Sample Corporate Minutes with Supplier by whs57995


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									Creating and Using
Supplier Scorecards
A scorecard with well-developed performance
indicators works to keep the vendor focused
on the customer’s corporate goals.

          About the Author                    Supplier scorecards are an integral        conformance to requirements. The
                                              piece of a supplier relationship           feedback from a scorecard frequently
 SHARON HORTON is a senior consul-
                                              management program.                        provides a supplier incentive for a
 tant and project manager at Contract
                                                Properly constructed and used, the       continuous improvement program
 Management Solutions, Inc., in Winterpark,
                                              scorecard assesses performance and         and as input to the supplier’s own
 Florida. She is a member of the NCMA
                                              customer satisfaction with individual      quality programs.
 Suncoast Chapter. Send comments on
                                              suppliers, as well as compares suppli-
 this article to
                                              ers across categories. The scorecard       Overview
                                              provides objective measurements of         The term “scorecard” is borrowed
                                              performance and indicates the supplier’s   from the academic “report card” and

22 ■ Contract Management / September 2004
is developed and used in much the              Performance indicators are mea-           If you are running a just-in-time
same way. Students have several mea-         surement criteria that may include          inventory operation, it is critical that
sures of performance within a subject:       summary components of the contract          your stock arrives when it is needed
homework, quizzes, attendance, par-          or factors that are apart from the con-     and not too soon (storage) or too late
ticipation in class, and class behavior,     tract. Performance indicators are the       (plant shutdown). So your “on-time
all of which contribute to a subject         components of an overall scorecard.         deliveries,” in this example may be 96
“grade.” There are several “subject”           Some examples of performance              percent, not too early, and 99.5 per-
grades, of course, and all of the subject    indicators are as follows:                  cent too late. However, if the supplies
grades add up to an “overall grade.”                                                     are not critical to core operations, the
   In much the same way, we’d like to        ■   Product prices,                         window might be broader, such as 90
have measures of supplier perfor-                                                        percent of deliveries are on time.
mance: on-time deliveries, meeting           ■   Percentage of on-time deliveries           The first step is to determine the
service levels, customer satisfaction,           in the last month,                      appropriate performance indicators
and responsiveness to problems, etc.                                                     for the category of supplier relationship.
Some of these measures will be objec-        ■   Customer satisfaction, and              Column 1 of Table 1 (on page 24) lists
tive, such as response time and                                                          several performance indicators that
average availability. Some of the mea-       ■   Percentage of defects and errors        might be appropriate for any supplier
sures will also be subjective, as in             on delivered products.                  who delivers commodity products—
customer satisfaction. One thing that                                                    general inventory products, office
all of these measures need, however,            As you can see, some performance         furniture, desktop hardware equip-
is the ability to apply some sort of         indicators may also, in some form, be       ment, and office supplies.
metrics. These measures, which are           used as service levels.                        The second step is to determine the
usually composed of an objective and            The scorecard, then, presents the        target ratings. These will vary by type
a target for the objective, are called       performance indicators and provides         of performance indicator. Some per-
performance indicators.                      for a sum of all of the performance         formance indicators will lend
   One of the frequent confusing parts       indicators with an overall rating of the    themselves to objective type mea-
of scorecards is the difference between      supplier. Usually, the consequence of       sures, i.e., 95 percent of the time, 92
performance indicators and another           a failing scorecard has no direct con-      percent of the service levels. Others
indicator of supplier results measure-       tractual impact (unless this is built in)   will be more subjective, such as “Has
ment—service levels. The usual               but has significant impact on the sup-       the supplier provided good customer
differentiation is that the service lev-     plier-customer relationship.                support?” See Column 2 on Table 1
els are performance measurements
that are included in the contract and
usually have contractual consequences                 It is usually desirable to have multiple
and/or penalties for failure to meet
them. Service levels are usually more                 people rate suppliers in order to get a
granular and are measured as a direct
part of the contract.                                  broader view of supplier performance.
   In our comparison with a report
card, service levels might correspond
to questions on a test. Some examples        Developing a Scorecard                      (on page 24) for examples.
of service levels are                        The most important step is to create           The final step is to determine how
                                             the right criteria to measure. On-time      important each performance indicator
■   Time to resolution for severity-one      deliveries are usually more important       relates to the others. This can be done
    errors: 95 percent of repairs will be    for suppliers delivering products, not      by assigning weights to each indicator.
    completed within four hours,             services (although “on-time deliverables”   As a rule, it is desirable to have the
                                             are a consideration). Price may apply       weights add up to 100 percent. Then,
■   System outages: No more than two         to all suppliers, as does customer          when the ratings are applied, a formu-
    monthly outages in any rolling six-      satisfaction.                               la will convert the rating to scores,
    month time frame, and                      Performance against overall service       which will add up to a portion of a
                                             levels only applies if the service levels   maximum of 100 points. This allows
■   System interruptions: No more than       have been written into the contract.        comparison across suppliers and cate-
    two interruptions to service that last   And, most of all, since the level of per-   gories of products, even when a different
    longer than 10 minutes during sys-       formance may affect the price paid for      number of performance indictors are
    tems availability in a two-month         goods or services, some products and        used. Since all will add up to 100 per-
    rolling period for all platforms.        services may have different standards.      cent, any supplier can be compared to

                                                                                          September 2004 / Contract Management ■ 23
C R E A T I N G        A N D       U S I N G     S U P P L I E R      S C O R E C A R D S

                                                                                          mance. In such a case, scorecards are
              It is sometimes helpful to actually                                         sent to all the internal reviewers, who
                                                                                          each complete an individual score-
           develop the scorecard with the input                                           card. Upon return, the scorecards are
                                                                                          consolidated across all reviewers by
       o f t h e s u p p l i e r, t h u s b u i l d i n g c o m m i t m e n t             summing and averaging.
                                                                                             Although the raw total is sometimes
            to both the process and the ratings.                                          used in supplier relationship manage-
                                                                                          ment programs, it is also frequent
                                                                                          to assign a letter “grade” to suppliers,
                                                                                          once a total is calculated. This scale
any other. (See Column 3 on Table 1          The others are either preset or calcu-       is common:
below) for examples.                         lated. Table 1 on this page illustrates a
  Now that the model is complete, the        complete sample scorecard, after the                A - 90–100
scorecard can move into actual use.          performance actuals are entered.                    B - 80–89
Several more columns need to be                 It is usually desirable to have multi-           C - 70–79
added to support actual use, however,        ple people rate suppliers in order to               D - 60–69
including columns for the actual per-        get a broader view of supplier perfor-              F - < 59
formance during the time period, the
rating, the score, and comments.                                           Sample Scorecard
■   The actual performance, when               Performance      Target     Weight Actual           Rating     Score     Comments
    applicable, would be provided from         Indicator
    data points collected during the per-      Description
    formance rating period.
                                               On-Time          95%
■   The rating is set up to be 1–5.            Deliveries       90%
    Where available, the actual perfor-                         85%        20%           92%
    mance should guide the rating.                              80%
    1 – unsatisfactory performance
                                               Price            Lowest     10%
    2 – marginal performance
    3 – satisfactory performance               Product          99.6%
                                               Availability     99.4%  10%               99.7%
    4 – very good performance                                   99.1%
    5 – outstanding performance
                                               Customer                    20%
■   The score is a calculation based on        Support
    the weight. If a performance indica-
    tor has a weight of 20 percent, then,      Meets All        95%
    on a scale of 1–100, only 20 points        Service          92%
    are available in this category. If the     Levels           90%        20%           86%
    supplier is perfect in this category,                       85%
    getting a 5 rating, then the score                          75%
    will be 20 points. A supplier receiv-
    ing all perfect scores (all 5s) will       Overall
    have a total score of 100.                 Customer                    20%
■   Comments should be added to
    document issues behind ratings.                                        100%

  The rating and the comments are
the only fields completed by the rater.                                             Table 1.

24 ■ Contract Management / September 2004
                                   C R E A T I N G        A N D      U S I N G       S U P P L I E R       S C O R E C A R D S

  The most frequent alteration to the        actions are needed to bring the score-        for performance improves relation-
scale is on the lower end, where com-        card up to a satisfactory performance         ships and can increase incentive to
panies may determine that “59” is            level. Finally, continuous improve-           perform. More importantly, focus is
entirely too low for a “failing” suppli-     ment programs are for satisfactorily          shifted onto the goals of the customer,
er. Rather, suppliers are expected to        performing suppliers and used to raise        rather than misaligned or actually
maintain a 70 or better.                     the standard of performance.                  lazy performance.
  From this point, overall supplier            For the customer, the scorecard use           A scorecard with well-developed
reporting will compare suppliers within      should go beyond grading an individ-          performance indicators works to keep
categories and across categories, leading    ual and move into comparing                   the vendor focused on the customer’s
to supplier relationship management          suppliers both within categories and          corporate goals because those goals
programs, continuous improvements,           across categories. There are many             are reflected in the ratings. If on-time
and remediation actions.                     opportunities to produce charts and           deliveries and responsiveness to cus-
                                             reports identifying performance               tomer support requests are important,
Supplier Performance Program                 trends and poor performers. The               they become part of the scorecard,
It is essential for the relationship         scorecard should also feed into suppli-       and the supplier’s performance with
between the customer and supplier            er replacement—a non-performer                the customer is evaluated based on
that the scorecard not be “sprung” on        should either be eliminated entirely or       those goals. Other customers may
the supplier. It is sometimes helpful to     not used. The customer can re-RFP             have different goals, such as low cost
actually develop it with the input of        (request for proposal) to add new sup-        and low error rates. In addition,
the supplier, thus building commit-          pliers to its category as failing suppliers   because the scorecard identifies prob-
ment to both the process and the             are “let go.”                                 lem areas, the supplier will now focus
ratings. During this development peri-                                                     on areas for improvement and
od, the customer and supplier will           Conclusion                                    innovation. CM
need to determine an appropriate fre-        The use of scorecards is critical in a
quency of usage—monthly, quarterly,          supplier relationship management
yearly—and have procedures for the           program, in the same way as report
role of the scorecard in the overall sup-    cards are used in public school sys-
plier relationship management program.       tems. Providing quantitative metrics
   Following the scorecard rating, the
results should be reviewed with the
supplier. This keeps the supplier
informed on its performance, allows
for mid-review period (or mid-con-
tract) corrections, eliminates excuses,
and, in many cases, provides incen-
tives for improved performance. A
comparison to last periods’ scorecards
also identifies performance trends—how
did the supplier do in each of the perfor-
mance indicators as well as overall? Is
performance getting better or worse?
   The outcome of the scorecard
review with the supplier should identi-
fy any required corrective actions,
remedial programs, and continuous
improvement programs. Corrective
actions, the first-level problem resolu-
tion processes, are used to improve
the results of one or more individual
poor performance scores.
   Usually, the supplier prepares a plan
that will address specific actions and
implement that plan with a timetable
for deliverables or results. Remedial
programs are used for suppliers whose
overall results are failing. Now, more

                                                                                            September 2004 / Contract Management ■ 25

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