Supplier scorecards are globally accepted as a key tool for managing a more profitable supply chain.

Key uses for a supplier scorecard include:

• Measuring performance and driving improvements
• Justifying which suppliers to keep in your supplier base
• Strengthening a negotiating position
• Developing suppliers into better partners
• Rewarding good performers based on objective data
• Gaining consensus on strategic relationships

A good scorecard helps identify which vendors deliver the best value, explains the drivers of performance, and is a preferred collaboration tool for improving supplier relationships. But building a good scorecard can be daunting. If you are just getting started on a supplier scorecard program, identify no more than three high priority objectives. Next, identify two or three measures that tap into each objective for the next 12 months. Having more than one measure per objective is important to getting a multi-dimensional view of performance. Lastly, develop Key Performance Indicators (KPIs) around those measures. A good KPI will be measurable against some benchmark or criteria.

It’s relatively easy to identify a large number of KPIs to monitor – but it can be a lot harder to capture the data you’ll need. Ask yourself, is this measure tied to a quantifiable outcome, and do I know what I’ll do if performance doesn’t measure up? If you can’t identify an outcome and a strategy to relate to the KPI, then you’ll be wasting time on data collection and analysis.

Follow these steps to build your initial supplier scorecard. Then, when you’ve deployed your scorecard and closely tied your KPIs to strategy, begin expanding your data collection and analysis.

1 Identify and define the right measures for your business
Sometimes the KPIs that seemed essential at the outset turn out to be less integral because getting the data is too hard – or even worse, your organization can’t figure out what actions to take with the data. On the other hand, you will inevitably find gaps in your scorecard. Most often, your measurements will require exceptions to handle strategic suppliers who have special status. Plan to review your KPIs monthly during the first three to four months and cull out the bad ones quickly. Then plan on a quarterly review for the remainder of the year.

2 Identify and get access to the right data sources
This can really be the hardest part of scorecard design. Data may reside in any number of software applications and spreadsheets. It may be incomplete, biased or even wrong. Yet pulling it all together in a believable way is the core of your success. Consider using software to automate data integration. These tools can maintain a live connection to your data and generate updates as needed. More advanced ones can structure and clean the data before dumping it into a format for reporting. If you use data quality tools, monitor the amount of clean-up needed and work hard to improve the quality in source data systems.

3 Get the metrics right
KPIs are often based on average performance levels. For example, average lead times may be calculated over time and compared across suppliers. However, if lead times tend to be very short for some suppliers and longer for others, an average will generate an irrelevant basis of comparison. In this case, calculate percentile ranks.

4 Update your data frequently
Supplier metrics should be captured about monthly. Use Year-to-Date aggregates to track performance over time.

5 Remember the essential purpose of your scorecard
As you roll out a new measurement tool, it can be tempting to expand it quickly, adding new measures. It can also be tempting to use the scorecard for a range of purposes, from internal vendor selection to negotiation to RFP selection and so on. But remember your initial top objectives. Make sure you have hit these objectives cleanly and completely before expanding. It’s likely that when you expand, your applications will require new data and changes to your supplier scorecard composition.

Building a new supplier scorecard program can have a major impact on the costs and value of your procurement and purchasing functions. But it’s important to carefully craft that scorecard to meet a few critical needs. And a good scorecard should be easy to maintain – meaning you may want to invest in some automation to keep report production running smoothly.

Interested in additional ways to improve profitability across your supply chain? Check out this white paper, Leveraging Inventory for Profitable Growth