In managing supply, buyers need to measure a supplier’s performance if they are going to get improvements. After all, what gets measured gets done! A common set of performance measures used by Purchasing Executives involves measuring the price you have paid for a product or service, the quality of that item and whether or not it was delivered on time. But this is looking backwards at what has happened. What you really need is a proactive set of measures that look forwards and this article describes what these are.
The problem with measuring price, quality and delivery is that it is reactive. There is a time lag between receiving the product or service and getting the results of these performance measures. It is too late then to do anything about poor performance.
If the product or service is mission critical in that poor performance by your supplier will cause a major disruption to your organisation’s business then you cannot afford for anything to go wrong. You need performance measures that allow you to take action before poor performance is received.
So here are three suggestions for turning reactive performance measures into proactive ones.
1. The first is price. Although you should never ignore the unit purchase price of the thing you are buying, just focusing on this aspect can lead to the wrong decision. For example, if you are buying batteries then there are other costs for you over and above the purchase price. The lifespan of the battery is important. A battery may be 10% cheaper than the alternative but if it only lasts half as long, you will finish up buying more of the cheaper battery for a given usage than the more expensive alternative.
Other costs that need to be considered when making purchases are the costs of using the item, any costs of maintaining it and the cost of disposing of the item at the end of its useful life.
For these items, the total cost of ownership (in other words the sum of the purchase cost, running costs, maintenance costs and disposal costs) is a more sensible performance measure than unit price.
2. The second is quality. The problem with most performance measures involving quality is that they measure the quality of what you receive, typically in terms of number of rejects for a given number of received items. This doesn’t help you if you have run out of that item. Often you need to keep inventory to compensate and this costs you money.
What you need instead is a quality assurance measure. In other words, identify with your supplier the key processes and inputs that are responsible for the ultimate quality of what you are buying and measure these. If your supplier’s processes are capable of delivering quality and are working well, the probability of receiving defects is greatly reduced.
3. The third suggestion is delivery. Measuring delivery leadtime doesn’t help to reduce costs. All it can do is aid planning and the longer the leadtime, the greater the uncertainty and so the higher the cost (through, for example, having to hold inventory). However, taking a similar view to the quality measure, what you need to do is measure your supplier’s operation cycle time. If you know what this is, you can work with your supplier on initiatives for reducing it.
By moving from price, quality and delivery measures to measures of total cost of ownership, quality assurance and cycle times you put yourself in the position of being able to assure supplier performance instead of having to react to it.