Supplier Performance Management Saves Time and Money

SIG University student Moath Alswaidan enrolled in the Certified Sourcing Professional (CSP) program and works at Mitsubishi Heavy Industries – MHPS Saudi Arabia. He shares what he’s learned in the program and how his team plans to implement best practices in supplier performance management.

Supplier performance management is one of the most important areas in sourcing and supply chain management and I feel fortunate to have worked on both the sell side and buy side of the table. Most of the sourcing process requires much effort from both sides until the work is awarded to the supplier. Supplier selling teams spend time and effort to prepare to negotiate a proposal that best fits the buyer. At the same time, the buyer team needs to put the same effort in searching and selecting the best proposal for their organization. It is a waste if the agreement doesn’t last due to the lack of supplier performance management.

Transition Process

The supplier performance management process begins by selecting the team from both the buyer and supplier organization. The mission is to translate the contract into the operation language and identify the measurement and monitoring criteria. This task is called transition. The team should have enough knowledge of the business and the scope of work defined in the contract. The transition process requires a joint effort from the transition team and may also require the support of other teams in the organization. The transition process is considered a change from an existing state to the desired state. Therefore, it is recommended to adapt to Lewin’s Change Management Model: Unfreeze, Change and Refreeze.

According to my experience, the transition process usually takes anywhere from two weeks up to six months depending on the nature of the contract. As a result, the team should identify the mentoring criteria, which are usually called the Key Performance Indicators (KPI) and set weights for each performance criteria according to the business needs. The team should also agree on the frequency of sharing the performance mentoring report and the frequency of the performance review meetings. The supplier is responsible for creating a standard operating procedure (SOP) for its operation team that reflects the same KPIs. The transition team should join the first two or three performance review meetings until both sides are familiar with performance mentoring and expectations.

5-Step Supplier Performance Management Plan

After the transition is completed, it’s time to have the supplier performance management plan. The plan consists of five steps in which the buyer completes the first three steps and then the supplier completes the remaining two.

  • Step 1: Measure the supplier performance criteria, or KPIs, over a defined period and multiply them to the associated weights to obtain the performance result.
  • Step 2: Evaluate the result against the agreed targets and compare it to the previous period to see the trend in performance.
  • Step 3: Communicate the result and findings to the supplier and request a face-to-face performance review meeting. The buyer is responsible for creating the meeting agenda and making sure the review is a structured business discussion.
  • Step 4: The supplier creates a performance improvement plan and shares it with the buyer. They should agree on action items and future targets.
  • Step 5: Implement the improvement plan, report back on the results and return to Step 1.

As these steps demonstrate, supplier performance management is not a “Point A to Point B” process. Instead, it is a continuous cycle process. The lack of a supplier performance management program may lead to a 75% loss of the sourcing value of the contract in one and a half years. In contrast, companies that follow the supplier performance program obtain a 5% reduction in their supply chain cost yearly.

The Certified Sourcing Professional (CSP) program is a 10-week on-demand program designed for the time-constrained professional. In the CSP program, SIG University students focus on the hard and soft skills of sourcing, learn about strategic sourcing and outsourcing methodologies, best practices in negotiations, and next practice insights in artificial intelligence, big data, crowdsourcing and other disruptive technologies challenging the future of work.

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