Today’s supply chains are robust, global, and dynamic.
Companies are relying more and more on third-party suppliers on the other side of the world for critical raw elements and materials.
However, the inherent dangers of this are very apparent and the COVID-19 pandemic served as a wakeup call for CPOs to enact stricter sourcing and supplier management risk protocols.
The Role of Suppliers in Your Business
Suppliers are pivotal in your success as an enterprise.
Good vendors enable you to achieve your goal of mitigating spend thanks to timely deliveries, price reductions as well service quality.
There can be no doubt that the quality of the entire supply chain is directly affected by supplier performance.
And for this reason, it is imperative that enterprises appreciate the importance of efficient supplier performance management (SPM) and the best SPM tools to take advantage of.
But, what exactly is supplier performance management and how do we assess it?
What is Supplier Performance Management?
The Chartered Institute of Procurement and Supply (CIPS), provides us with the definition of supplier performance management:
“…Supplier performance management (SPM) refers to the integration of performance evaluation, analysis, performance decision, supplier incentives, and punishment.”
Adding to this definition, the entire methodology (systems) used to acquire vendor information, appraise, assess, and rank suppliers also makes up part of SPM.
Let’s take a closer look at how these vendor assessments are carried out.
How to Assess Supplier Performance
Vendors are evaluated based on two sets of criteria – hard and soft key performance indicators.
Suppliers are not ignorant of these metrics because they are stated on the sourcing in supply chain contract signed between the vendor and the company.
In detailing exactly how supplier performance is measured, enterprises are giving vendors a clear guideline of what is expected as well as indicating potential areas that may need to be improved.
Should a contract need to be terminated, the vendor cannot claim unfair or discriminatory business practices if they have failed to adhere to the agreed-upon conditions.
Now that we know what supplier performance management is and what criteria are used to evaluate vendors, here are the top six benefits of supplier performance management.
How Supplier Performance Management Helps Your Business
Benefit #1 Protects Your Reputation
Despite careful due diligence on your part, at times, you can never fully know how a vendor will perform until you have entered into a contract with them.
However, what is certain is that poor service and or low-quality products from suppliers can do tremendous damage to your reputation.
An incompetent supplier – especially one who is overseas – can wreck the reputation you have worked so hard to build.
Fortunately, this is where supplier performance management steps in to help by giving you in-depth visibility regarding potential supplier risks allowing you to devise contingency measures ahead of time.
Benefit #2 Reduces Supply Chain Disruptions
Owing to the global interdependent nature of today’s supply chains, more measures must be put in place to counter unforeseen disruptions.
Strategic supplier performance management will give you the necessary insight needed to craft business continuity plans that can be implemented in the event of a disruption.
Benefit #3 Promotes Cost-Saving
What is every CPO’s worst nightmare?
Certainly cost overrun stemming from poor sourcing and supplier management is high on the list.
It is the task of the procurement department to find ways to mitigate spend so the bottom line can be increased. Therefore, overruns are extremely unwelcome.
SPM can facilitate tracking supplier performance against predetermined KPIs in order to take corrective actions that will keep costs low and profit up.
Benefit #4 Facilitates Data-Driven Decision-Making
SPM gives supplier managers actionable information upon which to make tactical decisions.
Data is the new oil of the 21st century and companies that use data tactfully will stand head-and-shoulders above their peers.
In fact, so important is effective data use that those organizations that make data-driven decisions will acquire 23 times more clients compared to those that don’t and will be 19 times more profitable too.
Benefit #5 Categorize and Rank Vendors
Vendors aren’t created equal. Some are just decidedly better than others. But how can you tell?
This is where SPM can help.
By carefully evaluating each supplier using the pre-determined criteria, an organization is able to gain visibility and so rank suppliers based on how well they meet expectations and fulfill their orders.
Benefit #6 Streamlines Internal Vendor Selection
Organizations sometimes have to contend with hundreds of suppliers at once. This can be laborious and time-consuming.
By relying on the SPM process and the data extracted, organizations can make internal decisions regarding vendor selection faster and with more accuracy.
It’s clear to see that sourcing and supplier management is an important business function for any enterprise. In order to boost your SPM efforts, you cannot afford to overlook digital supplier performance management software.
Solutions such as those provided by leading procurement software provider ProcurePort will ensure a smooth and centralized management solution.
So, if you would like to discuss SPM software with a consultant or to schedule a demo, contact us today.