How to manage supplier performance

Maybe you saw poor supplier performance coming right from the start but you went ahead anyway because there was no other choice.

Or perhaps it was just a strange feeling you had that you can only now identify in retrospect as suspicion.

Maybe there was nothing anyone could have done, sometimes things change and it’s out of your control.

Your early optimism is but a distant memory and all you’re left with is a cynical world-view.

Poor supplier performance has let you down. 

So what happens now?

First, let’s go back to the start.

It’s usually the case that a contract is arranged between an organisation and a supplier to solve an identified problem, to address a potential opportunity, or sometimes both.

The mutual expectations are that the contract will prove successful in solving the problems and/or capitalising on the opportunities, with good performance on both sides in terms of compliance with obligations and achievement of value for money.

When applicable, a contract should specify relevant performance criteria that are agreed by all the parties. These criteria provide the basis for determining the ongoing success or otherwise of the contract over time.

While anything less than the agreed supplier performance is undesirable, it would be unrealistic to expect no performance failures, and foolhardy to not allow for them.

Levels of acceptable and unacceptable performance and any associated consequences should always accompany the agreed performance criteria. This is a crucial aspect of supplier management. 

How to manage supplier performance

Supplier performance management software can support the process of performing a task or function, such as the supplier delivering certain services to the organisation, as well as provide an indicator of how well that task or function was carried out, like the level of adherence to an agreed delivery timetable.

When you measure supplier performance, it is absolute in real terms, such as 36 orders were delivered in the last month.

Meaning is only conveyed in relative terms, by comparison of the absolute measurement against a yardstick or target. This might show that only 31 orders were delivered by their due date, an 86% success rate. The acceptability of such a success rate depends on the targets that were agreed in the contract.

Tracking performance against supplier management KPIs is a key risk mitigation measure.

Bad things can happen very quickly but very quietly, and the effect on supplier performance can be significant. Poor performance can occur gradually or suddenly. The consequences can range from trivial and easily remediated to catastrophic and terminal.

In this article, we’ll describe a comprehensive approach for dealing with poor performance through supplier performance management, covering:

1. How is supplier performance measured?
2. What is poor supplier performance?
3. What causes or contributes to poor supplier performance?
4. Implications of poor supplier performance
5. Detecting poor supplier performance
6. Understanding why poor supplier performance occurred
7. Accepting responsibility for poor supplier performance
8. The impossibility of addressing it
9. How to address poor supplier performance
10. Failing to address it

Assumptions
To set the context for this article:

• The contract between an organisation and a supplier will be for the acquisition of certain products or services
• The supplier is important to the organisation, say by virtue of the criticality of its products and services or the size of the annual spend
• Most resources when monitoring supplier performance are directed towards important suppliers
• The organisation has the capacity, capability, commitment and contract management maturity to run an effective supplier performance management program.

1. How is supplier performance measured?

Delivery of contracted products or services is almost certainly required with definite targets in mind, such as:

• By a specific point in time
• To or at a certain location or locations
• For a specific price
• In accordance with some sort of specification or standard
• In a specific quantity
• Of a certain quality
• In compliance with various regulations
• To some level of user satisfaction.

These targets are often categorised as time, cost, quality or opinion metrics.

Supplier performance is often indicated by various levels of compliance with the agreed delivery targets. Depending on the products or services to be supplied, the minimum desired performance level might be expected immediately or after a transition-in period during which the supplier establishes and ramps-up capability or completes some sort of staged roll-out program.

Poor supplier performance can be defined in many ways. As a general concept, it is typically anything related to a service delivery failure of some kind that has, or has the potential to have, an unacceptably detrimental effect on the organisation.

As a specific measure, poor performance is commonly expressed as achievement of a level of performance less than the minimum desired, with the severity of the shortfall increasing with the distance between the actual and desired performance level. Risk analysis in the early stages of your supplier relationships can also be a key indicator of whether poor performance is likely. 

Automate performance monitoring with supplier management software

Other more indirect or subjective elements may also be included as general performance criteria, such as:

• Costs trending down
• Quality or speed trending up
• Reasonable service response times
• An effective working relationship
• Delivery of continuous improvement or innovation
• Ability to deal with changing organisational requirements and circumstances
• Forthrightness in calling out organisational obstacles to supplier performance

2. What is poor supplier performance?

A definition of poor supplier performance needs to be specified in the contract so that it is obvious to all concerned if and when it occurs, and is essentially incontestable.

The definition might describe various thresholds of different performance targets that individually or in combination represent an unacceptable situation, either instantly or over some period.

With forethought during initial contract development, it may be possible to establish a mechanism for increasing delivery and other supplier performance targets at certain points in the contract’s term. This should also apply to any definition of poor performance.

The mechanism could be based on continuous improvement or innovation obligations, or just an expectation that the supplier’s processes will improve over time, as will its experiences in delivering the required products and services to the organisation.

There needs to be repercussions as part of successful supplier performance management, and they need to consider intent. This is necessary to encourage appropriate behaviour in the delivery of products and services, to reinforce the notion that people are being trusted to do what they committed to do, and to provide a reminder of the linkage between actions (or inactions) and consequences.

3. What causes poor supplier performance?

The causes of poor supplier performance can be many and varied, ranging from a single activity, behaviour or event to a number of them occurring in sequence or simultaneously.

The supplier, the organisation and various third parties could be involved directly and/or indirectly, including in some uncontrollable force majeure situations. Anybody involved could be a victim of circumstances or plain bad luck, follow poor practices, lack awareness or experience, or suffer self-inflicted damage as a result of not tracking obligations.

"Seventy-eight percent of companies say they don’t
systematically track contractual obligations" - EY Legal

Supplier-side causes of poor performance can include:

• Overly-optimistic belief in capabilities, capacity and expertise
• Lack of preparedness for dealing with supply chain disruptions
• Mistreatment of supply chain
• Misunderstanding of the organisation’s requirements
• Financial difficulties
• Workforce disputes and stoppages
• Loss of or damage to production facilities
• Internal rather than external focus
• Poor relationship skills
• Failure to stand up to unreasonable demands or behaviour from the organisation
• Lack of robust and flexible processes
• Lack of agility, creativity, grit and resilience
• Uncontrollable force majeure events like armed conflict, bad weather, economic disturbance

Organisation-side contributions to a supplier's poor performance can include:

• Unrealistic or unreasonable demands on, or other poor treatment of, the supplier
• A failure to understand, monitor and act on risks caused by supplier
• Financial difficulties leading to persistent late payment
• Failure to abide by agreed ordering protocols and processes
• Failure to address every supplier performance issue
• Failure to track supplier performance and obligations
• Failure to verify supplier-provided performance figures
• Immature or non-existent demand management resulting in persistent high-urgency orders
• Requirements specifications that are impractical, imprecise, incomplete or inconsistent
  
  

4. Implications of poor supplier performance

The implications for the organisation centre around the potential for negative effects such as:

• The effort involved in checking if the supplier can address its poor performance
• Any need to update the contract to deal with the situations experienced
• The costs of taking any legal action against the supplier in the case of a contract breach
• The hassles involved in obtaining the required products and services from other suppliers
• The work to address any of its own contributions to the supplier’s poor performance
• Generally increased supplier risks if no alternatives exist
• The organisation’s inability to service its own customers to the required standards
• The subsequent loss of its own customers
• Legal action initiated by any affected customers
• Extra costs incurred in trying to remedy the business or legal situations
• Failure of its business

In a nutshell, poor supplier performance costs the organisation, in terms of money, time and reputation, can raise the risk of customer churn and even threaten the organisation’s viability.

The implications for the supplier are also negative:

• The effort involved in checking if it can address its poor performance
• The work to address its poor performance
• The imposition of any penalties or other disincentives for poor performance
• Any need to update the contract to deal with the situations experienced
• The costs of defending and settling any legal action taken by the organisation or a regulator
• The costs of taking any legal action against its own supply chain
• The hassles involved in utilising other supply chains
• Generally increased risks if no alternative supply chains exist
• Loss of the organisation’s custom
• A degraded market reputation
• The potential for loss of other customers
• Legal action initiated by any affected customers
• Extra costs incurred in trying to remedy the business or legal situations
• Potential failure of its business if the organisation is its only, or only major, customer

It’s unlikely that all such negative effects will occur as a consequence of a single instance of poor supplier performance. The scope and scale of any negative effects will depend on the nature of the poor performance and its exact causes, and how early the poor performance is detected.

5. How do you assess poor supplier performance?

Certain aspects of a supplier’s performance can be immediately obvious, say when blue widgets get delivered rather than the red ones that were ordered, or when the silver widgets arrived after their expected date.

A free and very effective early warning system for poor supplier performance can be established by a simple act: publicising details of agreed service delivery targets, either for specific orders or for orders in general.

The people expecting the ordered products or services should be advised of the date the order was placed and its expected delivery date, or referred to the location of the general delivery lead times information.

In lieu of any notice from the supplier that an expected delivery date cannot be met, the stakeholders in the order can watch for its delivery and advise the necessary people if it’s late.

Other aspects of supplier performance may only be revealed when relevant measurements for a period are reported. Presuming that delivery expectations are clearly stated in the contract, that the requisite measures are correctly calculated and that periodic efforts are made to ensure that the relevant numbers can be trusted, the supplier’s overall performance during the period measured should be clear.

Poor performance by stealth can occur, not necessarily by deliberate action. It can happen in decentralised organisations with a large geographic footprint and/or those with a lack of organisation-wide performance reporting.

The sum of relatively lightweight local instances of supplier performance issues or trends might well be a cause for concern if the details were known at a rolled-up level.

This is where a dedicated supplier performance management solution can prove its worth by centralising the view of suppliers, their compliance levels and their ongoing performance relative to agreed targets.

It’s crucial that no important measures of supplier performance are overlooked or hidden, and that they are reported quickly enough to allow the consequences of poor performance to be mitigated with minimal detrimental effect.

6. Understanding why poor supplier performance occurred

It can be difficult to readily tell if the supplier’s poor performance is isolated to just the organisation for some reason, or if it is indicative of a much more serious problem affecting the organisation’s country or region, or all of the supplier’s customers.

On awareness of poor supplier performance, discussions need to be promptly held with the supplier to establish the root causes and scale of the reported issues and who is responsible, consider the potential for abatement or continuation of the issues and their possible duration, and identify any other factors that can contribute to understanding of the situation.

Third parties may need to be involved, to give specialist perspectives and advice about causes, consequences and options.

7. Accepting responsibility for poor supplier performance

Not surprisingly, the supplier is usually the prime suspect in cases of poor performance. After all, they are the ones delivering the required products and services, so it has to be them, right?

Well, no, not if the organisation is affecting the timeliness of delivery say by placing orders after cut-off times and demanding expedited delivery by the usual due dates, or by providing incorrect delivery addresses requiring reshipment. It’s a big call to blame the supplier if those dates can’t be met in such cases.

Even if it’s usually the case, automatically blaming the supplier is blinkered thinking that can lead to embarrassment and apologies if it becomes clear that the organisation itself is responsible for, or has contributed to, some aspect of the supplier’s poor performance.

The organisation needs to recognise that its people may be at fault occasionally and that its approach to supplier performance management has room for continuous improvement.

To combat this, it’s worthwhile discovering the types of organisational behaviour that can impact the supplier’s performance, then ensuring that appropriate measurements are collected and reported for review along with the supplier’s performance figures.

Efforts should be made to ensure that the correct picture about supplier performance is reported after taking account of perturbations introduced by the organisation’s behaviour. Any dishonesty in this regard is likely to have a karmic payback sooner or later.

8. The impossibility of addressing it

It may turn out that there’s no real possibility of dealing with the root causes of the supplier’s poor performance. For example, the supplier’s manufacturing facilities may have been destroyed by fire, flood or war after execution of the contract, making it impossible for the supplier to fulfil outstanding orders.

If such circumstances were unforeseen when the contract was signed, both the supplier and the organisation may be released from performing their obligations under the contract in accordance with the legal doctrines of impossibility and frustration.

Should this happen, the organisation will almost certainly need to urgently make other arrangements for obtaining the required products and services.

Where alternative suppliers are just not available, the problem jumps an order of magnitude on the difficulty scale, to the realms of threatening the organisation’s ongoing viability. Dealing with such an issue is likely to be far beyond the Contract Manager’s area of responsibility so is out of scope for this article.

9. How to address poor supplier performance

It’s unrealistic to expect that poor supplier performance can be totally prevented. For sure, steps can and should be taken by a supplier and its own supply chain to try to minimise the prospect of delivery failures, and the organisation must also ensure that its own behaviour doesn’t negatively affect the supplier’s performance.

Reward and consolidate vendors based on performance 

A reality that must be accepted is that the fickle finger of fate doesn’t obey anybody’s rules, heed their best-laid plans, or care about the consequences. Stuff happens, however improbably.

The best anybody can do is be as prepared as practicable, expect the unexpected, react quickly and minimise the damage.

Dealing with poor supplier performance could involve:

1. Developing and applying any fixes to get things back on track. It’s important for the organisation to deal appropriately with every instance of undesirable or poor performance that can be attributed to the supplier, regardless of its severity.
   
   The absence of any mention to, or action against, the supplier by the organisation for such performance might be construed by the supplier as approval to continue to operate in such a fashion.
   
   Failure to address such performance infractions head-on can easily lead to decreasing real service and increasing lip service.
   
   Where the causes of poor supplier performance are treatable by the supplier and/or the organisation, their discussions should consider and agree on the approaches to be developed and applied. This needs to cover who has the responsibility for doing what, by when and how, in order to remediate the immediate issues and to prevent their future recurrence if at all possible.
   
   When neither the supplier nor the organisation is at fault for the poor supplier performance, and the contract is not subject to the doctrines of impossibility and frustration, their discussions should consider if there is any realistic way of dealing with the external causes at the root of the problem.
   
   If the externally-caused poor performance is potentially treatable, while it is mainly the supplier’s problem to resolve, the organisation could, to the extent feasible, offer to help or provide support to the supplier while it deals with the issues. Such help could come in the form of advance payment or extended delivery dates for orders, for example.
   
   
2. Updating the contract to formalise any agreed behavioural or process changes. The solutions to the supplier’s poor performance could be quick, simple and cheap to achieve, or the opposite in one or more respects. They may entail changes to obligations, processes, costs, service levels and so on.
   
   Formalising all such changes via an amendment to the contract is necessary. All interested parties in the organisation should be notified about the changes, with details published via the methods normally used in order to prevent any obscurity later down the line. 
   
   Closer attention than usual should be paid to the supplier’s performance for several reporting periods, to check if it returns to more acceptable levels, and that any associated contract changes don’t introduce new issues.
   
   
3. Terminating or refusing to use the contract. Addressing a supplier’s poor performance may neither be possible if there’s just no likelihood of dealing with its root causes, nor desirable if the supplier has exhibited persistent indifference, intransigence, reluctance or resistance in respect of remediating its performance.
   
   Terminating the contract early might be an option for the organisation If it can be readily achieved, and if viable alternative suppliers exist when continuation of supply is necessary.
   
   While termination might possible, it may only be achievable at specific times like on an anniversary of the contract’s commencement date or after a minimum term, and/or it may attract a significant fee. Both situations may be acceptable to the organisation if the impact of contract termination is less than that sustained during the supplier’s poor performance.
   
   Where termination of the contract is not possible or practical, the organisation might be able to just stop using it. This requires the contract to lack any supplier exclusivity or minimum spend conditions, and viable alternative suppliers must exist when continuation of supply is necessary.
   
   The contract can then be appropriately terminated at the end of its term or any earlier termination date allowed.
   
   Whether the contract is terminated or just not used, the organisation can commence a new contract with a different supplier as soon as it is clear that it can do so.
   
   

10. Failing to address poor supplier performance

Success in rectifying treatable poor supplier performance is not guaranteed. The supplier may not take any immediate or even deferred action, its solution rationale may be suspect or irrelevant, or the approach used might have failed to deliver.

It may take some time before failure to address the poor performance becomes apparent. As soon as the failure is recognised, immediate discussions are needed between the organisation and the supplier to highlight the fact, emphasise the ongoing effect on the organisation, and raise the stakes.

Even if the poor performance isn’t having a serious impact on the organisation, the problem must be escalated to a higher management level with the supplier as well as with the organisation.

A clear statement is needed about the situation and its causes, the implications for both parties, the actions taken so far and the outcomes achieved, plus a summary of the reasons for failure of the performance rectification efforts. This should be accompanied by a statement of the supplier’s contractual obligations with respect to service delivery and performance, and the organisation’s rights concerning performance failures.

The aim of the escalation is to reach a consensus on actions needed to obtain a timely resolution to the issues, then implement those actions.

On failure to reach consensus or rectify the performance issues via the agreed actions, one or more of the following options may be tried:

• Further escalation
• Invocation of the contract’s dispute resolution procedures, if any
• Legal action
• Contract termination.

Summary

The causes of poor supplier performance can sometimes be controllable, sometimes not. Regardless, the key to minimising poor performance lies in the relationship between the organisation and the supplier.

A good relationship provides a strong foundation for dealing successfully with instances of poor supplier performance. A fractious relationship does neither party any good.

A commitment to working openly and honestly together is necessary to figure out what’s going wrong and why, develop practical solutions for addressing the issues, plan and implement what can be done immediately and over time, check that it’s working and adjust on the fly, do the best that can be done to bring performance back to acceptable levels and keep it there.

Adjust the contract as necessary to formalise any new or changed performance targets, obligations and rights.

Mutual trust and respect, a strong and visible intention to make the relationship work through thick and thin, regular formal and informal communications, agreement of priorities, clear positions on the supplier performance targets and management, joint understanding of the commercial risks and mitigations, and judicious use of ‘carrots’ and ‘sticks’ are some important factors in achieving a comfortable working relationship and good supplier performance.

A good relationship plus good supplier performance equates to high satisfaction for all involved.

Crucial to achieving this high level of satisfaction is using the right supplier management solution to provide the insight and the data to help identify poor supplier performance. This is especially the case when businesses have a large geographical footprint or multiple divisions and supply chains.

In this article we’ve presented an approach to help you understand what poor supplier performance means, its causes and effects, how to detect it and deal with it, and what options are available when it’s untreatable.

If you would like more information on how to deal with poor supplier performance or how a supplier management platform could offer significant benefits to your business then contact Gatekeeper today for a free consultation.