This marks ITC Infotech’s third guest article with WhichPLM; Rajnish and Raghuveer explore vendor performance management here. Rajnish Kumar is the Global Practice Head of Retail Consulting at ITC Infotech; Raghuveer Rajashekar is a Senior Consultant in RFA PLM practice of ITC Infotech India Limited, and has a background of Apparel Industry with Manufacturing, Merchandising & Sourcing as core strengths.
Vendor Performance Management is a very essential component of an organization’s product sourcing strategy. It provides the organization with a much-needed visibility into the compliance and performance of their supplier base. It is important to note that Pareto Principle, commonly known as the 80/20 rule, applies to Vendor Management also. In a sourcing organization, it is most likely that 20 percent of a vendor base is delivering 80 percent of business value. However the problem is to identify which are those vendors that are critical to sourcing strategy and which are the ones that should be weeded out.
What is Vendor Performance Management?
Vendor Performance Management is the process of measuring, analyzing and effectively reporting the vendor’s performance to help in continuous process improvements and nurture a long lasting relationship with the vendor. It helps in managing the following:
- Time & resource efficiency
- Alignment of vendor to organizational objectives
- Risk mitigation
Managing a vendor base is a cost in itself. Organizations have teams who support vendors at every step besides making investments in their success. Many organizations implement various tools to manage work with their vendor base. ERP, PLM and Proprietary sourcing tools are some of the examples of how vendors are connected to sourcing teams. If risks associated to product sourcing are not managed the right way, organizations can potentially lose a good amount of money and resources due to performance of its vendors.
- Vendor’s financial incapability may lead to failures and non-compliance with defined regulations
- Over-dependency on specific suppliers is a huge risk, the risk usually will be absorbed by the purchaser
- If risks are not identified and mitigated, it could lead to eroding of a company’s brand value and reputation
Key Performance Indicators (KPIs) are the most common way to measure a vendor’s performance. To measure real value, the organization must develop appropriate metrics that quantitatively measure even intangible aspects of vendor performance such as innovation, flexibility etc. Most organizations have basic or no process at all to gather and analyze supplier performance data. Popular method is the usage of spreadsheets.
Disadvantages of having performance data on spreadsheets:
- Not possible to compare data across multiple vendors
- Excels lack an audit trail
- Prone to data manipulation
- Lack of collaboration between users
Organizations can holistically measure overall vendor performance by way of an ideally structured methodology. It will help in assessing individual and collective KPI scores for lead time adherence, quality levels, social compliance and many other success factors that organizations want to measure.
An Ideal Vendor Performance Management System
Whichever tool is used to manage Vendor Performance, It should allow an organization to capture vendor information during on-boarding, thus identifying any potential risk factors. Information should update dynamically as the sourcing events occur. The solution should allow capture of on-going weighted performance and Key Performance Indicators, measured at regular intervals. It Is important to note that the right technology can lower the cost of vendor management as well as give warning signals for various risks in the product development cycle.
If a vendor is associated with an organization for long period of time, it starts to assimilate values of the company and become an extension of the sourcing organization itself. Sourcing teams should appreciate these vendor dynamics and look at maximizing opportunities and mitigating risks. If done right, Vendor Performance Management can provide immense value both for the organization and for its vendor.
In the apparel and footwear industry, PLM is the tool where all vendor related data resides in the system. As the relationship with the vendor starts at the product development stage, it is PLM that should have vendor performance management capabilities also. Vendor scorecard and dashboards within PLM can enable informed decision-making during the product development cycle. The ranking based on KPIs can provide information about vendors who are at the bottom of performance metrics and thus perfect cases for either development or removal from the system. PLM with vendor performance capabilities can provide much needed visibility in an objective manner for vendor selection and subsequent product development with that vendor.