Last week we introduced a discussion on the use of non-price attributes in evaluating supplier bids and awarding contracts. This week, we continue the conversation by discussing specific non-price attributes as a way to help sourcing teams generate ideas and/or develop a more expansive list of criteria (besides price) that can be used during the sourcing process.
[Sidebar: I thought we were off to a flying start, but, after re-reading our last article on Supplier Market Share and what it could indicate about the supplier and its business and qualifications, I realized that sharing a list of about 30 attributes one at at time and in depth, this series would bog down. As such, I’ll try to take a higher-level view on the other attributes going forward. Today we’ll look at a larger set of factors that fall under Quality and Past Performance.
Non-Price Attribute: Quality
Commonly held view: You get what you pay for.
Commonly held view within procurement: You can always get more than what you pay for.
The truth is, everybody loves a good deal, but finding one is the sourcing professional’s mission.
For most a deal is when the quality or quantity outweighs the price. While defining quantity is easy, quality is a different matter. Quality is in the eye of the beholder and yet it is something that is partially subjective and partially objective.
Merriam Webster offers these definitions: qual·i·ty noun \ˈkwä-lə-tē\ (1) degree of excellence; grade (2) superiority in kind (3) a distinguishing attribute
Here’s wikipedia’s description of quality (in business): Quality in business, engineering and manufacturing has a pragmatic interpretation as the non-inferiority or superiority of something; it is also defined as fitness for purpose. Quality is a perceptual, conditional and somewhat subjective attribute and may be understood differently by different people. Consumers may focus on the specification quality of a product/service, or how it compares to competitors in the marketplace. Producers might measure the conformance quality, or degree to which the product/service was produced correctly….The common element of the business definitions is that the quality of a product or service refers to the perception of the degree to which the product or service meets the customer’s expectations. Quality has no specific meaning unless related to a specific function and/or object.
And then there’s Peter Drucker’s definition: “Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for.”
So, quality can mean different things to different people and it can mean different things for different categories. No matter the people and no matter the category, it is the sourcing professional’s job (and challenge) to develop an aggregate view of quality for a specific bid/supplier. Different industries have developed different standards for quality and performance that can be used to help quantify quality but stakeholders must also be engaged. Interviews and surveys are two primary methods used to gather quality feedback. eSourcing tools are a great way to capture stakeholders’ quality grades of particular supplier bids.
Non-Price Attribute: Quality Assurance and Control
If quality is an important factor, a supplier’s ability to consistently deliver it should also be reviewed. If you are paying up for superiority, you want to make sure that the supplier can deliver it. Quality assurance is the ability of a supplier to prevent defects or poor delivery. There are dozens of quality management techniques – Six Sigma, Total Quality Management (TQM), and Zero Defects are three pretty well-known examples.
Sourcing teams will want to evaluate a supplier’s QA programs and how they are applied to production and delivery. Depending on the industry, a supplier could or should be managing its quality of raw materials, assemblies, products and components, services related to production, and its management, production and inspection processes.While the level of rigor in a QA program should be related to the production, type, and usage of the goods/services, it is important to note that QA should not be limited to manufacturing businesses only.
Sourcing teams must decide which of these QA aspects are relevant and then compare and contrast supplier QA programs to industry standards, benchmarks and other suppliers’ programs.
Non-Price Attribute – Supplier Performance
Performance, like quality is something that can be quantifiable AND highly subjective at the same time. Like quality, the components of performance are highly dependent on the situation, the supplier, and the good/service provided. And, of course, like quality, there are thousands or sources for information on supplier performance, what it means, and how it should be graded and applied to supplier management and negotiation.
We’ll highlight a few important points:
- Past supplier performance is an indicator of future supplier performance
- If supplier performance is important, supplier communication is too
- Poor performance should not be rewarded
- When suppliers perform poorly, they should be told
- Suppliers generally have the ability to improve performance – they may not always know that they need to improve (see above)
- Good performance should be rewarded
- When suppliers perform over and above, they should be told
Performance evaluations should take a 360-degree view of the entire supplier relationship. Areas to evaluate include:
- Contractual performance: compliance to contractual terms and conditions and any service-level agreements (SLAs)
- Non-contractual performance: areas that should have been in the SLAs but were missed
- Non-contractual performance: Customer, product, and field support; invoicing quality
- Non-contractual performance: engagement, responsiveness, ease of interactions, etc
Sourcing teams can certainly use Supplier Performance evaluations to make smarter sourcing decisions, but they can also use this process to improve the quality of future supplier contracts (what SLAs did you include in a contract versus what was really important in evaluating supplier performance) and communication/relationships (what did we just learn that we can share during the sourcing process to better define our requirements? How can we build upon what worked and improve upon what didn’t).