To maintain an efficient supply chain and satisfy customers, companies must be assured of timely and accurate delivery from their suppliers. Many purchasing managers are turning to data analytics to calculate supplier performance metrics which leads to better relationships and stronger returns.
Fact-based analysis enables managers to measure and analyze suppliers’ performance metrics in an effort to identify potential problems and find a resolution as soon as possible. This blog will focus on how analytics can guide managers when making critical sourcing decisions to ensure the company is getting the best price and service.
Analyze supplier performance metrics
With data analytics, you can measure a number of supplier performance metrics such as number of orders delivered in full, on time (DIFOT), time to deliver, accuracy of orders, deliverance of damaged goods, performance over any time period, performance in specific markets and variances in product pricing. Metrics can be used as both a warning sign and to proactively improve performance. Analytics enables users to identify gaps in performance and failure to meet contractual agreements. With real-time analysis, you can identify your top and bottom performing suppliers which puts you in a better position to re-negotiate contracts or to make the decision to take your business elsewhere.
Here's three essential supplier performance metrics to get you started:
1. Delivery performance
Your supplier delivery in full, on time (DIFOT) metric is integral to analyzing supplier performance and negotiating better terms. It is extremely important to know how well your suppliers are fulfilling orders. This metric will show you which supplier is always late with a supply of stock, for instance. This metric also identifies which suppliers are getting your order to you on time but not the quantity you ordered. Delivery is full is important because it can affect your shipping rates, as several smaller shipments may increase your costs and cut into your profit margin.
The Order Completion metric measures your suppliers’ actual lead times. If you place an order, but your supplier doesn’t tell you when it shipped, the expected delivery date, or whether it’s going to be delayed, you have a problem. Companies must have accurate lead times to ensure they maintain appropriate stock levels without the risk of under- or over-stock. Lastly, Order Accuracy measures how often your supplier is shipping exactly what you asked for. Implementing these metrics will ensure that when contract renewal time comes around, you know how well each supplier has performed for you.
2. Compare prices and profit margins
Another aspect of analysis is the ability to compare prices to ensure the best profit margins. Data analytics allows you to drill all the way down to individual transactions and compare the price of products you’re are already purchasing to similar items offered by your suppliers. This comparison will help you detect variances in product pricing to assess whether a price is reasonable. Likewise, you can compare the price of similar items between competitors. Finally, analytics allows you to examine historical prices over time, taking inflation factors into consideration, to determine whether pricing increases have been reasonable.
When performing a price comparison, it is important to consider the direct cost as well as the hidden costs of doing business with the individual supplier. Hidden costs include inaccurate lead times, low DIFOT, incorrect orders, and other non-compliance issues. Such hidden costs can impact profit margins and negate the value gained during negotiations.
3. Share your data
Once you’ve completed a performance analysis, it is important to share your data with your suppliers. Some companies only use poor supplier performance information as leverage during contract renewals. However, companies that only use this data reactively miss the opportunity to improve the relationship. Companies that share their performance data with their suppliers see an improvement rate of 61% on average. Data sharing can add value to both parties as it enables the suppliers to understand your needs and expectations. However, sending an email report doesn’t encourage open dialogue necessary to resolve the issues. Instead, share this feedback during a face-to-face meet and provide actionable information rather than a simple report. For instance, the problem may be that a supplier his having an issue with one of their shipping locations. This collaborative approach encourages problem-solving and ongoing improvement
High-quality data analytics such as Phocas provides purchasing managers with a complete view of data on products and suppliers, in real-time, and in a just few clicks of a button. Managers can drill down into their data to quickly and easily to identify vendors with chronic problems and the best possible solutions.
Would you like to learn more about how supplier performance metrics can build better relationships with suppliers? Watch this on demand webinar, Inventory and stock insights, improving your purchasing decisions.