Supplier Performance Measurement (SPM)
By measuring supplier performance, an organization can understand their strengths and weaknesses outside of the organization. A supplier’s performance affects the organization directly, therefore costing time and money in getting the product to the end customer.
The more suppliers that are measured and rated, the more accurate the organization is in creating profitability projections. Many organizations only measure their key suppliers, providing scores for a limited range of their entire vendor base. Even a small item such as a screw or washer can hold up production if it is not delivered on time. For this reason it is good to have a system that is easy to use and can be used across the entire supplier base if desired.
Nonconformance reports can locate problems, especially if they are repeating problems. Measuring the elements that are important to the organization as outlined in the last section provides a score that all suppliers are measured to. By measuring supplier performance, an organization can make accurate sales predictions and create more reliable contracts. Areas where multiple suppliers are needed can be defined.
Statistical models can be used to include or eliminate suppliers based on their importance to the organization. Spearman’s r allows the organization to list elements in order of importance to the organization. The supplier team then reviews suppliers and ranks the same elements for each organization. Spearman’s r will compare and rate each supplier as to their compatibility with the organization’s needs.
Spearman’s r can also be used as evidence for sole source providers on projects, such as those where it is required for high cost items that are not easily produced by less experienced suppliers. Below is an example of a Spearman’s r ranking performed on a supplier against organizational requirements.
Altman’s z is a measure of solvency. Altmans z can be used when choosing suppliers for contract work, especially that which may last over longer periods. Altman’s z ratings will predict whether or not a supplier is likely to remain in business.
Many other statistical models can be employed that are useful in SPM. When written into the supplier performance measurement system statistical outputs are products of the inputs and need not be fussed over.
When a system is developed that allows the supplier rating team to modify percentages of the elements based on importance to the organization, more reliable scores are generated dependent upon the item being ordered. The end data provide information that allows the organization to reduce spending and increase profitability.