Supplier Scorecards: Are They Right for You?
By Kathy Gombas
As a manufacturer, what do you expect of your suppliers? How do you know when they are doing things right? Oftentimes you will know when they are doing things wrong, but then again, you might not know why. In the end, you need something as simple as what your child gets at school: a report card. In our industry, we call it a supplier scorecard.
Measuring Success: Using Supplier Scorecards
As manufacturers, we are all too apt to jump to conclusions—that is, we tend to leap from the anecdote to the conclusion. We may see one or two things go wrong with a supplier that we don’t like, and then we assume nothing is going well. But until now, we haven’t had a way to measure objectively how things are truly going. That’s where the beauty of the supplier scorecard comes in.
Just as it’s important that we get regular feedback in the form of customer reviews or sales numbers, we should also be looking to provide that same kind of feedback to our suppliers. When our customers give us feedback they are looking at a number of criteria. Do we provide consistent, safe, quality foods—delivered on time, without interruption, at the best possible price? Are our customers totally satisfied with their purchase experiences?
Do we feel the same way about our experiences with our suppliers?
Whether we’re the customer or the supplier, we’re all looking for the same thing: to be treated with respect and to have a good customer experience—every time. But how can we make sure that happens? Keeping score is certainly one way we’ve found that works.
Getting Started on the Scorecard Process
The best outcome of launching a supplier scorecard process is to achieve total customer satisfaction. The realistic outcome is to find out what’s working well and what isn’t working well and then to develop a roadmap to find solutions. Before you implement this process, you need to get buy-in from your suppliers. The customer satisfaction process is a performance-based partnership that demands accountability, commitment and quality service from your suppliers. Suppliers must be willing to take ownership to correct problems and prevent issues that get in the way of performance excellence. Together, we can build stronger business relationships and achieve improvements, but suppliers must be willing to engage and be true partners.
So how do you get your suppliers to agree to this kind of measurement system? Step one: start early. To ensure that you can leverage your suppliers’ full potential to achieve step-change improvement, you need to get them on board early. The whole concept of total customer satisfaction can be introduced early in the customer/supplier relationship by including it in the Request-for-Proposal (RFP) document that potential suppliers receive. You must make sure the suppliers understand and are committed to the process before establishing any contractual relationship.
Establishing a Review Process
Establishing a review process and defining the basis for the review are essential. In this way, you ensure that both supplier and customer are speaking a common language.
Make sure that you both agree that this is what typifies total customer satisfaction (Figure 1):
• Products that meet or exceed customer requirements
• Are backed by extraordinary service and support
• Exhibit flawless quality
• Are delivered precisely when needed, and
• Are competitively priced
During the early development of the customer/supplier relationship, the principle of total customer satisfaction should also be implemented in a detailed, formal supplier-performance review. The review measures the customer’s satisfaction with the supplier’s products and services and identifies improvement opportunities. The customer defines the key result elements of total customer satisfaction and then works with the suppliers to define their performance criteria.
For example, total customer satisfaction key result elements, originally developed by Brad Holcomb, Dean Foods Chief Procurement Officer, include:
• Product and technology leadership
• Service and support leadership
• Delivery and lead-time performance
• Total cost performance
Once you have established these total customer satisfaction key result elements, you then work with your suppliers to define performance criteria for each element. This is where the scorecard is created.
A scorecard is crafted to define standardized metrics for all suppliers. The intention of the scorecard is to:
• Provide regular performance feedback to the supplier to drive continuous improvement
• Have a system for improved communication
• Minimize food safety risks
• Promote supplier peer competition
Designing the Scorecard: Define Your Metrics
The old adage “What gets measured gets done” is at the core of the supplier scorecard process. Measuring supplier performance requires a set of metrics and a timetable. Supplier performance (and therefore the supplier scorecard) should be used at a set frequency (e.g., quarterly) to determine whether threshold performance levels have been met and whether performance has been sustained over the 12-month period.
A supplier’s performance can be compared against a competitor’s as well as against vision expectations. To ensure that a supplier understands their results, it is recommended that the customer schedule a business review with the supplier and discuss the details of the scorecard results. During this discussion, it is important to identify key result areas where gaps exist and improvement is required. Gaps may be relative to immediate customer needs, to competitors in a peer group and/or to vision expectations. A follow-up should be scheduled within three months to gauge progress.
Timing is just one element of the process. The most critical element is to develop metrics that work for you as a manufacturer. As you devise the scorecard metrics, it’s important to bring Procurement, Research and Development, Quality and Compliance experts to the table. Each discipline has a measure of success that is unique. Different relationships with your suppliers emphasize one area over another, so as you design your scorecard, it is important to understand which elements are important and how to weigh them in the overall scoring.
Key elements that we have identified include the following:
Procurement performance metrics focus on delivery and lead-time performance, total cost performance, and service and support leadership. Specific measurements could include complete, accurate and on-time orders; lead time; responsiveness to emergencies; replacement of defective goods; prompt and effective resolution of issues; contingency planning to prevent business disruptions; error-free billing; faster cycle times; timely delivery of rebates; willingness to inventory unique items; frequency of backorders; corporate social responsibility including diversity; environmental; and animal health and welfare.
Research and Development performance metrics could include product and technology leadership including a supplier’s product and packaging innovations; market intelligence, including industry and consumer trends; tamper evidence; packaging sustainability (e.g., recycling); and increased product shelf-life.
Quality performance metrics should include both qualitative and quantitative measures. Prior to measuring quality performance, most customers utilize raw material specifications and/or issue supplier quality expectations to their suppliers to define quality requirements. The supplier and the customer must understand the parameters/expectations before a scorecard can be meaningful and successful. (Again, this is why the definition stage of the process is so crucial.) Some purchase agreements include quality expectations.
Quality performance metrics could also include compliance to specifications; third-party audit scores; regulatory compliance; number of recalls; mock recall performance; material rejections/complaints; issue response time; transportation security performance; and Six Sigma.
Compliance: Another significant measure for consideration in a scorecard is a supplier’s compliance in providing regulatory and quality documentation. Examples of quality and regulatory documentation include but are not limited to Continuing Letters of Guarantee; product specifications; nutritional content labeling information; kosher certifications; certification of liability insurance; third-party food safety and security audit reports; compliance with the Bioterrorism Act; 24-hour emergency contact information; allergen statements; and ingredient and sub-ingredient country of origin information. Many customers utilize web-based networks to “house” this type of documentation that allows the supplier to post and update the documents, and let the customer view the documentation at any given moment. This supplier documentation database supports manufacturing plants during third-party audits. Third-party food safety system audits typically assess the facility’s supplier approval program. A web-based network (“the house”) allows quick and easy access for the auditor to review the facility’s supplier’s documentation. The days of calling the corporate office for a particular supplier’s Continuing Letter of Guarantee are over.
Designing the Scale: From Zero to Exceptional
Now that you have done the difficult work of defining the metrics of the scorecard, the second phase is the rating design. Some customers like to rate metrics specifically for particular commodities. However, this can limit the usefulness of comparing a raw material provider with a contract services provider. By keeping the metrics reasonably uniform for all suppliers, the scorecard is more useful and user-friendly and allows for more general comparisons.
Others like to use purely subjective scores, that is, the traditional “meets expectations,” “exceeds expectations” and “below expectations.” These are good general ways to construct scores; however, there are certain metrics that lend more to objective scores. In all cases, these need to translate into some sort of “scale.” Assuming a scale of 1–100, a top score for each metric would be 100. Then depending on the metric and the score, you would translate that to a value in the 1–100 range. For example, if you have one health violation, that might translate to a 60, whereas “meets expectations” translates to an 80 or 85.
Objective metric scores can be quite complex where you are using an “actual vs. target” measurement scale. For example, let’s say you have an on-time delivery of 95% and a missed deadline target of 2%. You could not compare these. And you could have wider gaps in each for comparing what’s acceptable and what’s not. You may say that on-time delivery can be ± 2% while missed deadlines can be ± 4%. So, you want to create an “actual vs. target” calculation and base the score on the percentage range of the result. Therefore, if the actual on-time delivery to target is 97%, you may give your supplier a score of 95, but if it’s 93%, you may give your supplier a score of 70.
While it may appear simple, thinking about what type of scale to use and how to score against that scale is an integral part of making the supplier scorecard successful.
The scale you use applies to each individual metric as well as to the overall evaluation. If you don’t have a scale within your organization, the 1–100 scale seems to work best because most people already understand this grading system based on academic ratings of test scores from 1–100. (We’re back to the report card!) However, the 1–100 scale is often used in a different way than a 1–5 scale. On a 1–100 scale, 60 is usually considered failing, whereas on a 1–5 scale, only a 2 or a 1 is failing. As in academics, just participating can be worth 50 points even if you do poorly. However, the wider scale gives you an opportunity to send some clear messages. For an important metric like health violations, if your supplier fails once, they get a failing score (60). If they fail twice, they get a zero. The 1–100 scale is more nuanced and provides more intermediate selections (i.e., if you need it, you can grade someone an 87, whereas with the 1–5 scale, people don’t understand a score of 3.7 quite as clearly). If you say a supplier has a score of 93, people know how this supplier is doing (based on academics again). But if a supplier is rated a 4.1, there’s a much more difficult basis for understanding.
For these reasons, we recommend using a scale from 1–100. It is more meaningful at the outset and also provides the means to show continuous improvement. Depending on the quality of performance of your current supplier base, you can start with an initial goal of 85 for a satisfactory supplier and raise the bar by 2–4% each year. Remember, the objective is to have your supplier show continuous improvement. This wider scale makes that goal more achievable.
Determining Objective Methodology: Who Completes the Scorecard?
Once the rating scale is designed, you need to determine the surveying technique you will use, and who will complete the survey. Today, there are many web-based companies that can assist you in designing your survey, but the best advice is to KEEP IT SIMPLE. A brief, clearly articulated survey with a limited number of questions and a simple rating system will be most successful. In this day and age when we just “don’t have time,” making a simple, easy-to-use scorecard is a smart move.
It’s also important to understand the mentality of the individuals completing the survey—in other words, walk in their shoes. Are they completing the survey at work or at home, by themselves or with the input of co-workers, via the internet or on paper by mail? Again, think about what is the most convenient, what will be the most efficient and, therefore, the most effective methodology for getting the survey completed.
Some basic recommendations include the following. The most convenient approach is an internet-based survey that utilizes a “point and click” system. The number of questions and rating scale need to be considered. Does the survey take 10 minutes or less to complete? Five closed-ended questions take approximately one minute, and two open-ended questions take approximately one minute. For the average busy individual who is completing a survey at work, a maximum of 20 questions with a rating scale of 5 choices is ideal.
As for who completes the scorecard, ideally both the customer and the supplier would. It is always interesting to see how one rates one’s own performance. Some are harder on themselves, while other may “perceive” their products and services to be superior to what their customers are actually experiencing. Suppliers may not be aware of their undesirable performance, or they may not understand the expectations. One supplier said, “My performance is only as good as my customer’s perception.” As stated before, the regularly scheduled business review between the supplier and the customer is essential to developing realistic expectations, to setting goals and to ensuring continuous improvement.
Ensuring Progress: Implementing the Scorecard
Sometimes expectations are not clearly defined before the scorecard process is initiated. It is important to communicate with your supplier before the process begins. Make sure that your supplier understands basics, such as your raw material specifications, contractual agreements and supplier quality expectations before the measurements begin. Don’t assume that your supplier knows what is important to you. Let them know what you expect and, with the help of the scorecard, how they will be evaluated.
One of the best ways to see whether the scorecard process is going to work for your business is to take “baby steps” and try out the process on a small number of select suppliers. For example, you could start with ingredients and direct product contact packaging before tackling contracted services. Your inclination may be to choose the highest risk suppliers and poorest performers. However, for your pilot you should try to select a group of suppliers that fill the following criteria:
• High-volume suppliers
• High-risk suppliers
• Multiple suppliers in one category
• Good performers as well as poor performers
• Business-critical supply base
Thus, you will get a good sampling and see whether the scorecard methodology is right for you, your suppliers and your business. Determine the peer group to use for the pilot and agree upon a defined period of time. Once the pilot is complete, talk to your suppliers about how they felt about the process and adjust your metrics, methods and scale as needed.
So, is a supplier scorecard right for you? We believe that, given the correct preparation and thoughtful implementation, your business can benefit from a supplier scorecard. Before you begin, remember these basics:
• Start early and make the supplier scorecard process part of your RFP
• Establish a review process that is agreed upon by both the customer and the supplier
• Define your metrics clearly
• Design a scale that is understandable and allows for continuous improvement
• Define your methodology and get buy-in
• Start slowly with a pilot program
• Learn as you go and adjust as needed.
If you follow these steps, you will find that a supplier scorecard will help you identify and fix problem areas more quickly and build stronger relationships with your suppliers. There are a number of tools online to help. Also, work with your suppliers—continuous improvement is a team effort and they should be an integral part of your successful team.
Kathy Gombas has been with Dean Foods for six years working in Operations Quality. Kathy was recently promoted to Corporate Director of Supplier Quality Leadership at Dean Foods in Dallas, TX, where she will be responsible for developing supplier quality leadership programs for Dean Foods’ supply base. She can be reached at [email protected].