When a purchasing organization contracts with a supplier to purchase goods and services, it is critical that the contract define specific measures and set achievable targets for those measures. As part of the negotiation process, the supplier and purchasing organizations work together to choose metrics for the performance of the service, and both parties agree to and understand clear targets for those metrics.
Furthermore, the purchasing organization should regularly review supplier performance in the context of these targets and ensure that the targets are adjusted accordingly.
Targets established in contracts with suppliers should be SMART. The best supplier performance targets meet these criteria:
- Specific. The target is clearly identifiable and unambiguous
- Measurable. It is possible to collect measurements against the target
- Achievable. The target can actually be met
- Relevant. The target pertains to the goods and services described in the contract
- Time-bound. The target has a useful time component
It is one thing to establish clear supplier performance targets in a contract; many organizations do exactly that.
However, it is another thing to regularly review supplier performance against those targets and to use that information to help improve the supplier’s delivery of goods and services. Fewer organizations do the latter. If an organization sets targets for its suppliers in contracts, it is critical that a regular review of supplier performance is carried out against those targets. Otherwise, the supplier is likely to conclude that the purchasing organization doesn’t take the targets seriously and, as a result, may not work to continually improve its delivery of goods and services. Setting clear supplier performance targets are a key aspect of improving supplier performance; without targets, it’s impossible to expect a specific level of services from suppliers. Additionally, setting supplier performance targets provide a means to judge the amount of improvement over time.
ITIL gives numerous examples of supplier performance metrics. Some of the best metrics assess the impact of the supplier upon the delivery of the purchasing organization’s good or services. For example, when contracting with a supplier for services, a useful performance measurement is one that specifically assesses the amount of impact or degradation to a service that is directly attributable to a supplier.
Consider an organization that buys web-hosting services from a supplier. The contract between these two organizations might set a target of 99.999% availability, 24 hours per day, 7 days per week, 365 days per year and detail how the measurement will be collected. During regular reviews of supplier performance, the organization can gather reports that show how the supplier performed against the target as well as specific information about any breaches or degradations to service that were encountered.
Next week we’ll talk about the third simple thing, categorizing suppliers.
Reproduced and available for download from Global Knowledge White Paper: Supplier Management: Five Simple Things Your Organization Can Do to Improve Supplier Performance