The Next Phase of Supplier Performance Management in the Retail Industry
Featured Author - Mark Jones
Supplier performance management in the mass merchandising market is undergoing a renaissance of sorts. Increasingly, retailers are deploying vendor scorecards as a means of better aligning their supplier network with their corporate direction. Suppliers need to consider the implications and begin preparing for this or face considerable risk.
For years, major retailers have had compliance policies in place to encourage adherence to their supplier guides. These guides are "how-to" manuals detailing the requirements for doing business with the retailer (e.g., the format of an ASN, type of hanger, placement of labels, what box should be used and EDI formats). These policies have forced vendors to make investments to make them better, more efficient supply chain partners.
Supplier guides and compliance policies are now widely used by soft goods and home goods retailers. Their success at large retailers lead to adoption across the industry, with discounters and small regional chains being the most recent adopters. For suppliers, the introduction of compliance policies proved to be painful. As retailers first began specifying their requirements and introducing expense offsets for non-compliance, few vendors were able to adjust quickly enough and as such, suffered significant profit dilution from deductions. It has taken years for suppliers to effectively reposition their operations to meet retailer requirements.
Over the past several years, a group of large retailers, perhaps as many as fifteen, have introduced supplier scorecards. The scorecards include key performance indicators (KPI) ranging from fill rate, or orders satisfied to total demand, to supplier creativity—new ideas implemented for either revenue growth or cost savings. Retailers tend to focus on between five to seven key measures, with a majority focusing on logistics.
The scorecard has multiple purposes. Assuming the retailer's scorecard has been cascaded from the corporate strategy (and balanced scorecard), it can be a device for driving strategic direction. After all, "what gets measured gets improved" (Edward Frazelle, Supply Chain Strategy, 2002). If the aggregate retailer performance bell curve is misshapen, senior management can assess the extent of the issue, the amount of time it will take to resolve, and develop a plan of action.
From a tactical perspective, the scorecard is a snapshot of a supplier's contribution to retailer profitability. Buyers will use them as a basis for mid-term course corrections and determining the willingness and extent to which their company will be prepared to grow the business with the supplier.
When a retailer has a thousand suppliers, providing consistent and continuing feedback to all suppliers is a challenge—and yet, it is a necessity if they want to move supplier performance forward. While a supplier's monthly deductions can provide clues as to how a retailer views their performance, the scorecard aggregates the impact of all transactions for the period and presents them in categories important to the customer.
The Retail Compliance Council, a sister organization to the Vendor Compliance Federation, has had an opportunity to complete a comparative analysis of scorecards for eleven retailers. This study revealed that seventy-eight different KPIs were in use. We evaluated each metric and found that there were thirty key measures. Twenty-three measures were relatively unique. Five measures were shared by more than three retailers. Only two measures were being used by more than 50 percent of the participating retailers.
Six retailers had differentiated weighting, whereas measures of greater importance to the retailer were weighted accordingly. The remaining retailers had equally weighted measures.
The Comparative Analysis
The comparative analysis below provides a supplier view of how their key customers will view their performance. Green shading reflects the relative importance placed on that metric. Blue shading represents equally weighted measures.
In many ways, this diversity is to be expected. People respond to how they are measured and scorecards reflect the desired focus of each organization. Retailers must differentiate how they serve customers in order to thrive. This will naturally contribute to differing requirements from their supplier network, which in turn will lead to measures specific to their goals.
While a dozen or so retailers have scorecards, there is nearly an equal number poised to implement scorecards in the next twelve months. Adoption will undoubtedly follow a path similar to compliance manuals—the largest retailers, then the next tier, and so on. Fifteen will quickly become thirty scorecards and suppliers will be confronted with managing to a myriad of templates, measures, and weightings.
Standardizing data captured for scorecards is the easy answer, but it is not realistic. Data availability will vary as will data definitions. Retailers may share common functions, but each business will be at a different stage of development and their strategy and measures will reflect this. The reality is that a well designed scorecard will tend to be unique to the organization.
What then can supplier management do to begin preparing for the proliferation of scorecards? To start with, senior management must become intimately familiar with the scorecards they are receiving and each customer's perception. Once management understands their position with their key customers, they should schedule regular meetings with them.
Suppliers need to position themselves to be proactive by building a data infrastructure to collect and build real-time scores to anticipate their customer's needs. The supplier should also consider creating their own corporate scorecard which distills the key elements of their customers' measures.
Ultimately, suppliers need to recognize that unlike compliance policies where non-adherence results in profit dilution, an inadequate response to poor scorecard performance can mean revenue elimination.
This article is from Parallax View, ChainLink Research's on-line magazine, read by over 150,000 supply chain and IT professionals each month. Thought-provoking and actionable articles from ChainLink's analysts, top industry executives, researchers, and fellow practitioners. To view the entire magazine, click here
About the Author
S. Mark Jones is a Co-Managing Director at the Retail Compliance Council. He can be reached at 646-442-3493 or firstname.lastname@example.org.
ChainLink Research is a bold new supply chain research organization dedicated to helping executives improve business performance and competitiveness.