In Brief: Companies want to choose and work with the best suppliers. They want to improve supplier performance but are not sure where to begin, what metrics to use, or how to get from metrics to action. This article profiles two companies that have successful supplier evaluation and performance management processes: Toro and Wolters Kluwer. Both have implemented successful supplier evaluation and performance improvement processes that have provided tangible return on investment and benefits to their stakeholders using a customerfocused continuous improvement process.
Many companies evaluate their suppliers in some manner, but many are dissatisfied with how they are measuring supplier performance and the results that they are getting. Many are unclear about what to measure, how to collect the information, and how to put into action the information they do collect. And, even though purchasing, quality, supply chain management, and manufacturing professionals are all aware how essential good supplier performance is to their firms, they still find it challenging to make a convincing business case to senior management.
As in all continuous improvement (CI) processes, supplier performance management (SPM) is a process, not an event, and the return on investment (ROI) depends on how much effort a company puts into closing the loop and taking action rather than on how pretty its supplier scorecard looks. The outcomes at both Toro and Wolters Kluwer are consistent with the findings of an APQC report, Supplier Relationship Management: Collaboration for Win-Win Competitive Advantage, which looked at success factors in companies with effective supplier relationship management processes. These success factors apply to SPM and include: strategic alignment, stakeholder involvement and support, and programs that drive effective collaboration and supply chain synchronization with suppliers. Supplier evaluation is a key component of supplier relationship management and enables companies to avoid inconsistencies in quality and supply, adversarial and unproductive relationships, and competitive disadvantage.
How Toro Manages the Supplier Performance Management Process
The Toro Company of Bloomington, MN, a $1.5 billion manufacturer of environmental care products, embarked on its SPM journey in 2003 with full management support and a cross-functional team. According to Len Kindem, sourcing quality at Toro, the executive sponsors were the vice president of operations and the vice president of Toro’s Commercial Division. Project sponsors were the director of sourcing and the director of information systems. The team created a project charter to define the business needs, project objectives, resource and system requirements, risks and obstacles identification, and a budget with an ROI analysis to justify the business case. To estimate the ROI, Toro established a project budget and calculated the projected reduction in failure costs. Total failure costs included warranty expense plus other major internal failure costs (labor for sorting, repair/rework, completion of failure documents, expedited freight for re-supply, etc.). The goals were a 5 percent reduction in warranty expense and a 5 percent reduction in failure costs. Then, the team estimated how long it would take to reduce those costs to match and exceed the original investment. The ROI has far exceeded the original goals.
Toro also used this total failure cost as part of a Total Cost of Ownership (TCO) ratio for each supplier. With the greater engagement in a global supply chain and varying levels of supplier performance, Toro found it necessary to have a level playing field for comparison of quotations for new business opportunities. Comparing new business quotations based on purchase price only did not address the total cost to procure products as relates to transportation and failure costs. Therefore, the following TCO ratio was used as a multiplier for each quotation (shown below). This, in conjunction with the commodity strategy and the individual supplier’s performance, determined who received the new business award.
Multiple functions were represented on the project team and included: plant quality, materials, assembly, warranty/service, finance, logistics, information technology (IT),
engineering advanced quality, and supplier representatives.
Toro’s supplier evaluation program consists of three elements: a supplier scorecard, internal stakeholder satisfaction questionnaires, and site visits. All of Toro’s 1200 direct suppliers receive scorecards. A small subset of those suppliers gets a site visit — new suppliers, key suppliers, and suppliers with development or improvement needs. The scorecard determines the supplier’s ASL (Approved Supplier List) status: approved, conditional, restricted (not meeting performance expectations), or probation. Scorecards are published monthly and made available to suppliers via a supplier portal.
The internal stakeholder questionnaire is a 20-question survey, deployed via the Internet, of internal Toro employees such as purchasing, advanced quality, warranty, and service who have regular contact with a supplier. Approximately 10 to 15 people are asked to score one supplier. The questions measure the supplier’s general and technical support and require a rating on a scale of 1 to 10 to score strengths and weaknesses. If a score falls in an upper or lower end of the range, the scorer is required to make a comment so that the supplier understands why the particular question was considered a strength or weakness. Kindem noted that these questionnaires have been well-received by suppliers, who find the feedback useful. But Toro often finds it difficult to get the stakeholders to respond. As is typical for stakeholder satisfaction surveys, the most motivated responders are those with either enthusiastic praise or severe criticism of the supplier.
Site visits typically last one day and are done by supplier quality engineers, who bring along the supplier’s scorecard and questionnaire and then perform a structured assessment of the supplier’s business system. The structured assessment contains elements of QMS (Quality Management System), Six Sigma, and DMAIC (Define-Measure-Analyze-Improve-Control), but there is no specific lean assessment. At the end of a site visit, using input from the scorecard, questionnaire, and site visit, suppliers agree upon goals for improvement and then create action plans, which are tracked until completed. If there are continuing development needs, supplier quality engineers help the supplier until the need for visits diminishes.
Scorecards are reviewed regularly in person or via conference call only with new and key suppliers and those with development needs or important corrective actions. Most use the portal to see their scorecards.
A Good Supplier Evaluation Process: Results
Toro’s supplier evaluation process has yielded excellent results. According to Kindem, “When we started our scorecard journey in 2003, 22 percent of our suppliers were not meeting our performance expectations. We have reduced that number to 10 percent, which is a greater than 50 percent improvement.” Toro continues to drive improvements through its SPM process.
Other results include:
- Reduced supplier ppm defects by 70 percent in Toro’s manufacturing operations. This has enabled Toro to implement a process to reach a goal of an additional supplier ppm reduction of over 90 percent in 2013.
- Significantly reduced major supply interruptions
- Reduced the supply base by 60 percent while turning some under-performing suppliers into performance leaders
- Total failure costs have been lowered by 40 percent, far exceeding the original goal of 5 percent.
Scorecard results are now used to drive Toro’s commodity sourcing strategy and offer new business opportunities for high-performing suppliers.
Be Careful About the Metrics You Put on the Scorecard
When Toro started its SPM process in 2003, the team came up with a wish list for the scorecard, then proceeded to develop one that was very difficult to sustain. It required a lot of IT support with data feeds from 12 sources and time-consuming manual updates by users. It was eight pages long and not intuitive, and it contained some metrics that left Toro open to supplier disputes (warranty calculations). On the positive side, suppliers loved the performance comparisons and trend charts, the questionnaire feedback, and the documentation of the CI plan and goals. The warranty information in particular was weighted very heavily on the scorecard, and the information was not based upon readily-defendable data.
As the scorecard became increasingly cumbersome and resourceintense to update, the company decided to simplify the scorecard and the IT platform. Toro is now using SAP. The scorecard is simpler, has defendable and understandable data, and is automatically updated. Toro uses the scorecard results to identify corrective action and supplier development needs, update its commodity strategy, and award new business to high performers. Toro links a supplier’s ASL status to RFQs (request for quotes). Suppliers who are in a conditional or restricted status are not asked to quote on new business opportunities.
Toro and its suppliers have come a long way in their seven-year scorecard journey and learned the following:
- Support from the leadership team and IT is critical
- KISS (Keep It Simple, Stupid) — don’t strive for the big scorecard in the sky
- Select the most important and impactful measures that link to your business needs while driving the desired supplier behaviors
- Limit the performance measures to factual, defendable data when possible
- Avoid manually updated information
- Educate and gain buy-in from all internal users to ensure they use the scorecard
- Clearly link new business opportunities to scorecard performance
- Use supplier performance to drive business and commodity decisions
- Meet with key, new, and problem suppliers frequently to discuss your expectations and their performance — and always bring the scorecard
- Use the scorecard data to drive corrective action and supplier development activities.
Don’t forget to brag about your results! No one will know how successful you are if you keep it a secret.
Going Beyond Scorecards
Over time, The Toro Company realized the need for a more holistic Supplier Performance Evaluation (SPE) Scorecard to drive performance improvement throughout the global supply chain, according to Len Kindem. “Our main objective was to improve the supply chain performance and reduce our total cost of quality,” Kindem said. “However, we also realized that a scorecard alone was not enough to drive the needed improvements.
“Therefore, we began our lean journey about the same time as the implementation of our SPE scorecard. We invested heavily in additional resources and training to ensure lean became a way of life for their entire operations,” Kindem continued. “We added resources to our quality functions at corporate. We increased the quality staff from four to nine, created a CI group of four, and added another four quality resources in Asia.” Toro also embarked upon a Six Sigma program which included training for personnel in quality, engineering, sourcing, and its manufacturing plants. DMAIC training was provided as Toro adopted the A3 format as a key component in the “lessons learned” process.
Toro reinforced the application of all of these key initiatives, and other related initiatives, through its corporate-wide strategy development and goal setting process, LINC (Linking Individuals to Needed Change). The LINC objectives ensure that the strategies and objectives established by the CEO flow down through the organization in the form of individual objectives. The SPE scorecard project was one tool in Toro’s overall strategy for supply chain improvement and went far beyond just the scorecard itself.
Supplier Performance Management Isn’t Just for Manufacturers: Wolters Kluwer
Headquartered in Alphen aan de Rijn, Netherlands, Wolters Kluwer is a $4.8 billion market-leading global information services company whose customers are professionals in the areas of legal, business, tax, accounting, finance, audit, risk compliance, and healthcare. While many are familiar with using scorecards to measure manufacturing suppliers, a company like Wolters Kluwer has a supply base that consists primarily of indirect suppliers who provide services to the company. Some of these categories include: printing, temporary staffing, shipping, IT hardware, IT consulting, and many more.
Steve Nied, vice president of operational excellence and strategic sourcing for Wolters Kluwers in Riverwoods, IL, home to Shared Services and three divisions for North America, saw how poor performance from suppliers can have a severe impact on the company’s ability to function and deliver their products and services to its customers. Wolters Kluwer has also seen how improving supplier performance can save them money. Unlike manufacturers, they do not have a system from which to extract performance data for scorecards. Therefore, it faced challenges in evaluating and improving supplier performance that are common both to service-oriented firms and to manufacturers that want to measure indirect suppliers or direct suppliers and for whom it has no reliable or consistent source of data.
According to Nied, Wolters Kluwer had exploited much of the value of rationalizing its supply base and felt that there were supplier capabilities and ideas that had yet to be tapped. With a formal SPM process in place, Nied knew that suppliers would respond to measures and incentives to improve their performance. The Wolters Kluwer vision of an effective SPM system that included clear performance expectations, performance measurement, and linked incentives is shown in an accompanying illustration.
With no real SPM tools residing in its current systems, Wolters Kluwer decided to use an SPM software application that they purchased from Emptoris, a Burlington, MA-based supply and contract management software company. However, the urgency to get started in the first quarter of 2008 before implementing the Emptoris SPM application led Nied’s team to develop and deploy scorecards manually using MS Excel.
Alejandro Gusis, director of strategic sourcing and operational excellence, and Anna Kroner, manager of spend and supplier analytics, who have been managing the implementation process, used Excel as a template to structure the KPIs and scorecards, then migrate to the much more effective, automated capabilities of the SPM software application by the end of the second quarter of 2008. During this period, they implemented scorecards for 11-15 suppliers in categories such as human resources, marketing, logistics, and paper.
The SPM implementation team is run by the operational excellence/strategic sourcing team with representatives from every business unit. Scorecards were developed to be consistent and category-specific. The Wolters Kluwer scorecard structure and KPI framework are shown in illustrations.
When Measuring Supplier Performance, Perception is Reality
Without a business system regularly churning out quality and delivery statistics, Wolters Kluwer has to rely on supplier performance data gathered from surveys of internal stakeholders and directly from the suppliers themselves.
Therefore, Wolters Kluwer has developed an internal survey that is sent to each category management team that works directly with the suppliers being measured and is knowledgeable about their performance. Questions focus on customer focus, agility, timeliness, cost, and quality. Suppliers are rated on a scale of 1 to 5, where 3 is passing or “meets expectation” and 5 means that the supplier consistently exceeds the performance expectation. If the respondent gives either a 1 or 2 rating, which are not considered acceptable scores, he or she must write a comment about why that score was given.
An external survey goes to suppliers, who report quantitative information on their own quality, timeliness, and cost. To discourage mis-reporting of data, Wolters Kluwer reserves the right to audit supplier-reported data at any time. In addition, the company uses 360-degree feedback from suppliers about Wolters Kluwer’s performance as a customer. The key to this whole system’s success is the responsiveness of the survey respondents. The surveys take only five minutes to complete, but Wolters Kluwer has found, similar to Toro’s experience, that the internal respondents often need to be nagged to complete their feedback surveys.
Scorecards are issued quarterly or semiannually and are discussed in a quarterly review with suppliers. These two-hour reviews are often done in person the first time, then over the phone and Internet by web conference thereafter because of the great geographical dispersion of Wolters Kluwer’s business units.
There is an annual scorecard as well. It has more strategic measurements including financial and operational risk and scores relative to the supplier’s contribution to innovation.
Closing the Performance Management Loop
Wolters Kluwer ensures that supplier performance goals are met by putting key performance indicators from the scorecards into the service level agreements (SLAs) of suppliers’ contracts. When suppliers do not meet their contractual SLAs, as determined by the scorecard, they can be financially penalized.
Part of the implementation of the SPM system has involved putting the contract SLAs in place and getting supplier agreement to do so. Scorecard results relate directly to the SLAs. Initially in the pilot period, penalties were not assessed, but now are. For example, one supplier owed $10,000 in penalties the first quarter as a result of its less-than-acceptable performance, $3000 the second quarter, and $500 in the third quarter, as its performance significantly improved. In retrospect, Gusis and Kroner realized how important it is to be thinking about SPM when they were writing supplier contracts and determining the SLAs. As they began to measure performance via KPIs in SPM, they gained much better insight into developing good SLAs in supplier contracts based on the experience gained on the supplier performance measurement side.
Category managers track supplier corrective actions that come out of the quarterly reviews as well as savings and cost avoidance. Cost savings are reported to senior management on a regular basis, including the controllers, vice presidents of operations, and the CFOs of the business units. Quarterly reviews can result in corrective actions, joint improvement projects with suppliers, or even contract amendments. Participation is tracked by business unit and reported to senior management in order to increase adoption and ensure that supplier surveys are completed. Also, training on the SPM process and system is conducted quarterly for new users and new suppliers to support sustainability.
The scorecard uses carrots, not just sticks. Suppliers who perform well are offered additional business. Good performers can reduce the frequency of a supplier’s reviews from quarterly to semiannually. The company takes the suppliers’ 360-degree feedback to heart and has worked to address supplier concerns.
Wolters Kluwer is still rolling out the SPM process and expanding it to include additional spend categories, with the goal of including common suppliers from the ten North American business units and including international categories as well.
Supplier Feedback
Cognizant of the important role that the customer plays in the success of its suppliers, many firms, such as Wolters Kluwer, ask for specific supplier feedback about their performance on topics such as payment timeliness, order accuracy, and ease of communications. Customer evaluation is part of the customer-supplier feedback meeting, and the customer implements supplier suggestions. Supplier feedback is an integral part of the company’s supplier scorecard and has resulted in increased operational efficiencies and reduced costs.
Realizing the Benefits of SPM at Wolters Kluwer
Since its inception in 2008, SPM has generated significant cost savings and has reduced supplier risk through the scorecard and quarterly review process, including:
- Risk avoidance: early identification of supplier problems, faster migration of newly-acquired suppliers’ businesses to preferred suppliers, and reduced need to switch suppliers
- Cost reduction: identification of cost reduction opportunities, continuous review of pricing and terms and conditions, collection of financial penalties when SLAs are not achieved, extension of current negotiated pricing to new acquisitions, and numerous operational efficiencies identified in the course of the customer-supplier collaboration prompted by the scorecard process.
Suppliers’ reactions have been largely positive so far. They like knowing Wolters Kluwer’s performance expectations and getting the feedback to help them know where they stand and where to improve. As one supplier commented, “The SPM program allows an open forum for both teams to evaluate and provide feedback on each other, as well as identify potential challenges/concerns and develop corrective action plans. Overall, the (quarterly review) meetings have a stronger feeling of collaboration with a strategic partner.”
Best Practices
The Toro Company and Wolters Kluwer, while vastly different businesses, have some commonality in their approaches to implementing their SPM processes. These include the following best practices:
- Senior management buy-in and support
- Strategic alignment of the process with the firm
- Involvement of stakeholders in developing the process, including suppliers
- A disciplined business process in place
- Regular performance feedback to suppliers
- Feedback from suppliers about the customer
- Taking action and making improvements using feedback from the process
- Tracking of improvements and savings and regularly reporting them to senior management.
Sherry Gordon is founder and president of Value Chain Group, a consulting firm that helps companies improve their operations by applying supply management practices and performance improvement strategies and methodologies such as lean and six sigma to their supply chains. She is a consultant, industry analyst, teacher, writer, and business adviser. Gordon was founder/CEO of Valuedge, a supplier evaluation software solution company acquired by Emptoris, an enterprise supply management software company where she was vice president, supplier performance. She previously ran the New England Suppliers Institute (NESI), a nonprofit organization focused on improving customer-supplier business relationships and on using lean enterprise practices to improve supplier performance. Before that, she held positions with several major manufacturing and distribution companies and management consulting firms.
