But what are the different performance indicators you need to evaluate your suppliers? Suppliers often are evaluated by looking at three different dimensions (KPIs):
- Quality (e.g defects rate)
- Service, or Delivery delays (days of delay or early deliveries)
Usually the purchasing department is concerned with cost indicators, the quality function worries about defects, and production planning looks at late deliveries. These are departmental interests, and there is a trade-off among them. The illustration below correctly shows the meaning of trade-off.
Usually you can't move one of these performance indicators without affecting the others. An evaluation plan for each supplier should be done together with all the interested departments to avoid conflicts and also to understand the trade-offs of changing any of the dimensions.
Use KPIs with Your Suppliers
Key performance indicators are not intended to be used only inside your company but they need to be shared with the supplier to concentrate on common interests. Also when you plan new levels of performance for your suppliers you will need to consider the three dimensions: you can't say only "reduce costs" because supplier could introduce changes which affect quality: that is not a right choice. The same for "improve quality": it may be to the detriment of service.
An important consideration is that you need to quantify improvements you are asking for. A suggestion I can give is to think in terms of global costs. This can be done by structuring a function that considers:
- The purchase price;
- Defects cost (e.g. warranties on suppliers, reparations, production stops, quality controls);
- Service-related costs (e.g. transport, stock amount, modifications by engineering costs related to stock amount);
- and try to quantify how the global cost changes by changing any of these factors.
- If we improve the service by decreasing batch sizes and increasing deliveries, how much does the global cost change considering that if we decrease the stock, we will need to update less parts following engineering modifications.
- If we improve quality how will it affect customer satisfaction, cost of quality controls, or purchasing price, ?
As soon as you understand how the global cost function moves by moving parameters, you will be able to correctly set appropriate goals for your suppliers, just by using simple KPIs.
For more from Matteo, visit his blog at http://danoinonsipuo.blogspot.it/p/we-cant-do-that-mission.html