How Well Are You Monitoring Your Suppliers' Performance Against Contract Terms?

Posted on 22nd July 2019

You’ve set up an excellent procurement process which has improved visibility and control over spending. You've invested time and effort building up strong relationships with your carefully chosen suppliers. You've even kept your compliance department happy by reducing supply-side risk. At this point, some organisations undo all their hard work by not maintaining relationships with their suppliers. The impact of this can be huge. Your profits may be hit, you could suffer reputational damage if your suppliers' poor service affects your customers or productivity may take a nosedive. Monitoring the performance of your suppliers is a crucial part of the ongoing procurement process and directly impacts the success of your business. 

How can you monitor your suppliers’ performance effectively?

Set KPIs and SLAs

First, it's essential that each contract has agreed key performance indicators (KPIs) and service level agreements (SLAs) in place so you can evaluate their performance. By reviewing these regularly, you can identify gaps and pre-empt issues showing underperformance, then address them before they develop into more significant problems.

Hold regular meetings with your suppliers

 

Have regular meetings with your suppliers will improve communication and help build effective relationships. A good relationship should mean a supplier will give you prior or immediate notice of any issues with the provision of the goods or service they provide. You can then take action to ensure minimal impact on your customers.

Discussing performance against KPIs and SLAs documented in the contract allows you to identify shortfalls and agree on measures to improve performance. Other measurements you can use include:

•            incidents that have impacted your business

•            quality of goods or services provided (for example, through customer feedback or surveys)

•            risk scores

•            responsiveness to queries or issues

•            Order and invoice processing (for example, error-free and timely)

Goods/services and site inspections

 

Carry out regular inspections of the goods or services supplied to ensure they meet specifications and are of the agreed standard according to contract terms. You may also have to check for compliance to industry regulations (for example, in Financial Services, the rules set by the FCA), legislation and best practice.

Periodic visits to your suppliers’ sites or places of work can help you understand their commitment to quality and working practices. You can evaluate their culture to ensure it fits with your procurement ethics and check workplace health and safety and the associated risks.

 

Develop feedback mechanisms

Gather feedback from both product or service users and procurement stakeholders to give you crucial insight into a supplier’s performance. Identifying issues and rectifying them allows for continuous improvement and helps you make better decisions to improve performance.

Maintain adequate records

Keep detailed records of communications, documentation and transactions with your suppliers. If there is a dispute, you can refer back to your records to identify when the issues occurred and what has been agreed to address them.

Tell the supplier about issues quickly

 

Once you've established a problem with a supplier, feedback to the appropriate person immediately using the agreed communication channels. Follow up by confirming what was said in writing so you can refer back to the communication if you need to. An informal conversation may resolve the matter, but it's important to have a record so you can identify patterns or reoccurring issues and deal with them accordingly.

Employ a third party to carry out an audit

 

Use an independent third party to carry out an audit on supplier capabilities, quality, risk management and adherence to contractual obligations. Not only will you get an objective view of performance, your suppliers will also understand the importance of relationship management to your business.

 

Use supplier relationship management software

The most straightforward way to monitor supplier performance is to use supplier relationship management software. A sound SRM system will:

•            Act as a central depository for all communication with suppliers

•            Provide a risk management tool with periodic risk reviews

•            Simplify performance management with automated management reports

•            Improve visibility of supplier performance

•            Enhance inter-departmental and supplier communication and collaboration

How often should you carry out a supplier review?

 

This will depend on several factors, including the size and terms of the contract, the risks to your business and the product or service being provided. For example, you may be an insurance company who outsources their IT services, and most of your business originates online. Here you will want to carry out a review with your IT company more regularly than you would with your electricity supplier.

 

What should you do if one of your suppliers is performing poorly?

 

Once you've identified the cause of the poor performance, work with your supplier to help improve their performance. You can put in place an improvement plan, increase the frequency of review meetings and escalate the issues to more senior people in the supplier's company. If the position becomes untenable, look at the contract with your supplier to determine in what circumstances you can terminate for breach of contract.

You may also want to check your SRM processes to see if you could have prevented the issues arising. For example, consider whether:

•            You are regularly evaluating supplier performance

•            The correct measurements are in place

•            You have been clear on what you expect from your supplier

•            You have enough visibility over supplier performance

Atamis is a leading supplier of procurement software. Contact us if you would like any help with supplier relationship management or any other aspect of procurement.

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