Objective:
To maximize supplier performance by effectively managing supplier relationships and interaction
Definition
A supplier performance management process is a structured process that defines how an organization measures, monitors and manages the performance of its suppliers. The process should include regular reporting and problem resolution monitoring, but, more importantly, proactive relationship management. An effective supplier performance management process should accomplish the following four goals:
- Communicate to suppliers how their performance will be measured;
- Generate performance reports to measure supplier performance and identify new opportunities to improve supplier relationships and performance;
- Proactively identify trends and potential problem areas so that appropriate action can be taken in a timely manner; and
- Outline standard processes for resolving issues with suppliers.
The process should also identify and address the hospital’s performance in areas critical to the success of the supply arrangements.
Rationale
To achieve supply chain excellence, the supply chain department should actively manage its supplier base, with a focus on relationship management and the performance of its suppliers. Poor supplier performance affects an organization’s ability to provide high quality service and increases workload for the supply chain department. An effective performance management process enables suppliers and organizations to jointly commit to new and continuous improvement opportunities.
Benefits
Patient Care
Proactively managing supplier performance facilitates improved supplier fill rates and decreases the instances of stock-outs, ensuring the right product is available when it is required for patient care.
Process Efficiency
Maximizing supplier performance results in reduced workload for supply chain staff and suppliers by decreasing the need to manage stock-outs, expedite orders and follow up on discrepancies.
Customer Service
Reliable performance of key suppliers is critical to ensure dependable customer service by ensuring the right supplies are available when they are required.
Risk Management
Monitoring supplier performance provides awareness of emerging trends and developing problems, allowing the supply chain department to proactively avoid unplanned, unexpected and potentially critical supply issues.
Supplier Relationships
A standard supplier management process strengthens the working relationships with suppliers by setting clear expectations and a consistent approach to measurement across all suppliers.
Related Metrics
3.2 Percentage of Rush Purchase Orders
3.5 Average Number of Purchase Orders Placed to Top 10 Suppliers in One Month
4.1 Stock-Outs at the Cart Level
4.2 Fill Rates to Customers
5.1 Percentage of Invoices Paid within Due Date
5.2 Supplier Performance
Guiding Principles
Organizations should establish a formal supplier performance evaluation process and ensure all suppliers understand the expectations.
Management of supplier performance is often understood to be a “downstream” activity, undertaken after the contract is awarded. However, proactive “upstream” planning is essential to creating a foundation for subsequent performance appraisals. Upstream performance management involves introducing the process and expectations to potential suppliers at the point of tendering and establishing agreement within the contract to participate in this process.
For high-risk and/or significant dollar value investments, a supplier performance management process should begin at the tendering process, with service commitments and metrics built into the supplier contract. For low-risk and low-value supplier arrangements, the performance management process can be less formal, with internal evaluations of supplier performance.
Periodic reviews are required to assess the supplier performance measurement process and any enhancements or modifications should be incorporated into the process.
Key Components
Upstream Planning and Key Performance Indicators
The specifications outlined within the tendering process should clearly outline the supplier and contractor requirements to meet the needs of the organization. The invitation to tender should outline the performance expectations and key performance indicators (KPIs) that will be used to measure supplier performance.
The required criteria for supplier performance measurement should be agreed to by the supplier before the contract is awarded. The contract should outline the process for collecting, evaluating and reviewing performance data. The criteria will vary depending on the nature of the supply arrangement in terms of value and business risk.
The following table outlines examples of KPIs that could be used to measure supply arrangements with different combinations of contract value and business risk.
| Risk Level | Dollar Value | |
|---|---|---|
| LOW | HIGH | |
| High | Low Dollar Value/High Risk: Strategic Security
Purchasing Objective: Secure Supply Typical Key Performance Indicators:
|
High Dollar Value/High Risk: Strategic Critical
Purchasing Objective: Manage Supplier Typical Key Performance Indicators:
|
| Low | Low Dollar Value /Low Risk: Tactical Acquisition
Purchasing Objective: Easy to Purchase Typical Key Performance Indicators:
|
High Dollar Value/Low Risk: Tactical Profit
Purchasing Objective: Drive Price Typical Key Performance Indicators:
|
Supplier Performance Appraisal Process
Key performance indicators, measures and processes should be included in supplier contracts and associated service level agreements. It is essential to secure the supplier’s agreement and commitment to these requirements before awarding the contract.
The depth and extent of the structured supplier performance appraisal process should depend on the size and complexity of the supply arrangement. The following diagram depicts a model of a structured supplier performance monitoring and management process for a large contract with significant risk.
1. Day-to-Day Management
Any issues that arise during day-to-day operations should be documented and tracked for discussion at planned future performance reviews. Major issues may need to be dealt with more immediately.
2. Performance and Management Information
Organizations can choose either to collect continuous or periodic data to measure suppliers against the agreed KPIs. This decision should balance the effort to collect data versus the risk associated with the significance of the products provided by the supplier. The KPIs should be reviewed and discussed during planned performance reviews.
3. Planned Performance and Progress Reviews
Planned periodic performance and progress reviews should be established before the contract is awarded. Frequency will depend on the timing and nature of the contract. For example, a higher frequency of reviews could be necessary during the early stages of a contract. Decisions regarding the protocol of reviews, including who should attend, who will act as chair, who will record and what documents are required, should also be agreed on before a contract is awarded.
4. Planned Management Reviews
For major contracts or projects, reviews of supplier senior level management may be appropriate. These reviews, though less frequent, provide a strategic overview of progress, issues and future plans.
Outcomes of each review should be documented, including decisions made and agreed-on action plans, responsibilities, timelines and milestones.
Supporting Tools and Templates
Organizations should establish standard templates for managing supplier performance. Attachments
5.1a-c provide examples of Supplier Performance Management templates. As a future initiative,
Ontario hospitals may want to adopt a common/consistent supplier performance management
process and templates.
Implementation Challenges
Challenges:
- The supplier performance measurement process could be viewed as complex and administratively burdensome, but, once established, it will aid an organization in the management of operational and financial risk of supplier non-compliance. The process should be adaptable for each supplier depending on the nature of the relationship and supply items and the associated risk.
- Staff may not feel the process supports or adds appreciable value to their roles. Supply chain managers need to communicate the importance of proactively managing supplier performance.
- The organization must act on the information generated by the process to improve supplier performance and obtain better outcomes. The performance reviews and associated action plans are critical components of supplier performance. Processes must be in place to implement recommendations or take appropriate action identified in supplier appraisals.
Attachments
Supplier Performance Monitoring Template
Attachment 5.1a: This template is an example of performance evaluation that could be used before a contract is awarded to detail aspects of supplier performance to be monitored, specific key performance indicators, frequency of reporting and reporting format. The desired outcome is that the hospital and supplier would agree on the program, which would then be included in the formal contract.
Supplier Performance Reporting Template
Attachment 5.1b: This template can be used in planned review meetings to provide an overview of the supplier’s performance in the period since the previous review. Actual performance in each key performance indicator can be readily compared against the target. A scoring system could also be incorporated such as the following:
| Actual Performance | Performance Rating |
|---|---|
| Performance above target | 3 |
| Performance at target level | 2 |
| Performance below target but not causing major problems | 1 |
| Performance below target and unacceptable | 0 |
Action Planning Template
Attachment 5.1c: This template can be used in planned review meetings to capture agreed-on action plans and assigning accountabilities following the performance review. Progress against the plans can be jointly monitored and discussed at the next planned review.
Attachment 5.1a – Sample Supplier Performance Joint Monitoring Program Template
Contract:
Review Date:
| Performance Area | Criteria | Key Performance Indicator (KPI) | Reporting Frequency | Format |
|---|---|---|---|---|
| Quality | Adherance to Specification | % and number of non-conformances | Monthly | Exception report, statistics and graphics, including trends |
| Service | Program Delivery | % of programmed maintenance jobs fully completed | Monthly | Exception report, statistics and graphics, including trends |
| Responsiveness | % of unplanned jobs responded to within contractual response time | Monthly | Exception report, statistics and graphics, including trends | |
| Customer Satisfaction | Customer survey via selected sample of face-to-face interviews with key customers | Biannually | Report | |
| Administration | Invoicing Accuracy | % and number of invoices approved | Monthly | Exception report, statistics and graphics, including trends |
| Contractual | Compliance with Agreed Terms and Conditions | Number of contractual problems encountered first time without query | Quarterly | Report |
| Management Information | Timely Provision of Data | Provision of the full management information "pack" one week ahead of the planned quarterley joint reviews | Quarterly | Agreed "management pack" including all KPI data and trend graphs |
Attachment 5.1b - Sample Supplier Performance Reporting Template
Contract:
Review Date:
| Performance Area | Criteria | Key Performance Indicator (KPI) | Performance | Performance Rating | |
|---|---|---|---|---|---|
| Target | Actual | ||||
| Quality | Adherance to Specification | % and number of non-conformances | < 1% | ||
| Service | Program Delivery | % of programmmed maintenance jobs | > 95% | ||
| Responsiveness | % of unplanned jobs responded to within contractual response time | > 90% | |||
| Customer Satisfaction | Customer survey via selected sample of face-to-face interviews with key customers | Good | |||
| Administration | Invoicing Accuracy | % and number of Invoices approved | 85% | ||
| Contractual | Compliance with Agreed Terms and Conditions | Number of contractual problems encountered first time without query | 100% | ||
| Management Information | Timely Provision of Data | Provision of the full management information "pack" one week ahead of the planned quarterley joing reviews | 100% | ||
Attachment 5.1c - Sample Joint Action Planning
Contract:
Review Date:
| Performance Area | Comments/Issues | Agreed Action | Responsibility for Delivery | Deadline |
|---|---|---|---|---|
| Quality | ||||
| Service | ||||
| Administration | ||||
| Contractual | ||||
| Management Information |
