The ABCs of Building an Effective Scorecard
By | Thomasnet
In nearly every industry, supplier scorecards are viewed as an important part of managing supplier relationships. Scorecards help keep both parties on the same page. They are used to identify areas of improvement, justify changes, or add an extra incentive when pushing good suppliers to take their performance to the next level.
Unfortunately, many will tell you that while they believe in the scorecard process, they struggle to build scorecards that are truly effective. Data can be inaccurate, not timely, out of sync, too hard to measure, or insufficient in providing enough “direction” on how to address a particular issue.
Manufacturers have been wrestling with this challenge for years, but many have made significant progress. Here are some key practices that have made a difference.
Establish the Right Purpose
A truly effective scorecard is one that successfully identifies supplier risk and performance issues, allowing ample time to correct them before they impact financial performance. The metrics used should be linked to root causes and easily verifiable by the supplier. The scorecard is a communication tool that all parties should help build and act upon. Each party should be motivated to get the most effective scorecard system in place. A scorecard should be viewed as a tool that help creates long-term, successful relationships.
Build the Scorecard Backward
The best way to build a truly effective scorecard is to start at the end of the process and work your way back to the metrics you need to capture. The “end of the process” can be defined as the final action you need to take based on the “storyline” that the scorecard metrics are telling. The following is an example.
Suppliers need to be able to deliver the right amount of components or direct materials in the time frame required. Those that fail may ultimately be replaced, even if they have the best prices. In this situation, this action marks “the end of the process.”
So let’s continue to build the story backward, identifying measurements and data needed to identify the problems.
- A manufacturer has identified that if it should run out of component XYZ, production lines will stop completely and result in significant costs and a potential loss of sales. The component is a critical part of the final product and hard to source at a reasonable price.
- For such strategic components, a policy is created. It states that every supplier that misses its delivery commitments on average of 20 percent of the time will be reviewed for corrective action or possible replacement.
- A dashboard indicator is created that turns red when 15 percent of the components provided arrive beyond the promised delivery date. A three-month rolling average is used to calculate the metric.
- Any supplier receiving a red flag on this issue must immediately review its production floor metrics to determine if the agreed-upon quantity is being produced in the agreed-upon time frame, as well as metrics on how long it takes to move the finished product to port.
- At the same time, the logistics group reviews the metrics that show the amount of time it takes for products delivered to the port to reach their final destination: the plant floor.
- Finally, metrics are created to show the number of components in stock, as well as the number needed for the week or month of production.
Working backward allows you to identify various storylines that need to be tracked, so you never experience a production line stoppage due to a component shortage. The metrics developed along the way help identify root causes and potential solutions. In the example above, shipments from Asia to the United States can be held up in customs much longer than expected. The supplier agreed to provide additional lead time to help address the problem.
Address the Roadblocks
Building a scorecard backward allows you to create a path from metric to action. It enables you to identify root causes and correct deficiencies before they impact your profits. But you still must pay attention to the finer details of data collection, which, if ignored, can truly derail a good scorecard. Here are some tips:
- Make sure the data collected for each metric is from the same time period.
- Rely on data that is system generated and less subject to human error.
- Audit key data elements to ensure quality, including supplier-provided data.
- Only pull the data you need, as it is easier to manage, maintain, and keep clean.
When done well, scorecards can be a powerful tool that not only reduces risk and enables better supplier performance but improves product profitability. Scorecards are worth the investment they require to set up. Those that excel at building effective scorecards will achieve a competitive advantage by ensuring that the right suppliers are delivering the right materials at the right time.