintain success. Regularly reviewing supplier metrics, setting and measuring KPIs, updating SLAs, proper communication, and adopting better technology can help businesses manage supplier performance and improve their operations and profitability.