Kmgt 697 - Supplier Evaluation - Strategic Purchasing Management

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School of

Management

Key Concept

Overview

Supplier Evaluation

KMGT 697

Strategic Purchasing Management Week 3

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Key Concept[pic 5]

Supplier Evaluation

Although buyers spend a lot of time ensuring they make appropriate sourcing decisions, over time mismatches between an organisation’s needs and a supplier’s performance can occur. This risk is higher for new suppliers because despite assurances of quality and performance offered at the contract negotiation stage, problems can, and often do, occur later. Poor performance adds costs to the buyer’s organisation through poor quality, delays and poor service which can damage its reputation with customers.

Evaluating the performance of suppliers’ performance against an agreed contract enables early identification and warning signs of supply problems to be flagged. Sometimes although a performance dip may be seen as fairly minor, it can be indicative of wider issues. For example, if a supplier starts to slip in its delivery performance it could be an indication of problems accessing raw materials in the supply, production problems or supplier resource issues. Identifying problems allows early responses to be taken by the buying organisation. This is also important feedback to the buying organisation, as some short-term measures can be counter-productive in the long-term and purchasing need to have oversight of the impact of their sourcing strategies to enable learning, drive performance and mitigate risk. For example, buyers often focus on negotiating to drive down prices from suppliers to deliver commercial savings. However, if suppliers face continual pressure for price reduction over time, they may be left with limited financial resources leading to financial risk, quality problems and an inability to invest in longer term improvements.

Supplier performance measures should include targets and baselines to enable an assessment of performance to be made. There are two broad categories of measures. The first category is supplier performance effectiveness—essentially assessing if suppliers are doing the right thing; supporting corporate goals, focusing on key performance indicators (KPIs) and service levels set out in the contract. The second category of evaluation is performance efficiency—which measures whether suppliers

are doing things well, reducing waste, improving processes and reaching performance goals set (Möller and Törrönen, 2003). The subtle difference between effectiveness and efficiency is illustrated in Figure 1. Balancing the two areas is important as it is possible that we can have suppliers who are very good in areas not aligned to corporate goals (efficient not effective) or suppliers that are strategically aligned but not delivering desired level of performance (effective not efficient). Purchasing needs to ensure it measures suppliers against effective and efficiency criteria to push them to do the right things and do them well.