Supplier Performance Management Best Practices for KPI Creation

One of the must followed best practices in business is to know that you are indeed getting what you contracted for. This may be as simple as confirming on time delivery of goods that conform to specifications. However, with time, as the business and service requirements repeat or become more complex, monitoring performance against contract requirements over time becomes an essential activity. In the beginning, when a contract has just started, there is always a degree of risk and uncertainty for both the sides involved. However, as the contract proceeds, both sides learn from experience and the risk begins to reduce as the original assumptions in the contract come to be tested. This can easily bring in complacence and declining performance levels go unnoticed. Therefore, it is necessary to monitor and measure supplier performance against the parameters agreed in the contract, the supporting service level descriptions and other documents such as partner agreements. Monitoring the supplier performance is thus a key aspect of Supplier Management. However, very often, it can easily be under-resourced and neglected.

Post-contract performance monitoring and management has a dual purpose:

  • To ensure that the supplier is meeting the performance criteria, e.g. service levels and quality, laid down in the contract
  • To identify room for improvement

Therefore, it is important that the buyer manages the suppliers on an ongoing basis and takes corrective and/or preventive measures for problems as and when they arise. For example, if a supplier starts facing difficulties due to unstable financial conditions, he will start facing difficulties in discharging his obligations. If this happens, there is a very high chance that the supplier will begin making behind-the-scenes cutbacks irrespective of what may or may not be specified in the contract. Thus, the key is to take corrective and preventive measures for problems when they are still minor and, therefore, easier to resolve. In order to take these corrective and preventive measures in time and make provisions for alternative supply mechanisms, the buyer needs some kind of early warning regarding the financial strain faced by the supplier. This can effectively be done by a tool that can monitor the symptoms for financial strain in the form of Key Performance Indicators (KPIs).


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