The connection between a distributor’s use of supplier scorecards and its bottom line may not seem obvious. But what scorecards are used to track – on-time delivery, sales growth and other performance metrics – can directly drive profitability. The key is collaboration.
Unfortunately, collaboration is the exception rather than the rule for many distributors that are using scorecards. The idea behind the supplier scorecard is good – removing the guesswork from supplier management and replacing gut feel with data. But if the use of supplier scorecards is not approached with a partnership in mind, the relationship will only go from bad to worse. It’s no wonder the supplier would be defensive if a distributor is constantly beating them over the head with an eye toward more concessions.
One supplier told me that the more adversarial scorecards they see tend to focus on more short-term results. The back and forth in meetings with these distributors tended to be limited because no one wanted the information they shared to be used against them in the next negotiation. They dreaded these reviews because they were focused on where the supplier failed rather than where they were successful. These reviews occurred less frequently, if at all, outside of negotiations.
This approach – which is akin to keeping score – drove the manufacturer to satisfy only the base requirements for doing business with these distributors as anything above and beyond would result in additional cost. They had no incentive to do more. They just wanted to minimize the damage.
For this manufacturer, the opposite was true with collaborative distributors. These distributors focused more on the long-term growth of the relationship. Their scorecards emphasized trends, including progress toward sales goals, increasing speed and responsiveness, visibility to internal and external customers, reducing defects and errors, and increasing efficiencies. They viewed the scorecards as a way to drive joint sales growth and process improvement. They involved several team members from both organizations in conversations around the metrics. These meetings were naturally more open, as neither party was defensive.
What – and How – to Measure
On-time delivery, lead-time consistency, orders shipped complete, damaged deliveries, supplier response rate, stock availability and ship-date changes are all examples of scorecard metrics. But coming up with every conceivable way to measure a supplier isn’t ideal and in fact may indicate an adversarial approach. Instead, identify a shorter list of metrics that are key business drivers. If it’s important, for example, that all deliveries be made before noon, add this to your scorecard.
The difference between long-term (typically the focus in a collaborative scorecard) and transactional or short-term is important. Most of these metrics could be viewed either way; the key is whether the distributor emphasizes the score or looks at the long-term trend. In other words, are they sitting around debating the numbers, or are they talking about the plays that need to be run to move the ball forward?
Collaborative scorecards reflect an ongoing conversation, one that is less about how a supplier is “not performing” and more about how a distributor and supplier can better align their processes to maximize returns. If you already track and review scorecards with your suppliers, evaluate your approach and consider adopting more collaborative practices to expand your supplier relationships. If you don’t use supplier scorecards, start with a key supplier and work with them to identify areas you can track that will benefit both businesses. (We’ve developed a partner toolkit to help start this conversation; send me an email if you’d like a copy.)
A supplier scorecard should be all about creating an objective view of the relationship that can drive improvements – and ultimately more to the bottom line for both of you. As the investor James O’Shaughnessy said, “By relying on the statistical information rather than a gut feeling, you allow the data to lead you to be in the right place at the right time. To remain as emotionally free from the hurly burly of the here and now is one of the only ways to succeed.”
Justin Stewart is an associate consultant for Indian River Consulting Group, which specializes in helping distributors and manufacturers accurately diagnose problems and identify risk-bound alternatives. Contact him at [email protected] or 321-956-8617, or visit ircg.com.