take the lead!

Editor's Note: No two successful performance management programs are the same, but all successful performance management programs share common principles. To shed some light on what separates a good company from a great company with regard to performance management, DC VELOCITY will publish a column on one of the 12 Commandments of Successful Performance Management each month. This month we will drill into the 11th commandment: Lead.

The 11th Commandment
Lead: Practice what you preach

It's an unfortunate fact of modern business, but the more you outsource, the more vulnerable you are to supply base screw-ups and their costly consequences. Studies conducted at Georgia Tech University show that supplier bankruptcies and unexpected business closures have cost U.S. companies billions of dollars through stock-outs and delays as well as outright production shutdowns. At particular risk are those companies that fail to monitor their suppliers' performance, thus raising their exposure to quality problems and service deficiencies.

Before demanding that suppliers let you measure their performance, of course, it's best to practice what you preach. Establish an internal metrics program so that you can learn from your own experience first. However, once you've nailed that down, you should think about leading your suppliers down the measurement path as well.

Why? Simply, your performance and that of your supply partners are inextricable. And as outsourcing becomes more prevalent, company success will depend increasingly on the effective management of extended supply networks. By some estimates, the amount U.S. businesses spend on outsourcing will top $350 billion next year.

Getting started
These days, supplier management programs come in all sizes. The most popular requires measuring only a part of your supply base (e.g., your top 10 suppliers or your strategic suppliers). However, many best-practices companies have questioned the wisdom of measuring only the "critical few." One of the skeptics is the U.S. military, which reckons that its ability to complete a sortie mission relies just as much on a tireas it does on an engine!

Whether you choose to monitor a few suppliers or extend your program to include the entire base, it's important that you establish up front the measures you'll use to track and evaluate performance. Create a solid Statement of Work and associated Service Level Agreements with your suppliers.

The more progressive companies are already looking beyond operational measures such as stock-outs and on-time deliveries, and implementing a "predictive" approach to their supplier performance measures—one that incorporates, say, financial data. That may sound like overkill, but it can stave off disaster, as one consumer gaming company found. That manufacturer learned about the value of predictive indicators the hard way from a key supplier that performed well right up until it went bankrupt—leaving the company scrambling to make Christmas deliveries!

Beyond measures
The monitoring benefits aside, the real value of a supplier performance management program comes when a company creates a continuous improvement process with its suppliers. Honda and Toyota, for example, have created joint teams with their suppliers to identify opportunities to reduce costs and improve performance. And the U.S. Department of Defense has found its continuous improvement program to be so successful that it has formalized the program, Performance Based Logistics—and enshrined PBL in its canon of acronyms!