Measuring Performance - Supplier-Appraisal

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What is it?Astructured evaluationprocess to help us assessthe technical, commercialand financial suitability of apotential source of supply.

How do we do it?You may have a standard

checklist to evaluatepotential sources of supply,but these can sometimesreduce the exercise to aclerical task, whereassupplier appraisal done wellcan be imaginative andcreate opportunities for boththe organisation and thesupplier.

Consider what you wantto buy. You might think thisis obvious, but consider

carefully what the key

...supplierappraisal donewell can beimaginative andcreateopportunities for

both theorganisation andthe supplier.

outcomes the organisation

needs from this category?The RFI or the PRACTISEprocess should have shapedyour understanding of this.

If these are the outcomesthat we need, consider whatare the drivers that enablethese outcomes?

For example, if we needchallenging cost reductions,

you might expect that thesupplier who delivers year onyear cost reductions has astrong procurementdepartment, or a valueanalysis function, or tightintegration of cost andmanagement accountantswith the production activity.

A supplier of a categorywhere we need continuity ofsupply probably has effectiveproduction management, orjust high stocks of finishedgoods! What they wont haveis incompetent productionand below average stocks offinished goods.

A supplier from whom weneed innovation, willprobably have a track record

of generating ideas, or aresearch and developmentdepartment.

A supplier who we want totake the pain away will havea proper accountmanagement structure, andnamed personnel who areexperienced in managingcustomers like theorganisation, or at least a

track record in this area.

Therefore if you reverse

engineerfrom the outcomesthat we want to the enablers

that deliver those outcomes,you can focus on evaluatingsuppliers against a handfulof relevant criteria, ratherthan a generic shopping listof nice to haves.

The sources ofinformation for supplierappraisal include:

Catalogues.Annual reports will yield

good financial data, and thechairmans report will oftenbe surprisingly honest aboutstrategy and developmentplans.

Supplier visits.References from otherreputable customers [butbeware, the supplier willchoose their best accounts,and very few buyers expressextreme views incommenting on suppliers].

Visits to referees sites.Bank references [but these

are often very circumspect].

Clippings services or theinternet can elicit contextual

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material, but you have to

know what you are lookingfor.

If you are evaluatingseveralsuppliers, there is atendency to compare them inrelative terms such as A isbetter than B. In fact, weneed to compare them inabsolute terms against a

high bar that we have set.The location of the high barcomes with experience, butwe need to begin with clarityabout what are we reallybuying:

If we are buying expertisethat we dont possess, aim todevelop an idea of whatwould evidence that

expertise. For example, ifyou are buying design skills,what would evidence gooddesign? Enablers ofsuccess would be access toa number of designers, agood recruitment process fordesign expertise, apassionate cultureencouraging good design.Outcomes of success would

be a track record of satisfied

customers, or a number of

awards won.

Here is an example ofpainting word pictures ofgradations of capability inrespect of design:

Good design will beevidenced by a design teamwith access to the latesthardware and software,senior level support and

representation, and ademonstrable track record ofsuccess in developing newdesigns to improve productperformance.

OK design will beevidenced by a subordinateddesign team with lowmotivation and a variedrecord in contributing newdesigns. Design may beisolated from the productcreation process, or turnoverof talent may be higher thanexpected.

Baddesign may beevidenced by warrantyclaims or frequent productrevisions. Personnel may bepoorly motivated or poorlyled. Design may be a

marginal player, not wellregarded by marketing orproduction. CVs of the staffmay show limited experienceor expertise, and investmentin technology may show lackof senior managementsupport for the function.

Unacceptabledesignmay show unfilled vacancies,low morale and poor

facilities. Rework or

production problems may be

caused by poor design andother functions may buy indesign expertise. Thefunction may be a secondthird or fourth tier activity,with weak leadership andrecognition that there is aproblem.

Then it becomes possible tocalibrate the scoring system.

Aim for more than oneopinion on each of thedimensions and comparenotes among the team. Mostsupplier appraisals involve acombination of deskresearch using mainlysecondary sources and fieldresearch using primarysources of information.

Supplier appraisal is likepiecing together the piecesof a jigsaw, and the keypieces are:

Technical capability i.e.can the supplier perform,meet our standards?

Commercial capability i.e.

can the supplier supply to usat a cost that we can afford?

Financial capability i.e. willthe supplier still be trading insix months time?

In particular, the answer tothe last question above ismuch harder than it looks ,because we usually reviewhistorical financial

information which means we

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are looking in the rear view

mirror. Some simple ratioanalysis can help identifyearly warning signs,especially if you look at twoor three years data to find atrend.

It cannot be emphasizedenough the importance of avisit to your supplier. Thisaction alone can tell you

much more about a supplierthan twenty different ratioscombined! Be prepared tovisit every supplier, and takealong the relevant subjectmatter experts.

When it comes todealing with suppliers, we

probably know a quarter as

much about them prior to

engaging with them, as theyknow about us, before theysupply to us. Dun &Bradstreet and othercommercial rating agencieswere originally set up toassist suppliers avoid baddebts by assessing if theircustomers were solvent.

How does it help?Appraisal is a key process.It creates a level playing fieldwhereby we make sure thatonly competent suppliers areengaged to supply us. Itcreates an image of theorganisation as aprofessional buyer, and itcan inform negotiationtargets and supplierdevelopment programs lateron.

In summary, identifybetween 5 and 10 keydrivers of success, calibratewhat good andunacceptable look like,appraise against thesebenchmarks, and beprepared to have an opinion.If you feel the supplier willcause the organisationproblems, substantiate youropinion, and stick to yourguns. Better to have anopinion than adhere to someclerical process which results

in all suppliers being rated assomewhere in the middle

.

Paul Rogers is a freelanceprocurement consultant.

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Measuring Performance - Supplier-Appraisal