Performance measures and metrics should be part of any trading partner relationship within the supply chain. Continuous measurement and evaluation of suppliers is an important element of the management of suppliers and the procurement function.
Supplier measurements can be used in a variety of ways:
Ways to Measure Suppliers
Categories. This is a relatively easy and inexpensive method and is also the most subjective. It consists of determining a rating such as excellent, good, fair, or poor to each specific area of performance, e.g., on-time delivery performance or quality.
Cost. This method calculates the total cost of doing business with each supplier. It can be used to compare the total cost of ownership (TCO) for each item purchased from each supplier. It can be difficult to do if the financial system cannot capture the data required, or identify the costs incurred
when a supplier does not perform as expected.
Weighted. This method provides scores across each area of performance, which are weighted based on organizational priorities or types of supplier. Firms decide what performances should be measured, assign a weight to each, and determine minimum standards. The steps for creating a weighted supplier rating are:
Step 1: Select the mutually acceptable dimensions of supplier performance.
Step 2: Assign weights to each dimension based on relative importance to corporate objectives; weights must sum to 1.
Step 3: Collect supplier performance data.
Step 4: Evaluate and rate the supplier on each of the dimensions.
Step 5: Multiple the dimension rating by the importance weight.
Example of Supplier Rating
(100 is best)
Overall combined weighted rate
Step 6: If needed, suppliers can be classified based on overall scores. Examples of scoring levels might be:
Step 7: Perform ongoing supplier evaluation process.
Guidelines of a Supplier Measurement System
In addition to the guidelines previously discussed for implementing a performance measurement system, the following apply when measuring suppliers:
Many companies elect to have suppliers perform and communicate an evaluation of their own performance as part of the evaluation process, which promotes buy-in of the supplier to the measurement program.