Course: Vendor Managment

Quiz #3

Faculty:Khushnood Khalid

Mustijab Ahmed Khan

FA18-MBAP-0095

Date 31-October-2020
Q1) Why supplier measurement is essential, how are the different measures to evaluate supplier?

Supplier performance is a business measure

In purchasing we seem to be very keen to measure things. Traditionally purchasing functions have concentrated on
measuring the overall contribution of purchasing function using umbrella metrics such as price savings achieved or
other efficiency based measures. This is good, especially if the organization needs purchasing to demonstrate how it
adds value. Yet other indirect functions typically don't seem to be held quite so accountable; I don't know of too
many legal functions that need to demonstrate how good their contracts are or HR functions required to prove just
how effective they are at implementing policy. It seems purchasing still has something to prove here and perhaps
needs to increase its accountability in order to strengthen its position at the board of directors, leaving purchasing
professionals searching for tools to measure purchasing performance. Purchasing might typically need to account for
what it does through financial efficiency indicators such as:

• Purchase Price Variance (PPV) - a measure of the difference between what the organization budgets for cost of
third party spend and what it actually spends. PPV is a financial measure that helps organizations budget and plan.

• Price savings - a measure of reduction against previous spend, again a variant of PPV but linking the reduction to
some form of intervention.

• Cost savings - a similar measure by focusing on more than acquisition price but cost to the organization, perhaps
over the life of the product/service.

• Contribution to EBITDA (Earnings Before Income Tax, Depreciation and Amortization) - another variant of PPV
and price savings - if purchasing intervention can directly reduce price and cost then this reduction will positively
impact the bottom line profit.

• Cash retention - through negotiating payment terms that favor the organization.

• Return on Investment (Rol) - savings and benefits against cost of purchasing function.

• Cost of inventory - where stockholding is part of the business; the value of stock and cost to hold and manage it.

However, efficiency measures alone do not reflect the full extent of purchasing activities, in fact the preoccupation
with such measures may detract from more useful indications of how purchasing performs.Furthermore, these
typical measures are largely financial and would inform a wider business financial management system.

Crucially though, measuring the performance of the purchasing function does not necessarily ensure we are
measuring supplier performance. It may follow that the measures for the purchasing function flow down to suppliers
who are then required to demonstrate savings or cash retention, but alone these measures serve only to enable the
purchasing function to hit targets. However, suppliers don't typically serve a purchasing function, they serve an
entire business and have relationships and stakeholders across the entire firm. Other parts of the business are
interested in supplier performance and so might look to purchasing to measure the supplier in other areas such as
delivery or quality compliance.

Supplier performance measurement is therefore distinct from purchasing function measurement and so is a business
measurement approach not a purchasing function approach, but likely to be coordinated by the purchasing function.
It may include measures of purchasing efficiency but together with wider business measures too. Adopting the
mindset that supplier performance is a 'business measure' not just a purchasing measure is important to ensure we
develop the right approach. It helps shift our focus to the wider organization and demands cross-functional
involvement and engagement in order for supplier measurement to be effective for the entire organization.
Organizations measure many things, and each function has its own suite of measures that help demonstrate
effective contribution overall and suppliers, the supply chain and purchasing are part of the big measurement story.

Align performance goals

Smart businesses must first have a clear-cut supplier strategy that relates to the overall organizational objectives and
goals. In the long run, this will also help them to enhance their supply chain management. To achieve this,
organizations can pursue continuous improvement programs and methodologies such as Six Sigma, lean enterprise,
lean sigma, continuous improvement, operational excellence, and total quality management. Typically, companies
trying to get to the next level of excellence need to have key suppliers aligned with their own organizational
direction. Lack of synchronization in supplier activities and organizational goals can adversely impact cost, quality,
and delivery.
Choose evaluation approach
Companies must evaluate some of these critical aspects of supplier performance, including financial health,
operational execution, metrics business processes, and practices enabling behaviors or cultural factors risk factors.
These factors can help review and understand the supplier’s readiness to comply with the organizational
requirements and also efficiently meet the supply chain management requisites and guidelines.
Develop information collection method
The methods of information collection regarding the supplier performance include paper questionnaires, web-based
questionnaires, and extracts from current systems, site visits, and third-party standard certification. However, all
these methods have their own challenges and complications. Companies must choose the method that best suits
their purpose and gives them the optimal results.
Design a robust assessment system
No matter which components of a supplier performance assessment system an organization develops, a significant
challenge lies in creating a system that is based on metrics both relevant to the business and based on generally
accepted best practices. Designing and developing a robust supplier performance assessment system requires in-
depth business knowledge, familiarity with high-performance systems, and expertise of measurement
methodologies. Furthermore, it also requires expertise in adequately constructing the questions to elicit accurate
responses and correctly measure performance.
Roll out the system
One of the most significant difficulties in assessment systems is the deployment. Primarily due to the vast number of
challenges associated with each of the supplier assessment systems. Survey instrument development expertise,
subject matter expertise, and knowledge of IT are needed to avoid the pitfalls in deploying all these approaches.
Provide actionable feedback     
Customer companies need to have a real dialogue and discussion with their suppliers on performance and work on
the critical issues of the performance. This requires a two-way flow of information. If the results of supplier
performance measurement and supplier assessment are not actionable or expectations of actions are not
communicated, those actions will not be put into practice.
Showcase results
Measuring supplier performance is all about understanding, communicating, and then implementing the necessary
corrective action for improving supplier performance. What companies need to do is to work with suppliers to
develop action plans as a result of assessments. They should then track performance to these plans to close the loop
and realize the full benefits of the supplier performance measurement process.