7 Supplier KPIs You Should be Monitoring
Explore the importance of monitoring supplier KPIs and why having them in place is key for reducing costs and improving your bottom line.
By Mackenzie Oakley | February 23, 2021
Businesses rely heavily on their suppliers to provide them with the raw materials, components, and services they need to operate. Relying on suppliers also means accepting a certain level of risk, as their performance can directly impact your business’s success. It’s critical to monitor and evaluate supplier performance using key performance indicators (KPIs).
Supplier KPIs are measurable metrics used to measure a supplier’s performance against agreed-upon standards or benchmarks. They provide a clear picture of how well suppliers are meeting your expectations and enable you to identify areas for improvement. Without KPIs in place, it’s difficult to determine whether your suppliers are meeting your requirements or not.
Procurement managers, supply chain management professionals, and business owners should all understand how to use KPIs to manage supplier performance. Doing so can help you improve efficiency, reduce costs, and improve your bottom line.
The benefits of supplier KPIs
Procurement teams use key performance indicators (KPIs) to ensure vendors comply with (and hopefully exceed) the obligations outlined in a contract. KPIs help us better understand performance, measure outputs over a long period of time, and identify areas where improvement is needed.
KPIs are a business tool to make sure you’re getting the products and services you expect. They might be as straightforward as confirming a product or service is delivered on time. In this instance, the KPIs you need to use will be minimal and basic.
In other circumstances, your contract will be much more complex with your expectations changing and evolving over time. In this case, supplier KPIs will be more thorough and the data you collect will provide important insights.
Depending on your needs, a set of KPIs should be easily understood. They need to provide a range of qualitative and quantitative data to help with your overall analysis.
Supplier KPIs are a business tool to make sure you’re getting the products and services you've come to expect from your supplier partners.
Measurable supplier KPIs
Here are seven suggested supplier KPIs you should be measuring.
Defect rates
Quality control is an important part of any buyer-supplier relationship. A supplier defect rate is used to measure and record the number of faulty or damaged products a supplier delivers. Over time, this information can provide a clear indication of their reliability and trustworthiness.
The defect rate can be divided into various types of faults. Additionally, the time needed for a supplier to repair the product(s) must be considered.
Lead times
Thanks to Amazon Prime, we’ve become accustomed to receiving a reliable and fast delivery service. For procurement professionals, that expectation is no different.
Lead time is the time required to fulfill an order. It’s the duration between when a supplier receives an order and when it is sent out. This KPI tracks the lead time and compares the quoted time with actual delivery time. It can also measure the frequency of late deliveries, and how significantly this impacts your business or production.
Contract compliance
A contract compliance KPI simply means confirming that your supplier is delivering what they promised to deliver during your negotiations. Have they honored your agreements on pricing and price increases? Are they adhering to delivery times? Is the level of service you are receiving up to scratch? When it comes to supplier contract compliance, procurement should be striving for 100%.
Return on investment
We recommend including a KPI that focuses on evaluating your ROI. This is an opportunity to analyze your overall budget against the cost savings you’ve made by using that supplier. While this gives an indication of how cost effective a supplier is, it doesn’t tell the full story. Remember, short-term savings don’t automatically equal long-term profitability.
Innovation
Working closely alongside suppliers provides a unique opportunity for procurement to drive innovation. It’s a harder KPI to measure but innovation KPIs can be used in a number of ways. Asking suppliers to innovate in terms of improving product design or using alternative materials can help keep prices low. Suppliers may be able to develop new processes that improve sustainability or increase efficiencies.
Risk and transparency
Every practitioner wants the reassurance that their supplier is financially stable and complying with all government regulations and laws. This KPI requires suppliers to provide proof that they are compliant and stable to protect your company’s brand reputation. It’s also important to require suppliers to implement sufficient security measures. There are plenty of third-party services that track factors such as supplier credit risk.
Customer service
This KPI is an opportunity for procurement professionals to rate the overall experience of working with a supplier. Was the customer service up to expected standards? Were complaints and issues handled professionally and efficiently, and were they easy to communicate with? Do you have a single point of contact or multiple people to deal with within that organization?
Customer service goes both ways, as well. Survey your suppliers for feedback. Ask about their experiences working with you as a customer and how the relationship can be improved.
Procurement managers, supply chain professionals, and business owners should all understand how to use KPIs to manage supplier performance. Doing so can help you improve efficiency, reduce costs, and increase profitability.
Conclusion
The process of implementing new contracts can feel uncertain and risky. Naturally, you might feel compelled to be diligent with your supplier KPIs. As time goes on, however, it’s easier to grow complacent. As a procurement leader, it’s your responsibility to continue monitoring and upholding of your suppliers’ performance.
What other KPIs does your company use to hold supplier partners accountable? Are you having trouble establishing a set of KPIs that work for you? Contact us to learn more about managing suppliers and getting the most out of your supplier relationships.
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