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The Essential

Sourcing Skills
Handbook series

6.2

Service Level
Agreements and Key
Performance Indicators

2010 SpringTide Consulting Ltd.


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distribution in hard or soft form
prohibited.

The Essential Sourcing Skills Handbook series


Strategic sourcing
1.

2.

3.

4.

5.

Launch process
1.1. Category Profiling
1.2. Business Needs
1.3. Sourcing History
1.4. Stakeholder Mapping
1.5. RACI Matrix
1.6. Communications
Charter
1.7. Change Management
1.8. Transition Analysis
Current position
2.1. Portfolio Analysis
2.2. Sellers Perception
Matrix
2.3. Relationship
Positioning
2.4. Risk and Vulnerability
Analysis
2.5. Specification
Challenge
2.6. Supply Market
Analysis
2.7. Opportunity Analysis
Strategy development
3.1. Request for
Information
3.2. Conditioning
3.3. Price and Cost
Analysis
3.4. Supply Chain Analysis
3.5. Quick Wins
Strategy selection
4.1. Options Analysis
4.2. Request for Proposal
4.3. Supplier Selection
4.4. Capability
Assessment
Strategy
implementation
5.1. Negotiation
5.2. Contract Award
5.3. Debriefing
5.4. Implementation Plan
5.5. Savings

Post-implementation
management
6.

7.

8.

Supplier performance
management
6.1. Problem Solving
6.2. Service Level
Agreements and
Key Performance
Indicators
6.3. Total Cost of
Ownership
6.4. Contract Register
6.5. Relationship Audit
Supply chain
management
7.1. Market Movements
7.2. Industry Curves
Specification
management
8.1. Learning Curves
8.2. Value Analysis/
Value Engineering
8.3. Gainsharing
8.4. Exit Strategies

Supplier performance management

6.2

6.2 Service Level Agreements and


Key Performance
Indicators
Introduction
A Service Level
Agreement (SLA) is a
schedule attached to the
contract or framework
agreement that defines
the service that the
supplier must deliver
and at what level this is
required and that details
responsibilities and
priorities. The SLA
incorporates specific
metrics, such as response
times to queries, that are
to be measured and
reported against. These are
known as Key Performance
Indicators (KPIs). The
metrics and reporting
frequency vary: for
example, bi-annual
measurement and
reporting may suffice for
uncomplicated categories
where the impact on
the business of poor
performance is low.

Summary
A contract or framework
agreement for a product
or a service may be
accompanied by a Service
Level Agreement (SLA)
The SLA specifies the level
of service required from the
supplier
Key Performance Indicators
(KPIs) are metrics included
in the SLA to enable the
measurement of the
suppliers performance
against business-critical
areas
The suitability of suppliers
for an SLA/KPI programme
depends on
contribution to decreasing
the cost of poor supplier
quality
Portfolio Analysis
positioning
Supplier Perception Matrix
positioning
level of impact of poor
performance
The SLA/KPI programme
can be tailored to each
contract

SLAs and KPIs are agreed


with the supplier, and form an essential ingredient for effective
Supplier Performance Management. While Relationship Audit
(see section 6.5) evaluates the overall strategic alignment of
the buyersupplier relationship, SLAs and KPIs tend to focus on
the operational aspects:
the service provided
the level of service required
a timeline for delivery
responsibilities for both parties
provisions for legal and regulatory compliance
2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

performance monitoring and reporting methods


payment terms
the process for dispute resolution
a confidentiality and non-disclosure agreement
termination conditions.
SLAs specify mechanisms for performance monitoring
and reporting to ensure that the service levels are met and
maintained over the contract term. Adherence to the SLA
should be a main condition in the contract, such that
repudiation and damages can be sought for continued breach.
Therefore, it is important to ensure that the KPIs incorporated
are meaningful and agreed by both parties. Moreover, making
a KPI too stringent, such as 100% of queries to be resolved
within 4 hours, simply creates unnecessary tension in the
relationship. Typically, escalation processes are embodied
within SLAs such that repeated failure is addressed by the
appropriate level of seniority on either side. The frequency of
review meetings and standing agenda items are also specified.
SLAs and KPIs help the organisation in assessing the cost of
poor supplier quality (COPSQ) for both products and services.
Studies have shown that the COPSQ ranges between 10% and
40% of spend with a supplier: a significant loss that must be
addressed. COPSQ can be segmented into four areas of cost:

Preventative costs
Avoidance of poor quality
Training

Appraisal costs
Reviews
Testing
Inspections

COPSQ

Internal failure costs


Rework
Remedial actions

External failure costs


Time spent resolving
customer complaints
Loss of business

2010 SpringTide Consulting Ltd. All rights reserved.

Supplier performance management

6.2

Objectives
To develop a programme to measure and monitor supplier
performance
To use SLAs/KPIs to measure those suppliers who confer
real business benefit (in terms of cost, value and/or risk)
To ensure that the programme is
appropriate: capturing the right categories and
suppliers
achievable: in terms of effort and resource availability
flexible: to incorporate new sites or to change
parameters
not merely a number-crunching exercise

Relevance
The use of SLAs and KPIs enables the determination of
performance levels being achieved
the level of understanding of the contract or compliance
with it
areas that require remedial action
how issues can be resolved
emerging trends that require attention at a strategic level.
It would be inappropriate to put KPIs in place for all suppliers
as the supplier database can contain hundreds or even
thousands, so the emphasis needs to be where there would
be significant business impacts (i.e. costs and risks) to the
organisation if adverse events were to occur. The intensity of
reviews should therefore also vary: some act as mere data
collection from supplier-based management information
systems while others become more complex through the
engagement of stakeholders and possibly end-clients in the
review process. Such 360 approaches can yield insight and
cost/value gains for those areas where a comprehensive
programme of activity has great benefit.
KPI reports highlight error rates and emerging trends and
thus guide the business to areas that require perhaps more
front-end training (preventative cost) and awareness (see
5.4 Implementation Plan) to reduce the COPSQ to the
organisation. For example, the COPSQ for a product or
service may comprise the following elements (see overleaf).

2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

COPSQ

KPI:
Poor standard
of cleaning
for a retail outlet

KPI:
Late delivery
of goods
to project site

KPI:
High rejection
rate of
inward goods

Preventative cost
Retraining of the
supplier
Policy introduction
Short-term cost
through increased
frequency of reviews

Preventative cost
Stocking of product
onsite: cashflow
impact
Use of more than
one supplier to
create resilience

Preventative cost
More quality control
at the supplier's end

Appraisal cost
Assessment of
whether the cause is
the standards of an
individual or the
company
Overhead costs of
validation

Appraisal cost
Visit(s) to the
supplier
Assessment of the
P2P process leading
to possible delays in
issuing orders

Appraisal cost
Implementation of
process control
Interim and final
inspection costs

Internal failure cost


Possible tightening
of specification
Possible change of
specification from
output to input

Internal failure cost


Necessity to send
items by special
delivery
Interim solutions to
the problem

Internal failure cost


Necessity to source
new suppliers

External failure cost


Handling of
customer complaints
(i.e. from the public)
Poor image in a
competitive market
Potential loss of
business

External failure cost


Impact on others:
end-customer and
sub-contractors
waiting for goods

External failure cost


Possible delay in
manufacture leading
to loss of business

2010 SpringTide Consulting Ltd. All rights reserved.

Supplier performance management

6.2

SLAs/KPIs are often criticised for becoming a measure solely for


the supply chain rather than incorporating all parties. Moreover,
the buyer often takes a punitive approach, developing metrics
that are deliberately difficult to achieve such that post-contract
concessions can be obtained through the imposition of service
credits. Adoption of the structured SLA/KPI programme
development Tool ensures that only appropriate suppliers
are involved and that the KPIs are mutually designed,
realistic and relevant.
Caution should be exercised at the tender stages of supplier
selection (see 4.2 Request for Proposal) as large national
suppliers eagerly supply examples of sophisticated and
sometimes meaningless KPI reports demonstrating their
superior service. However, this is merely a selling or closing
tactic (see 5.1 Negotiation). The data may be skewed to
illustrate only their well-fulfilled areas or the account used
may be with a tame client; they may also have several years
of experience with the particular client, distorting the results
(see 8.1 Learning Curves).
New entrants or smallmedium enterprises may need to be
educated regarding the value and necessity of SLA/KPI reviews.

When to use
SLAs and KPIs are appropriate for both products and services
where poor performance would introduce unnecessary risk or
impact the organisation detrimentally in other ways, such as
additional cost or loss of value or reputation.
If the organisation has no system of SLA/KPI performance
review, the Tool can be used to evaluate all categories of spend
and determine which categories and suppliers would benefit the
most from an SLA/KPI programme.
In general, SLAs and KPIs should be generated alongside the
main contract or framework agreement, and agreed with the
supplier. Thereafter, monitoring and performance review should
be ongoing throughout the term of the contract.

The Tool
1. Determination of suppliers for which SLAs/KPIs are required
Suppliers who can make a significant contribution to lowering
the COPSQ are profiled, ranked and evaluated. The choice of
which suppliers to include in an SLA/KPI programme is based
on the following questions.
2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

What is the consequence of failure?


Are there clear benefits from closer measurement?
Is the supplier potentially problematic?
Would SLAs/KPIs help in creating a better impression with
end-customers?
How can performance measurement reduce risk?
Is the product or service simple or complex?
Portfolio Analysis (see section 2.1) can be used to accelerate
the creation of a list of potential suppliers. Dependent on the
Business Needs and Wants (see section 1.2), probing questions
may reveal which quadrants require more immediate review.
Answer according to Portfolio quadrant
Question

Routine Leverage Bottleneck

Strategic

Does the level of service


impact the product or
service user?

No

Yes

Yes

Yes

Are value-added
services available?

No

Yes

Yes

Yes

Is value more important


than price?

No

No

Yes

Yes

Is the service key?

No

Yes

Yes

Yes

Are there multiple levels


to the service?

No

Yes

Yes

Yes

Is the marketplace
complex?

No

No

Yes

Yes

Does the product or


service have many
features?

No

No

Yes

Yes

Is management
complex?

No

No

No

Yes

Does the buyer


or supplier require
specific training?

No

No

No

Yes

Are the consequences of


failure costly (COPSQ)?

No

No

No

Yes

The buyer should, however, consider that not all suppliers are
willing to participate in SLA/KPI programmes (see 2.2 Sellers
Perception Matrix and 2.3 Relationship Positioning). This could
be due to a variety of reasons:
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2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

costly overhead
lack of interest
perception as post-contract justification for their selection
lack of resources to manage the process
fear of revealing inadequacies in their service or solution
lack of capability to capture the data required.
Gaining an understanding of the underlying reasons
for refusal enables the buyer either to plan to exit from the
relationship (see 8.4 Exit Strategies) or to seek ways in which
to reinvigorate the suppliers interest (for example, through
volumes, concessions, marketing rights).
2. Prioritisation
After the initial category or supplier selection stage, the list of
possible candidates for SLA/KPI programmes may still be fairly
long. Therefore, a second level of rationalisation and ranking is
required to test the validity of the original assessment, scoring
suitability factors on a weighted basis, for example:
Score on a scale of 05 (weighted %)
Stationery Management Advertising
consultancy

Packaging

COPSQ
(weight 30%)

0.5 (3%)

4 (24%)

5 (30%)

2 (12%)

Cooperation
of supplier
(weight 20%)

4 (16%)

2 (8%)

3 (12%)

4 (16%)

Availability of
4 (8%)
internal resource
to manage KPIs
(weight 10%)

5 (10%)

2 (4%)

1 (2%)

Capability of
2 (4%)
internal resource
to be objective
(weight 10%)

5 (10%)

2 (4%)

1 (2%)

Potential for
additional value
(weight 30%)

3 (18%)

2 (12%)

3 (18%)

2 (12%)

Total (%)

49%

64%

68%

44%

Factor

Concentrating on spend front-end can distort the selection


process as there may be a propensity to review only high-spend
2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

suppliers. Therefore, questioning and weighting first ensures


that Business Needs remain the driver. The results of the
prioritisation are then plotted against spend to determine
the level of impact of poor service for each category:
100
Impact of poor service

Weighted score (%)

90
80
Advertising

Management
consultancy

70

60

Enterprise
impact

Stationery

50

Moderate
impact

Packaging

40

Category
impact

30
0

Low
2

Medium
6

High
10

12

Supplier spend (000,000)

This level of impact determines the intensity of the performance


management process, ranging from simple data capture and
measurement up to full strategic review:

Category
impact

Moderate
impact

Operational measures: driven by supplier


Exception reporting: correction of mistakes
Annual review: relatively simple operation

More frequent reviews: team approach

Strategic focus
Monthly review with steering committee
Enterprise 360 review, possibly with shared resource
impact

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2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

3. Design of a Supplier Performance Management programme


Once the suppliers have been grouped by impact level,
a Supplier Performance Management programme is designed
and tailored to each. The depth of the SLAs/KPIs can be guided
by the following table.
Action

Category
impact

Moderate
impact

Enterprise
impact

Data capture cycle


(KPIs): operational

Monthly

Monthly

Monthly

Review cycle (SLA):


strategic

N/A

Bi-annual

Quarterly

Exception reporting

Supplierled

Supplierled

Supplierled

Apply Remedial Measures


(ARM) report

Supplierled

Joint focus

Joint focus

User survey: standard

User survey: bespoke

User survey: interviews

360 survey

Trend analysis

SLA termination rights

Customised KPIs

Formal review meeting:


senior stakeholders

Formal review meeting:


customers

Formal review meeting:


main board

A plan is developed to ensure that all appropriate suppliers are


ultimately captured by the process, clearly stating objectives,
measures and realistic targets that increase the adoption rate
of the programme over perhaps one or two years (see example
overleaf).

2010 SpringTide Consulting Ltd. All rights reserved.

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6.2

Supplier performance management


Objectives

Measures

To refine and
strengthen existing
SLAs over the next
12 months
To introduce SLAs
to appropriate
suppliers not yet
covered

Targets

50% adoption within


3 months
75% within 6 months
100% within 12 months
50% within 6 months
65% within 12 months
85% within 18 months
100% within 24 months

Number of
contracts
revisited
Number of
new suppliers
included

4. KPI design
KPIs are wide-ranging, but typically cover:
Response times

Delivery

Invoicing

orders
queries
problems

on time
correct first time

on time
correct first time

Scrap levels

Inventory levels

Set-up times

Non-value-added
time

Product
development

Cost

For complex areas, a suite of both quantitative and qualitative


measures against which performance can be measured is
designed, covering areas such as:

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KPI areas
for products

KPI areas
for services

Quantitative measures
Scrap levels
Punctuality
Full delivery
Cycle times
Inventory levels
Quality
Performance
characteristics

Quantitative measures
Placement rates
(e.g. temporary labour)
Malfunctions/downtime
Cost savings
Utilisation levels
Loss of customers from
call centre

Qualitative measures
Workmanship
Management attitude

Qualitative measures
Transfer of
knowledge/concepts
Customer service

2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

The objectives of Supplier Performance Management (section 6)


varies by Portfolio quadrant and therefore SLAs/KPIs should be
developed to suit these varying needs: a standardised approach
across all categories/suppliers would be sub-optimal because
data may not be captured correctly and finite time and resource
may be spent on, for example, Routine categories rather than
Bottleneck areas which require performance to be managed and
outcomes improved.

Leverage
Emphasis on price
Demanding
satisfaction levels
Changing remit
Constructive
dissatifaction

Strategic
Total Cost of
Ownership
End-customer's
perception
Minimal disruption

Example SLA/KPI objectives by quadrant


Routine
Reduction in
number of
transactions
Improvements in
response time

Bottleneck
Minimal disruption
Availability

Performance measures must be:


specific: no room for misinterpretation (written response)
measurable: quantitative and qualitative
achievable: but not too easy (for example, 75% within
the first 3 months of the contract increasing to 85% within
6 months)
relevant: linked to Business Needs
timely: measured at appropriate intervals.
The performance measures must be linked to Business Needs
to ensure relevance, to demonstrate to the supplier why the
particular area is being measured and to show internal
stakeholders that the exercise is worthwhile. For example:
2010 SpringTide Consulting Ltd. All rights reserved.
13

6.2

Supplier performance management

Product X

Business
Need

Sourcing
strategy

Objective

Measure

Target

Initiative

Reduce/eliminate
waste

Selection process/
supplier adoption of
waste management
principles

Eliminate waste
through production

Quality checked at
each production
stage

Reduce by x%

Supported across
the supply chain

Service Y

Business
Need

Sourcing
strategy

Increase end-user
satisfaction levels

Selection process/
supplier achieving
user satisfaction

Improve feedback
ratings from
ultimate client
Objective

Measure

End-user surveys at
set intervals

Target

Reduce targets by
x%; increase scores
by x%

Initiative

Trialled at flagship
sites and then rolled
out

A scorecard is constructed including all the KPIs, starting


from the top level then drilling down to a more detailed level
and keeping measures logically grouped. The KPIs should be
prioritised according to Business Needs. The input data are
likely to come from multiple sources, and quantitative results
should be used wherever possible. Trend analysis is important
(for example, quarterly capture and reporting reveals what is
working well or poorly), so the same scorecard should be
used for each review to maintain consistency. If over time
it becomes apparent that a certain area is not an issue, its
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2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

monitoring can be relaxed, perhaps measuring in a less


detailed way. Other areas, however, may be below target
with no improvement over time and actions must be put in
place to tackle these. An ARM report is useful here:
Apply Remedial Measures Report
Ref.

Nature of
complaint

Raised
by

Date
raised

Owner
(supplier)

Action
taken

Date
resolved

BTA1

Aggressive
staff

KC

1/11/2020 Supplier A

Legal
advice

2/1/2021

BTA2

Unreasonable
demands

AU

1/11/2020 Supplier A

Email
rebuff

5/1/2021

The KPIs should be reviewed regularly to ensure that they


continue to accurately reflect the requirements of the sourcing
project and the wider business objectives.
5. Effective use of surveys
For categories or suppliers that were scored low (i.e. <60%)
in the prioritisation stage, it may be suitable to conduct user
surveys to assess the suppliers performance against one or
more particular KPIs and pass the responsibility for analysis and
remedial action on to the supplier. To optimise the responses to
a survey, the buyer should:
keep it concise, precise and relevant
naturally link questions
avoid jargon
use consistent scales to avoid confusion
allow free text to avoid forcing responses
check that recipients can answer the questions
ensure that results are linked to a form of feedback
indicate the importance of the exercise and the payback
to the supplier
allow the supplier adequate time to respond but not so long
that they procrastinate or forget
avoid distributing the survey during busy times
progress responses.

2010 SpringTide Consulting Ltd. All rights reserved.

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6.2

Supplier performance management

The buyer must be aware of the possibility of false responses


from suppliers who are attempting to create a positive
impression. Typically, random audits reveal such duplicitous
behaviour. If misrepresentation is clear and trust has been
broken then exit may be the only option.
6. Performance feedback
For suppliers that have moderate or enterprise impact,
feedback and two-way dialogue help in ensuring the removal of
bias and in fine-tuning to achieve the right balance and targets
behind the measures. This includes distribution of the data
internally, as those who have participated in surveys and buy
regularly from suppliers want to know how the supplier is
performing. Withholding negative performance results only
exacerbates the problems, as the supplier may have been
able to correct the issue sooner and it may have been of the
buyers making. Both parties should therefore attempt to
communicate issues in advance of meetings
adopt a learning culture and remove defensive behaviour
reward effort with praise and support
avoid telling each other how they should run their business
admit organisation failures
use rational techniques to identify problems
(see 6.1 Problem Solving)
keep to the facts
bring the right individuals to meetings.
Ongoing review and feedback can be linked into Relationship
Positioning, with the potential for high-performing suppliers to
progress into the Key group if appropriate, i.e. if the supplier
makes a significant contribution to competitive advantage and
is prepared to invest heavily in the account and if both parties
gain mutual benefit.

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2010 SpringTide Consulting Ltd. All rights reserved.

6.2

Supplier performance management

Act
Check
Do
Implement
KPIs
Capture
Plan
results
Who to involve
Level of depth
according to
impact

Trends
Logic of
metrics
Rationale

Develop the
relationship
Communicate
results
Recalibrate
Improve

Notes
Not all suppliers are willing to participate.
Supplier Performance Management is not merely a process
of ticking boxes at periodic intervals.
Measures should be mutually developed and the results
shared.
If there is no benefit, do not do it.

2010 SpringTide Consulting Ltd. All rights reserved.

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