Performance Measurements and Metrics: Developing Collaborative Supplier Partnerships
Performance Measurements and Metrics
Tracking the performance of suppliers is instrumental in evaluating whether or not they are showing improvement. Each company must assess what measurements and metrics are important evaluation tools for them. Most organizations track various performance criteria, and although there are a myriad of measurements that could be used when developing suppliers, the consensus among most experts is that the following measures are the most important:
One would be inclined to believe that late delivery should be the only metric in assessing performance. In fact, late delivery is not the only thing that should be measured in this area. Deliveries made too early can have a negative impact on performance. For instance, if a manufacturer has little space to store inventory, the material could easily be misplaced and unavailable when it is needed for production. Also, early deliveries could impact the carrying costs incurred by the manufacturer. So it is important to note the potential impacts of early delivery.
Bruce Nolting, senior manager of purchasing and production control for Toyota Industrial Equipment Manufacturing, believes “that delivery is the most challenging aspect of (supplier) development.” Toyota set its goal at 100% for on-time delivery and requires, in most cases, that the delivery be made within one hour of when the parts are needed. Toyota only considers a delivery as complete when the *entire* order arrives when scheduled. This is a very difficult standard for the majority of suppliers to meet, so Toyota must be selective during its supplier selection. However, Toyota is willing to work with the selected suppliers to develop them so they are able to meet these difficult milestones (9).
Measuring quality improvements is vital to gauge the development of a supplier. A supplier needs to demonstrate its willingness to learn new techniques and to work extensively with the organization it is supplying. Companies must be willing to work with their suppliers to help reduce/eliminate errors and defects, or at the very least guide their suppliers in reducing quality problems (2).
Honda of America has shown impressive results through its quality improvement programs with its suppliers. Honda holds a yearly supplier conference and identifies areas for improvement as well as recognizes suppliers who have shown exemplary performance (11).
Perhaps the easiest evaluation tool to measure, costs can be quickly identified. Reducing supplier costs impacts the company’s bottom line directly. Often the focus of attention, two methods of tracking a supplier’s cost reduction efforts are normally used. The first method is to track supplier costs, adjusted for inflation. Another method is to benchmark a supplier’s costs against similar suppliers (2).
Cost reduction is a benefit of going through Honda of America’s BP Program. In this program, Honda works extensively with suppliers on continuous improvement projects and expects that the supplier will split the cost savings 50/50. This shows the level of cooperation necessary to invoke this sharing of cost savings (11).
Why start from scratch when others have already paved the way? Knowing which companies have successfully developed collaborative suppliers is critical in beginning the process. Companies that have exhibited successes in this area need not be in the same industry, but the processes should be similar in nature or purpose. For example, Honda has effectively employed supplier development techniques for quite some time now (10).
Honda has carried this process over to its North American manufacturing group. Honda North America has created what is known as the BP Program. This approach focuses on the following areas of project improvement:
- Best Position – improve global competitiveness
- Best Productivity – improve the process
- Best Product – improve quality and delivery
- Best Product – decrease cost
- Best Partners – improve Honda / supplier relationship (11).
The program is a hands-on venture that lasts 13 weeks and has been successful in over 120 projects. Its aim is to improve productivity within the supplier’s operations. However, the primary driver of success in these projects is not engineering know-how provided by the Honda group, but communication between company and suppliers. Initially Honda team members spend considerable time at the supplier’s facility to demonstrate their commitment to the program and their dedication to continuous improvement techniques. More often than not, employees involved in production are hesitant to accept Honda’s involvement, having seen the failure of other programs. Once these employees have bought into the program the improvements begin to compound. Taken individually, these improvements are not meaningful, but viewed together they can positively affect the performance of the organization (11).