Question

Essay Question:

You are asked to develop monthly, quarterly, and annual metrics for evaluating your suppliers and the supply chain. What do you propose? How will set goals for the metrics, KPIs and/or scores? Will you review the same KPIs or different ones at each cadence?

Answer 1

For many organisations, the reality of supplier performance management is that time and opportunity to track and react to dozens of complex KPIs simply doesn’t exist. Therefore it is important to carefully chose handful of KPIs which are meaningful and actionable such as -

1. Quantity Ordered versus Quantity Received -

This measurement will require data from the purchase orders placed by your buyers, and that from your receiving operation. The most usual method is to record the percentage of the ordered quantity which was actually received. The measurement is typically taken over a given time period (often monthly).

Example: Purchase order quantity in current month = 200,000 units, Quantity received = 199,880 units. Supplier performance = 99.94%.

You would need to decide whether to include or exclude quantity differences which the supplier advised you of in advance. Alternatively you could have two metrics, one for advised variations and one for variations discovered upon goods receipt.

2. ASN Accuracy -

For suppliers that provide your company with advanced shipment notifications, it’s a good idea to monitor the accuracy of the data provided. This ties in with metric 1 above, since an ASN would serve as advanced notification of variance between ordered quantities and quantities dispatched by the supplier.

Example: ASNs received (current month) = 17, ASNs which are 100% matched to physical goods receipts (current month) = 16. Supplier performance = 94%.

Rather than monitoring this KPI using received/ordered unit quantities, ASN accuracy is typically measured on the basis of the quantity of ASNs, and how many of those were accurate.

3. Delivery On-time -

Just as you should measure your own outbound delivery on-time performance, so you should keep your suppliers on their toes by tracking the percentage of inbound deliveries received on time. Although the criteria to classify a delivery as “on time” can differ from one organisation to the next, the measurement usually follows the typical percentage formula (percentage of deliveries received at their promised arrival time).

Example: Inbound deliveries received (current month) = 8, Inbound deliveries checked in at security within 5 mins of promised arrival time (current month) = 7. Supplier delivery on-time performance = 87.5%.

Depending on the set-up of your warehouse operation and agreements with suppliers, you might use the arrival time promised by your supplier, time of delivery arrival, delivery book-in time or perhaps even time windows (for example, delivery between 8.00 am. and 9.00 am.) as the baseline against which to measure supplier performance.

Other practical supplier performance KPIs include:

• Ordered price versus invoiced price
• Percentage of units failing inspection vs. total inspected units
• Returns rate metrics
• Order fill rate metrics
• Lead-time variance metrics

None of these KPIs require sophisticated analytics capability and most can be managed even without enterprise business software. Of course it helps if the necessary data can be captured automatically and displayed in a digital dashboard, but if that’s not possible, some spreadsheets will do.