I often get asked to share "best practices" I have seen that measure supplier performance, especially for strategic and complex outsourcing deals.
On the surface, this is a reasonable request. But the answer lies below the surface, in understanding the essence of the supplier relationship. Metrics need to be aligned to the type of Sourcing Business Model an organization uses with a supplier.
Simply put, don't say you want outcomes and then come up with a list of 50 SLAs that are designed to measure (or micromanage) the activities or outputs of the supplier. Your metrics need to be about the best fit with your sourcing business model, not simply about benchmarking a best practice that someone else has used successfully. Choosing the wrong metrics is like putting a square peg in a round hole - it doesn't fit.
The below provides an example of the differences how an organization might think about facilities management based on if it is buying transactions, outputs or outcomes.
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.
An output is a well-defined and easily measured event or a deliverable that usually is finite in nature. 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. An output typically focuses on the resources and capabilities of the supplier or the processes needed to produce the service. It is important to understand that output-based metrics should only be used when a supplier has complete control of its output. Most organizations tend to use the term SLA or KPI in association with out-put based metrics.
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 a PM scheme so that unplanned downtime's target is not exceeded. The functionality of the service (minimized downtime) is emphasized versus the actual activities (monitoring that PM activities were completed)
An outcome is the result or consequence of actions taken by the supplier and/or buyer. 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, not just the workscope under control of the supplier. Many organizations say they want "outcomes" - but fail to understand that almost all outcomes can be achieved by working collaboratively with the supplier. This is because success is determined through a series of interactions between the buyer and supplier and may be impacted by uncontrollable events.
Example: Machine reliability, spare parts, and consumables inventory optimization. The workscope is the same as that for output-based metrics in that the supplier is accountable for preventive maintenance (PM). However, the supplier is challenged to work cross-organizationally to look for ways the buyer can increase the effectiveness of the machines used. The supplier invests in analytical equipment and processes to baseline current success measures across multiple dimensions. For example, the supplier-implemented inventory parts planning and worked with a regional parts distributor to put in a vendor-managed inventory program for maintenance, repair, and operations (MRO) suppliers, reducing working capital by 20 percent. The supplier also implemented a condition-monitoring program that would prevent machine downtime by fixing problems before they happened. The program reduced unplanned downtime by 7 percent. Lastly, the supplier shifted some key bearings and lubricants from a cheaper solution to more expensive options; however, 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. As a result, the buying company was able to improve manufacturing throughput, which positioned it to gain market share.
Making the Shift
Making the shift from best practice thinking to best fit thinking is not difficult. It starts with education. SIGU is the only sourcing certification course that has embedded Sourcing Business Model theory and teaching into its certification program. Start your journey to make the shift to best fit thinking by taking our SIGU courses or picking up a copy of the book Strategic Sourcing in the New Economy.
Kate Vitasek is an international authority recognized for her award-winning research and the Vested business model for highly collaborative relationships. She is the author of six books on Vested and a faculty member at the University of Tennessee. She has been lauded by World Trade magazine as one of the "Fabulous 50+1" most influential people impacting global commerce and has shared her insights on CNN International, Fox Business News, Bloomberg, and NPR.