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Supplier Performance Scorecarding and Stratification Modeling

  • 6 February 2014
  • cre8
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Categories: ERP

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Two manufacturers talk with each other

Supplier performance scorecards and supplier stratification modeling are related concepts, but very different in how they should be used.  A supplier performance scorecard program should be used between an organization and its suppliers as a means of evaluating the performance of the suppliers against mutually agreed upon or accepted criteria. Supplier stratification should be an internal metric, where an organization takes other criteria (one of which can be the scorecard metric) and combines them to rank its suppliers (traditionally in an ABCD type model).  The information below will help guide anyone wanting to implement either concept in their organization.  Successful implementation of these concepts will have a positive impact on supplier relationships, operational efficiency, and improvement of EBITDA.

Cre8tive Technology & Design will be posting a weekly 3 part series on Supplier Performance Scorecarding and Stratification Modeling.

Part 1 – Supplier Performance Scorecarding (SPS)

              Common SPS Criteria

               Weighing Factors

               More Criteria

Part 2 – Supplier Stratification

Why Stratify your Supplier Base?

Best Practices Criteria

Part 3 – Conclusion

Supplier Performance Scorecarding (SPS)

Most organizations that have a scorecard methodology for their suppliers will likely admit (begrudgingly) that they are not entirely happy with the results of their scorecarding.  There are many possible reasons for this, ranging from complexity of factors used, to required manual input, suppliers lacking buy-in, and acceptance of the scorecards, etc.

A scorecard or performance measurement program is critical in the development and maintenance of supplier relationships, as it provides quantitative measurements that can be used to engage suppliers about improving their performance and incentivize them to do so (especially if high scores mean new opportunities for the supplier).  Having a program that is well developed and executed helps keep suppliers focused on their internal process improvements, which will ultimately impact your organization’s business goals.

The scorecard should be shared with your suppliers as often as possible, in order to keep communication about metrics fresh in their minds and to keep them abreast of their performance.  Far too often, organizations share these scorecards only once a year…during pricing negotiation meetings.  That is not the time to use a scorecard.

Common SPS criteria

One of the biggest challenges to a successful SPS is accuracy of data.  For example, on-time delivery is usually one criterion in SPS, but the supplier often uses the date of shipment as the target date for calculation, while the organization will use the receipt date.  The time in transit is sometimes a frustrating challenge, because a supplier often loses the ability to control the actual delivery date once the shipment has left their facility.  And some organizations may leave a container or package sitting in a receiving area for a few days before acknowledging or recording receipt, further complicating the accuracy of the data used for SPS.

Price

This criterion is tricky. Many organizations use it incorrectly and score their suppliers on whether or not sell prices increased over the previous year, even after contract pricing negotiations have occurred and the current pricing was agreed upon.  A better method is to look at price from a variance standpoint, meaning, is the price agreed upon at the time of order also the price that the organization was ultimately invoiced?

Delivery

Utilizing an on-time metric for this criterion is a no-brainer, but one that must be accurately defined.  If “on-time” means on the exact day delivery was requested, then it needs to be clearly expressed to the supplier and agreed upon mutually. If it is a window of delivery (say, seven days earlier than delivery date requested and never late), then that should be the expressed and agreed upon date.

Quality

Quality is a key performance metric that many organizations have difficulty defining as well as tracking.  Quality should not just address whether or not the product ordered was delivered undamaged and in a usable condition.  It should also reflect whether or not the product performed correctly and for the acceptable period of time (i.e., the warranty period), as well as the ratio of returns to the supplier.

Weighing factors

When determining a supplier’s final score, it’s critical that the criteria used are given weights.  The weights assigned to each criterion will vary among organizations, reflecting the importance of each factor to a particular organization.

To adequately conduct the weight exercise, you must develop a matrix, by determining what the acceptable ranges are for each criterion using an ABCD factor.  Calculating supplier scores and final rankings can involve more detailed statistical analysis.

More criteria

The examples above used the Price, Delivery, and Quality criteria for the purpose of simplicity, and it should be noted that there are many more (possibly better suited) criteria that can be used to determine a supplier scorecard.  Texas A&M University’s Industrial Distribution program has used the concept of a Supplier Performance Index (SPI) with four metrics-based criteria that easily allow suppliers to be scored methodically.

Follow this series and other previous postings.

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From an Epicor White Paper

About Epicor

Epicor Software Corporation is a global leader delivering business software solutions to the manufacturing, distribution, retail, and service industries. With more than 40 years of experience, Epicor has more than 20,000 customers in over 150 countries. Epicor solutions enable companies to drive increased efficiency and improve profitability. With a history of innovation, industry expertise, and passion for excellence, Epicor inspires customers to build lasting competitive advantage. Epicor provides the single point of accountability that local, regional, and global businesses demand. For more information, visit www.epicor.com.

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