Procurement Manual:
Good Practice 4
4. Assessing Supplier
Performance
A. Whose responsibility is it?
B. Deciding what to monitor
C. Deciding which suppliers to
monitor
D. Supplier Relationships
A. Importance of assessing ongoing supplier performance
Having established the supplier’s ability to deliver
specified requirements and carried out due diligence, it is vital to ensure the contract is successfully executed. In particular, buyers need to
• Realise the contract aims;
• Ensure both sides fulfill their respective obligations;
• Manage risk and supply chain vulnerability;
• Deliver continuous improvement, learning and
knowledge transfer.
It’s crucial, therefore, to set out at the start of the
contract process – ideally at tender stage – which
will be responsible for undertaking contract management tasks and ensuring the supplier is performing to standard. (see also Procurement Guide
1: Contract Management: Responsibilities and Duties)
Effective performance monitoring is part of the contract management process and needs to be included in the contract specification.
All contracts require a minimum level of management oversight but, as complexity and risk increase,
so the need for performance monitoring rises.
B. Deciding what to monitor
E. Service Delivery Management
For larger contracts, buyers will need to go beyond
ensuring compliance and work with the supplier to
secure further benefits, such as cost savings.
Post-contract appraisal is fundamental to contract
and supplier relationship management – it allows the buyer and supplier to:
• Monitor compliance;
• Identify non-compliance and trigger corrective action, including contractual penalties;
• Quantify important performance attributes and measure change and improvement;
• Assess supplier performance and compare it with its peers.
At a basic level, performance monitoring is about whether the supplier fulfils the contract.
Indicators of performance can relate directly to important attributes of the product or service itself, such as measures of size, weight, quality, availability or cost.
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Procurement Team: University of Exeter August 2010
It is also possible to appraise the supplier’s performance in the execution of the contract – by,
for example, measuring responsiveness to queries, quality of account management and accuracy of invoicing. These are service levels and documented in a service-level agreement and
measured by KPIs.
There is no hard and fast rule about which characteristics of the product or supplier should be
measured or how many measures there should be. It depends on what characteristics are important to the buyer and how KPIs are selected and used. As a general rule, there should be as
few measures as possible (since monitoring costs money) and KPIs should be linked to the user
or consumer experience.
Factual, objective information about performance (particularly in relation to the product or service itself) can usually be obtained from the supplier’s or buyer’s IT systems. Examples could
include:
• How often delivery is in full and on time;
• The level of non-conformance, e.g. rejects;
• Invoice accuracy;
• Project milestones delivered on time and to cost;
• The number of customer complaints/returns or rectification costs;
• Flexibility (ability to respond to changing needs);
• Levels of waste, CO2 emissions or landfill disposal.
Some performance characteristics, especially in service contracts, require the views of customers or other stakeholders. These may relate to satisfaction with the product or services, responsiveness of the supplier, quality of people or ancillary support services (such as call centres) or
perceived value for money.
Ways to collect data include:
 Interviewing against a defined set of questions. This can be face to face, or on the phone
but needs to be interactive so that the interviewer can explore more detail when necessary. Sometimes commitment is required from stakeholders, such as engineers in the
field, to keep records of their experiences of working with a supplier in order that objective factual data can be used;
 Using customer/stakeholder surveys that can be distributed and collated electronically.
 Verification – perhaps of self-assessment reports and quality information. This is normally part of a product or supplier audit and can involve direct sampling of the product or
service (for example as a “mystery shopper”) or by auditing the supplier’s management
and control systems. This verification can be a contractual obligation and paid for by the
supplier.
 Performance information should be reviewed formally with the supplier at intervals. The
frequency depends on the duration and complexity of the contract or relationship, but
should be at least biannually for high-risk suppliers. The review should cover a range of
indicators, including:
 An assessment of KPIs and trends;
 An analysis of non-conformance events and any follow-up investigation;
 Any changes to the supply situation (supplier or market);
 Any changes in the buyer organisation;
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Procurement Team: University of Exeter August 2010
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Progress against improvement or efficiency targets;
An assessment of any relationship issues or appraisal findings;
Identification of opportunities to further improve efficiency and quality.
It is usual for any organisation to carry out staff appraisals to assess performance and
provide feedback. It is well documented that this process helps the organisation to be
more effective. Considering this, and the increasing dependency on bought-in goods and
services, it seems odd that supplier appraisal isn’t more prevalent (see Procurement
Guidance 3: Supplier Appraisal)
C. Deciding which suppliers to monitor
The normal distribution of expenditure (the 80/20 rule) means there will be a high concentration
of expenditure (80 per cent) with relatively few suppliers (20 per cent).
For the University it’s likely that many suppliers and contracts will be of relatively low value and
criticality and need lighter management than others. Contract and supplier management activity
costs money. As well as the supplier’s cost built into the contract price, contract management
will cost the buyer about 2 per cent of the contract’s value, according to the National Audit Office.
To determine which suppliers to monitor use the Kraljic model, if this has not already been done
at pre-contract stage.
Using the Kraljic portfolio purchasing model
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Procurement Team: University of Exeter August 2010
This allows contract managers to position each contract systematically and apply an appropriate
set of contract and supplier relationship practices, appraisal techniques and governance.
Contract segmentation and appropriate appraisal and monitoring techniques will go a long way
to providing a clear understanding of the risk profile and any deterioration in performance. However, risk is also affected by external factors such as the supplier’s financial standing, market
activity such as the supplier being taken over by a competitor, or by internal factors such as a
change in use, increased sales or dependency on a particular product or service.
Dependency can be measured in terms of the proportion of the supplier’s turnover represented
by your business, or the proportion of the buyer’s expenditure with a single supplier. Figures
greater than 30 per cent either way would be a concern and require closer risk monitoring, especially if supply risk or market difficulty is also high.
Performance Monitoring Action Plan
D. Supplier Relationships
While many aspects of supplier appraisal relate to operational delivery, the ability of organisations to work and develop together requires particular characteristics and behaviours on both
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sides. In these circumstances buying organisations stand a better chance of improving performance and value if they work in a consistent way.
At the very least, contract management and performance management practices should be applied in the same way and contract and supplier key performance indicators (KPIs) shared with
other contract managers and key stakeholders.
To strengthen governance and co-ordination a senior relationship officer could be appointed to
manage the most critical relationships.
Contract management and planning have a key role in developing the management framework
and making sure it is properly applied. Procurement may also assist by helping to to consolidate
and make sense of the various performance indicators and to co-ordinate stakeholder activity. The supplier is responsible for producing goods and services of the required quality as
agreed in the contract, and thus for quality assurance and reporting.
Roles and responsibilities for the various management tasks need to be allocated clearly. Use
the RACI (responsible, accountable, consult, inform) model to avoid any ambiguity (see also
Procurement Guidance 1: Contract Management: Responsibilities and Duties)
Relationship management is often explained as soft or intangible and based on the perception
of the relationship participants. Appraisal is often undertaken by interview or survey and compares the relative perception of both parties in a constructive and open way to encourage debate and better alignment.
These techniques are similar to those used for personal development and involve 180 or 360
degree feedback against a common set of parameters, ranked in terms of importance by both
parties. Factors that can be appraised include:
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Cultural fit;
Innovative capacity;
Openness and trust;
Mutual understanding;
Attitude to change.
Appraisal results are used to complement relationship development or to correct negative perceptions or behaviours if a relationship is underperforming.
E. Service Delivery Management
Ensuring that the actual service provided by the supplier meets the agreed standards and prices
is important to the success of the contract. The ability to measure the performance of the supplier and to provide feedback is critical to successful contract management and supplier development.
There are three aspects to performance measurement:
 Gathering factual, objective information from the supplier, usually obtained from IT
systems;
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Procurement Team: University of Exeter August 2010
 Gathering feedback from users about the service received, typically through ques-
tionnaires, surveys, telephone or face-to-face enquiry;
 Understanding the supplier’s own experience of dealing with the organisation
through communication and open dialogue
Performance measures should be set out in the contract documentation to ensure suppliers are
fully aware of both the measures and the measurement methodology. It is important that the
performance measures selected provide clear and demonstrable evidence of the success (or
otherwise) of the relationship and, in principle, issues such as the following should be covered:
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Cost and value obtained;
Performance and customer satisfaction;
Delivery improvement and added value;
Delivery capability;
Benefits realised;
Relationship strength and responsiveness.
It is important to ensure that the actual metrics selected are not over-specified, and, as
far as possible, readily obtained from the direct performance of the contract. Remember
that there are costs attached to the production and maintenance of metrics by the supplier who
will seek to pass them on in the form of higher prices or charges.
Performance measures should not be seen as a method of control, but as a proactive means of
improving the performance of a supplier. There are a number of themes which could be used to
measure supplier performance:
 Product quality Mean Time Between Failure (MTBF), Mean Time to Repair (MTTR),
percentage of delivery rejects, warranty claims;
 Service quality using SLAs call-out time, customer service response time, performance against agreed delivery;
 Relationship management accessibility and responsiveness of supplier management;
 Commercial costs are maintained or reduced, service improved.
Other useful references
Procurement Manual: Good Practice 1: Contract Management Responsibilities and Duties
Procurement Manual: Good Practice 2: Risk Management and Handling Change
Procurement Manual: Good Practice 3: Supplier Appraisal
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Procurement Team: University of Exeter August 2010