How to Measure Supplier Performance
A Great Strategy
In the manufacturing industry, important decisions must be made of whether to make certain parts in-house or whether they should be purchased from an outside supplier. The trend in recent years is that if the manufacturing of a part is not considered to be a core competence for the company, it will be purchased. In fact, some companies outsource most of their parts and operate primarily as a design-assembly-test location.
Purchasing parts from suppliers can often be substantially cheaper than manufacturing them in-house, especially for lower volume items. Suppose one of your parts is constructed from a raw metal and you need 300 of them per month. The cost for you to manufacture these in-house would include the purchase of machinery, the labour (salary plus benefits) to run the machine, the cost of equipment maintenance, etc. In addition, the equipment takes up valuable factory floor space and eventually becomes obsolete. Disposal costs may also exist at the end of the equipment’s useful life.
If you outsource this part, the supplier can combine your needs with the needs of other customers to manufacture a much larger number of these parts. This larger volume allows the supplier to produce the part at a much smaller piece price.
But… You Must Manage Supplier Performance
Outsourcing small volume parts and parts that are not a core competence is an excellent strategy, but what many companies forget is the incredible importance of managing your supply base under this strategy. With most of your parts outsourced, you are now highly reliant on the performance of your suppliers. If you don’t actively manage them, they can shut down your business and damage your reputation with customers and the community. Whether you decide to have one or several suppliers produce your parts is just one decision impacting your ability to manage supplier performance.
Suppliers will make or break your business!
In most procurement teams, the day is taken up by the activities of ordering parts, trying to manage inventory, paying supplier invoices and addressing immediate research needs to source new parts. So, strategic activities like actively monitoring the performance of the supply base and trying to project inventory needs remain undone.
Imagine this… You have a series of crucial parts that you need on a manufacturing line and your supplier’s contract promises that they will deliver parts to you within 7 days. Mostly they do deliver on time but occasionally they take much longer and you run out of inventory. You need to study and plan for “real-world” variation in delivery because the end result of a missed delivery is that your customers are unhappy that they did not receive their order from your company on time. While the root cause of the issue is the supplier’s performance, it is your customer base and delivery reputation that suffers. Now expand this risk across your entire supply base.
To reduce this risk, it is first essential to monitor your supply base performance to answer the following questions:
How does each supplier perform against its contracted delivery time?
How much variation is there in each supplier’s delivery time? (See YouTube video below.)
How often does a supplier quality issue arise?
Can your suppliers handle flexible order quantities?
These are just a few of the questions that can be used to review supplier performance.
In Summary
Taking the time to assess supplier performance is crucial since suppliers can make or break your business. Supplier reliability and flexibility have become performance factors that are just as important as price in order to protect your business reputation and top line. Setting up a method to monitor key supplier performance factors and studying demand patterns can help provide insight into supplier issues and set up a good path for reducing risk of the supply base on your company.