Supplier Performance Management (SPM) is the process of supplier evaluation, monitoring, and then improving their, to ensure they meet an organisation's expectations. The foundation is typically measuring quality, cost, and delivery performance. It involves setting clear goals and Key Performance Indicators (KPIs), collecting and analyzing data, providing feedback, and driving continuous improvement through collaboration.

What is Supplier Performance Management?

Supplier Performance Management by definition helps businesses mitigate risks, optimise relationships through more consistent approach to supplier evaluation, as well as enhancing overall supply chain efficiency. 

Certain aspects of SPM can now be automated or semi-automated thanks to developments in AI, ensuring that Procurement teams can focus on more value-added activities that require human intervention.

But how do you establish the link between supplier performance and business success?

Collaborative Approach: SPM encourages a partnership mindset where suppliers and buyers work toward mutual success.

Guiding Suppliers to Success: By guiding suppliers to improve quality and compliance, businesses can ensure long-term sustainable success and build stronger relationships with their supply base.

Why is Supplier Performance Management important?

One of the benefits of supplier performance management is that it’s an important strategic as well as operational tool. 61% of Chief Procurement Officers highlighted "increasing level of supplier collaboration" as their top priority in the 2023 CPO Survey from Deloitte (Deloitte, 2023). 

Applied effectively, it can ensure that both day-to-day performance, long-term strategy, and contract lifecycle management are optimally managed.

Let's take a look at a few ways that SPM delivers critical value to businesses:

1) Operational Efficiency

Supplier Performance Management (SPM) ensures that suppliers consistently meet delivery, quality, and service expectations. By monitoring performance through defined KPIs, organisations can drive efficiency improvements and resolve bottlenecks, leading to streamlined supply chain operations and improved productivity. Efficient suppliers reduce disruptions, enabling businesses to maintain steady operations.

2) Measuring the Cost of Poor Quality and Late Delivery

Poor supplier performance directly impacts costs, including rework, lost sales, and higher inventory levels. Late deliveries can delay production schedules and hurt customer satisfaction. SPM helps quantify these issues, enabling businesses to take corrective action and avoid hidden costs that erode profitability.

3) Tracking Continuous Improvement

SPM provides a structured framework to measure and support supplier improvement over time. By regularly tracking performance metrics and collaborating with suppliers on improvement plans, businesses can foster innovation, reduce waste, and enhance the overall quality of goods and services.

4) Metrics to Steer Objective Commercial Negotiations

Objective performance data collected through SPM enables businesses to approach negotiations with clear, factual insights. Metrics such as on-time delivery rates, quality scores, and responsiveness provide a strong basis for discussing pricing, terms, or future collaboration opportunities.

5) Formal Mechanism to Address SWOT Metrics

SPM offers a formal process to evaluate and address suppliers' strengths, weaknesses, opportunities, and threats (SWOT). By identifying key risk areas and opportunities for growth, businesses can take proactive steps to mitigate risks and leverage strengths, strengthening the overall supply chain.

6) Enables More Strategic Supplier Relationships

Effective SPM transforms supplier interactions from transactional to strategic. By fostering transparency, collaboration, and mutual accountability, businesses can build long-term partnerships with key suppliers. Strategic relationships not only enhance performance but also support innovation, resilience, and sustainable growth.

In summary, supplier performance management advantages bring essential improvements for optimising costs, improving quality and delivery performance, as well as driving stronger, more strategic supplier partnerships.

Key KPIs in Supplier Performance Management

To give a flavour of what to include as supplier KPIs, here is a brief rundown of some hard and soft performance indicators you may wish to consider.

Regardless of how many of these you wish to include, there are some common measures you should take to improve your chances of success: 

Proven Methods to Improve Supplier Performance

Improving supplier performance requires a strategic and structured approach that benefits both the organization and its suppliers. One effective method is offering supplier training and workshops. These sessions focus on educating suppliers about quality standards, compliance requirements, and industry best practices, ultimately enhancing their capabilities and aligning them with your business goals.

Another key strategy involves conducting regular performance reviews and feedback. Scheduling monthly or quarterly reviews provides an opportunity to evaluate supplier metrics, identify performance gaps, and address issues proactively. A collaborative approach to these reviews fosters open communication and enables joint problem-solving to implement corrective actions effectively.

Finally, technological integration plays a pivotal role in streamlining supplier performance management. By implementing supplier relationship management (SRM) software, businesses can automate data collection and analysis, ensuring accurate and timely evaluations. This not only improves efficiency but also provides valuable insights to drive better decision-making and strengthen supplier partnerships.

Step-by-Step Guide to Implementing Supplier Performance Management (SPM)

So, that’s the theory. We know why it makes business sense to pursue SPM. But what are some of the best supplier development strategies when organisations wish to implement it?

1) Define Goals and KPIs

• Start by identifying the specific goals you want to achieve through implementing Supplier Performance Management. 

• Once goals are set, define measurable KPIs based on those suggested in the previous section to evaluate supplier performance. 

• Ensure these KPIs align with your organisation’s broader business objectives. 

• And, most importantly, communicate them effectively to your suppliers.

2) Collect Data and Analyse Supply Base

• Gather relevant data from internal systems, such as ERP systems, quality management software, supplier business reviews and contracts. 

• Supplement this where necessary with external data, including supplier audits or certifications. 

• Use this information to categorise your supply base by their performance, their strategic importance, and the risk level that substandard performance poses to your business. 

• Using Supplier Relationship Management software is a great opportunity to bring all of this into one single source of truth. Solutions such as Mercanis are both easy to use and able to connect with other sources. Don’t leave it to manual inputs into spreadsheets!

Tools such as balanced supplier scorecards or dashboards can help streamline this analysis. It can also ensure that both hard (qualitative) and soft (quantitative) metrics for supplier collaboration are considered. 

Not everything is black and white. This step lays the groundwork for prioritising which suppliers to focus on and identifying trends or issues.

3) Conduct Evaluations and Feedback

• Regularly assess supplier performance against the defined KPIs at specific, defined intervals. 

• Use methods like surveys, audits, or collaborative review meetings to evaluate performance. 

• Share the results with suppliers in a constructive manner, highlighting both strengths and areas for improvement. 

• An open and transparent supplier management process fosters trust and encourages suppliers to actively participate.

4) Implement Continuous Improvement Measures

• Improving supplier performance requires you to work with them to create improvement plans based on evaluation outcomes. 

• Provide training or share best practices to address skill or process gaps. 

• Investing resources into a Supplier Development team can bring the supplier’s capabilities to an acceptable level faster. 

• Collaborate on innovation opportunities, such as new product development or process enhancements, to add value for both parties.

5) Check, Adjust and Monitor Continuous Optimisation

SPM is an ongoing process. 

• Regularly monitor progress against improvement plans and KPIs. 

• Use feedback loops to identify new issues or opportunities as they arise. 

• Adjust your goals and KPIs when necessary to reflect changes in business needs, market conditions, or supplier capabilities. 

• Leverage technology such as supplier management software to streamline monitoring and reporting.

Following these steps, organisations can build stronger supplier relationships, mitigate unforeseen risks, and drive long-term value.

Strategic partnership relationships will drive more value for both parties over the long-term. A cost-focused, transactional relationship, where neither party invests much effort to grow together, is highly unlikely to succeed.

An effective Supplier Performance Management framework drives stronger supplier relationships and improved operational outcomes.

Tools for Implementing a Supplier Performance Management (SPM) Strategy

Implementing an effective supplier performance management strategy requires various tools to gather, analyse, and present data. Here are the key tools, and a brief description of how each of them fits into the process.

ERP Systems

Much of the data for evaluating supplier performance is housed within ERP systems. However, accessing and displaying this data can often be unintuitive. To overcome this challenge, organisations should consider integrating the ERP data with SRM software such as Mercanis, that can present the information in a more accessible and intuitive format.

Supplier Relationship Management (SRM) Software

SRM software serves as the central portal or fulcrum for all the data needed to manage supplier relationships. It can aggregate data from various sources, including external platforms, through API connections. 

For example, SRM tools can pull financial stability data from credit agencies or ESG metrics from sustainability platforms, creating a single source of truth for a digital supplier evaluation.

Every different organisation will have different criteria for selecting the right software. In another recent article, we also covered how to select software and what to look for more generally

Supplier Quality Management (SQM) Systems

SQM systems are primarily used to track KPIs related to production and manufacturing metrics. They are typically focused on direct materials and purchased parts. It is rare that they are also used for indirect materials or services. 

If quality data resides in an external system, it should also be integrated into the SRM software to enable tracking of these KPIs alongside other qualitative and quantitative supplier performance metrics.

Mercanis is able to integrate via API connection to other systems, ensuring that all of your data can be accessed in our 360º Supplier Profiles in one place.

Contract Management Systems

Contracts stored in databases, SharePoint, or other repositories must be linked to the SRM system. This allows for the evaluation of supplier performance against contractual service-level agreements (SLAs) or KPIs mandated in the contract. Post-signature contract management is a critical yet often underrated aspect of SPM.

With our built-in Contract Management module, all of your contracts can also be housed within Mercanis. We therefore ensure smooth access between contractual performance data and other SPM criteria in one application.

Project Collaboration Tools

Useful for projects such as capital equipment, construction, or new part introduction (NPI). In such cases, supplier performance is tied to the overall success of the project rather than delivery of routine goods or services. Project collaboration tools help track performance metrics that directly impact the project's outcomes.

You should leverage all or some of these tools effectively, depending on how your data is stored.

In doing so, your organisation can build a robust framework for Supplier Performance Management, ensuring seamless data integration, user-friendly dashboards, and one single source of truth to house everything that you wish to track.

Each of these systems plays its own part in the quest for successful SPM. 

A specialist supplier performance management tool such as Mercanis does all of this. Trying to achieve this in spreadsheets or through Sharepoint or maybe a project management tool is often a futile endeavor. 

The ability to bring together all the data into one tool and to present to suppliers and stakeholders effectively, without spending hours in PowerPoint, must not be understated.

Common Challenges and Solutions in Supplier Performance Management

Succeeding is not without some common supplier management challenges. Aside from onboarding the suppliers, the most common challenges which can hinder a successful SPM strategy are as follows:

Success Stories from Real Businesses

If you want to see supplier performance management in action, discover how real companies achieve tangible results through innovative strategies and tools. For an in-depth look, check out our webinar with GASAG and IntegrityNext, where we showcase a powerful success story that combines sustainability and performance excellence.

Conclusion

In summary, SPM is a critical process for ensuring consistent quality, minimizing risks, and fostering long-term growth through effective supplier relationships. By defining clear KPIs, leveraging technology, and promoting collaboration, businesses can achieve a streamlined and efficient supply chain. 

This guide provides you with a comprehensive supplier performance management summary, highlighting actionable strategies and tools to drive results. As organizations prioritize sustainable supplier success, they can not only meet operational goals but also align with ethical and environmental standards. 

Start implementing SPM today to build resilient, high-performing supplier networks that contribute to your business's lasting success.

FAQs on Supplier Performance Management