Tuesday, March 1, 2011

Managing Suppliers - Supplier Scorecards

If you do reading about Supplier Scorecards most of the time the authors will talk about the roles in evaluating performance and using them to improve performance. My opinion is that Supplier scorecards real value scorecards is in their potential use:
  1. If your collect and retain the information from the scorecard for use by others in your company, the scorecard should help others from making the same mistake in hiring a problem Supplier over and over again.
  2. The scorecard should be used to drive performance during the term of the agreement.
  3. If you have objectively measureable performance levels, they should be contractually linked to additional commitments or remedies.
  4. Scorecards should be used in subsequent negotiations to either:
    1. Get contractual assurances that there will be improvements in performance to committed levels or
    2. Used to reduce the price you pay the Supplier because of the cost their performance is causing you.

The most difficult thing in contractually linking performance to additional commitments and remedies falls in three areas:
  1. What levels of performance are unacceptable, acceptable, or superior?
  2. How do you come up with timely, credible, objective measurements?
  3. If commitments or remedies are tied to an overall score, what are the items that will be measured and what is the weighting?

Traditional measurements that can be timely, credible and objective are things such as late delivery, order accuracy quality and meeting cost or cost reduction commitments. Slightly less objective are most customer satisfaction measurements such as overall responsiveness, response to changes or problems, management oversight required, customer support provided. Overall management ratings tend to also be slightly less objective and would include management processes and problems such production control, MRP, 6 sigma implementation and use and complexity of customer facing systems and processes,

At the end of the day all Supplier caused problems wind up costing the Buyer and provide no added value. Scorecard processes are needed to not just highlight the Supplier’s performance but to also remind them of the cost of doing business with them. You use them to remind the Supplier that if they want to either retain the business they have or be considered for new business, they need to change.  They other message all of the costs they have created will be take into account in awarding new business, so if they don’t change they will need to price their product or service that much lower than their competition to offset the difference.

I can remember the first time we implemented scorecards at one of my previous employers. There was significant reluctance on the part of the Suppliers. Some readily accepted it and started to work on improvement and some didn’t and spent most of their time arguing over whether the numbers were real and whether the measurements were objective or not. When we implemented the program we told all Suppliers that the scorecard measurements would be one of the criteria we used in awarding future business.  When some long term suppliers didn’t get any business, or had their business dramatically reduced, they all complained. Our simple response was they were the ones that made the decision. We told them what we would do. We told them what was important. They opted not to take the necessary actions and they were now feeling the result of their decisions. They were costing us money, and their price wasn’t low enough to competitively offset the difference from Suppliers who were meeting all the commitments.

If your company uses Supplier Scorecards,  make sure you read them as preparation for preparing your contract or amendment and for your your negotiation.  Identify any problem areas that need to be corrected and address those as commitments in your new agreement or make them conditions of any new award and include them in the amendment to add new business to an existing agreement.  If they 
won't agree to them and you have other sources use that to negotiate a better price or buy from the alternative source. 

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