The success or failure of any business depends on the quality of performance of its suppliers. The performance effectiveness of suppliers should be thoroughly evaluated to meet the requirements of the quality management system. There is a common trend where organizations are always trying very hard to build formidable relationships with their suppliers through supplier alliances (Trent, 2007). Supplier alliances play a major role in sustaining the continuous improvement programs as well as minimizing operational costs within an organization.
A supplier alliance should be based on mutual trust with much emphasis being placed on innovation. Organizations that evaluate the performance of their suppliers from time to time will always have a competitive advantage. It is important for organizations to consider all the key performance indicators before forming any alliance with the suppliers (Trent, 2007). This paper will highlight the metrics used by the BJB Manufacturing Company for measuring performance effectiveness of its suppliers.
Supplier evaluation is among the key processes that an organization should consider when forming supplier alliances. Performance indicators are supposed to check the progress of organizations and are based on an organization’s priorities (Trent, 2007). BJB is a manufacturing company and, therefore its key performance indicators are based on manufacturing priorities. To begin with, cost reduction is a priority for a manufacturing organization that seeks a supplier alliance.
Cost per invoice is therefore a key indicator in forming a supplier alliance. The cost involved from the time an invoice is delivered by the supplier to the time of payment by the buyer is a key performance indictor that determines if a supplier alliance is viable or not (Trent, 2007). First time match rate is another performance indicator that checks the number of delays and manual interventions in a purchase to pay arrangement. The smaller the percentage of delays and manual interventions the more viable the supplier alliance becomes.
The first time match rate is a key indicator in a purchase to pay system because it improves productivity as well as reducing the cost associated with invoice processing. The number of invoices paid on time comes with a lot benefits to both the company and suppliers. The operations of a supplier can only be effective if invoices are paid on time (Wisner, 2011). A supplier alliance can only be beneficial if the purchase to pay system is effective. The payment on time performance indicator determines whether an organization becomes world-class or not.
Productivity per full-time equivalent is a very important metric in forming a supplier alliance. This performance indicator is used by organizations to measure the workload of its employees (Wisner, 2011). The productivity of employees within an organization can be increased with processes like automation that ensure that invoice processing is done in the shortest time possible at minimum cost. The productivity per full-time equivalent is an indicator that shows how effective the processes within an organization are. This indicator is not meant to measure the cost aspect of supplier alliances.
Touchless invoices are a key performance indicator that measures the effectiveness of electronic invoices. The number of electronic invoices accepted by the system forms the basis of a supplier alliance (Wisner, 2011). The first time match rate is also applicable in this scenario. Electronic invoices have eliminated all the manual processes in a purchase to pay system. Discounts captured in a supplier alliance are also a key performance indicator in a purchase to pay system. Discounts maintain the cash flow of suppliers and at the same time enables buyers to generate some returns on surplus cash. By calculating the discounts received from a purchase to pay system, an organization is able to determine whether it is saving or making loses in a supplier alliance (Wisner, 2011). An efficient procure to pay system can only be achieved with a lean list of suppliers.
The number of suppliers per 1000 invoices provides the procurement department with a perfect opportunity to negotiate for good contracts (Wisner, 2011). A small number of suppliers reduce the number of duplicates in a purchase to pay system. It is always easy to negotiate for a better deal when purchasing a large volume of goods with few suppliers. A supplier alliance is always at its best when dealing with a small number of suppliers. Cash flow forecasting is an element of spend under the purchase order key performance indicator. This type of indicator determines whether a supplier alliance is beneficial or a liability (Wisner, 2011). Organizations should ensure that suppliers receive their payments within the shortest time possible.
Many organizations withhold a lot of cash meant for suppliers in order to sustain their working capital. Some suppliers offer discounts for early payments made by buyers and, therefore making organizations make their payments as soon as possible. The percentage of invoices in query helps an organization determine which among its processes hinder or enhance its purchase to pay system. The percentage of invoices in query enables an organization to make necessary changes to facilitate an effective purchase to pay system (Trent, 2007). An organization such as BJB should carefully evaluate the qualification and performance of its suppliers using the mentioned key performance indicators.
It is important for a company like BJB to conduct supplier evaluation because it is a process that gives an organization a competitive advantage. To begin with, it enables an organization select a supplier with efficient delivery systems that reduce costs associated with delays (Trent, 2007). An efficient delivery system is very important for organizations that deal with perishable raw materials. Storage and inventory costs are normally reduced when suppliers deliver materials on time. Flexibility is another benefit brought about by supplier evaluation. A supplier that offers flexibility to organizations enables them to maximize on good opportunities and at the same time allows an organization to make inevitable last minute changes without a lot of complications (Trent, 2007). Supplier evaluation ensures that the products and services produced are reliable and of good quality. Supplier evaluation is very essential in ensuring that the quality of materials requested meets an organization’s quality standards.
Supplier evaluation ensures that the price agreed upon by the organization and supplier benefits both parties. This mutual arrangement guarantees an organization some cost reduction and in the process promoting profitability (Wisner, 2011). This arrangement also leaves the supplier with a fair profit to continue running. Familiarity between an organization and supplier is very important because the supplier is able to understand the challenges and issues faced by an organization for purposes of serving them effectively (Wisner, 2011). Supplier evaluation enhances financial stability within an organization and, therefore an organization is able to operate effectively without incurring unnecessary costs.
Organizations change supplier alliances from time to time but, there are some switching costs involved in the process. The first category of switching costs is the procedural cost (Wisner, 2011). This category includes the costs associated with service interruptions, training, and troubleshooting. New routines are normally introduced in the system with the users needing a lot of time and effort to get used to new systems. System users have to established new communication networks with fellow users and this requires a lot of training. The second category of switching costs is the financial costs.
The process of changing supplier alliances can make an organization lose a lot of money in replacements. Moving equipment from one supplier to another comes with a heavy financial budget. An organization may be forced to pay a lot of money in the case of a breached contract at the time of switching (Wisner, 2011). The third and final category of switching costs is the relational cost where the performance of some stakeholders comes because of their inability to accept and adapt to changes.
In conclusion, supplier alliances are very important to organizations since its benefits are more that the shortcomings associated with the arrangement. In order for a supplier alliance to work effectively, supplier evaluation using the key performance indicators is very essential. Supplier evaluation ensures that an organization is supplied with materials and services that meet an organization’s quality requirements. The relationship between an organization and its suppliers determines whether the organization becomes successful or not. The performance indicators used to evaluate a supplier varies from one organization to another depending on the priorities put in place by the company. An organization may be forced to change its supplier alliances but, it is important to understand that such a move is very costly. BJB should try to evaluate its suppliers before forming supplier alliances for efficiency and profitability.
References
Trent, R., (2007). Strategic supply management: Creating the next source of competitive advantage. New York, NY: J. Ross Publishing.
Wisner, J., (2011). Principles of supply chain management. A balanced approach. New York, NY: Cengage Learning.