Picking the right metrics for your supplier relationship should not be about simply buying into the latest benchmarking data. Rather, it should be about aligning the right metrics for the purpose. For quality metrics, pick what is the "best fit," not the "best practice." This is especially important for strategic, long-term supply chain relationships. -Kate Vitasek, faculty member, University of Tennessee Haslam College of Business Administration; author of six books on the Vested business model; and Karl Manrodt, Professor of Logistics at Georgia College. He is the co-author of seven books and numerous academic articles.
Which Model – Which Metrics? -- Metrics should be about the best fit with your sourcing business model. Choosing the wrong metrics simply won’t work and can lead to suboptimal performance. For this reason, organizations need to align the metrics they employ with the business based on the model it is using with its suppliers: transactions, outputs or outcomes. Here is a good example using spare parts logistics support:
Transaction-Based (Activity Level or Input) Metrics: A transaction-based metric typically measures an activity, input or level of effort. Activities or inputs are often defined as resources, tasks or capabilities the supplier must do.
Example: Preventive maintenance actions performed on time. The workscope defines that the supplier should conduct preventive maintenance (PM) tasks on key machines. The buyer specifies all aspects of PM, including defining skill levels of resources, the PM schedule, and how each of the key machines should be serviced and dictating the replacement parts to use.
Output-Based Metrics: An output is a defined and easily measured event or a deliverable that is usually finite in nature. Outputs relate to the purpose/functionality of the good or service, instead of the activities or inputs needed to create the good or service. Thus, it focuses on resources and capabilities of the supplier, or the processes needed to produce the service. In transaction and output-based metrics, comparison to best practices can be helpful.
Example: Unplanned machine downtime. The workscope requires that a supplier is accountable for preventive maintenance (PM). The buyer provides a list of machines under scope and the manuals that came with the machines. The buyer does not define the PM schedule or a prescriptive statement of work defining how to complete PM. The supplier is responsible for maintaining the PM scheme.
Outcome-Based Metrics: Outcomes typically focus on the economic or strategic value generated by the good or service. Typically, an outcome relies on an end-to-end perspective, and in many cases, an outcome measure can only be obtained when both the buyer and supplier work together. Here, best fit is more critical than best practice.
Example: In one case we worked with, a company selected a supplier to help them optimize the overall total cost of ownership of spare parts inventory for their capital equipment. The supplier invested in a vendor-managed inventory program for maintenance, repair and operations (MRO) program with the desired outcome to reduce working capital by 20 percent on MRO supplies. The supplier also suggested paying more for an SFK branded bearing because of increased reliability. The added costs were justified because the more expensive bearings and lubricants resulted in a 28 percent improvement in the number of hours a machine could operate between PM actions.
Suppliers are paid to meet metrics; for this reason, buyers need to be clear as to expectations. Pick what matters the most: transactions, outputs or outcomes. Focusing on outputs and outcomes requires more work, but can lead to greater performance and innovation.
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