Properly aligning metrics with supply chain partners to track and improve strategic relationships is an idea whose time has come. Simply monitoring transactions is not enough; metrics must add value.
The questions about which 3PL metrics to use and how many are needed is an ever-present debate among supply chain practitioners. A binder-full of measurements might look impressive, but what good does it do if it doesn’t help the company achieve its goals? Choosing the right metrics is especially critical for strategic supplier relationships. One of the best tips is to align the metrics based on what you want out of the supplier relationship. This falls into three buckets: inputs, outputs or outcomes.
Input (Transaction or Activity) 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. Transactional metrics are by far the easiest to measure because they are really measuring operational data that is often easy to extract from common logistics and operational ERP or WMS systems. If you have a basic or approved supplier relationship and are simply buying tasks or transactions, these are the best metrics because they provide an easy and accurate way to monitor performance.
Stepping up from the simple transactional approach, an output is a defined and easily measured event or a deliverable that is usually finite. Outputs relate to the purpose and functionality of the good or service, instead of the activities or inputs needed to create the good or service. Thus, the focus is on resources and the capabilities of the supplier, or the processes needed to produce the service. Output-based metrics are best manifested in the form of service-level agreements (SLAs) and should be chosen when it is important to measure the performance of a supplier against a process they are accountable for, such as “best practice” performance (e.g., on-time shipments).
Outcome-based metrics focus on the economic and strategic value that can be derived by working with a supplier. Typically, an outcome relies on an end-to-end perspective, and in many cases, an outcome measure is obtained only when the buyer and supplier work together. A hallmark of a Vested, relational agreement are the desired outcomes that the parties mutually establish to define success at the very beginning of the relationship, typically less than five. These “best fit” metrics help align the parties on the critical aspects of their strategic relationships that result in business value – not just the supplier meeting an SLA.
When it comes to strategic supplier relationships, deciding on the metrics that matter the most is essential. Companies should not start with a list of generic best practice SLAs or even what is possible to measure. Rather, start by thinking about the purpose of the supplier relationship and if you should be measuring inputs, outputs or outcomes.
Kate Vitasek is a faculty member at the University of Tennessee’s Haslam College of Business Administration, and author of six books on the Vested business model.
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