4 Tips for Effective Supplier Performance Management

Rob O'Byrne

Site Owner & Gold Sponsor
Supplier performance—can you really manage it? Or is it something that you can merely monitor and hope to influence through discussion, application of penalties, or threats to discontinue relationships? With no way to directly control the performance of your suppliers, how can you really manage it effectively?

It's Not What You Call It; It's The Way That You Do It

Perhaps it's just a matter of semantics, hence the increasing tendency to speak of supplier relationship, rather than supplier performance management. In this post I'd like to share four tips which, regardless of terminology, will help your company to get the best performance—and thus the best value—from your company's suppliers, vendors and service providers.

1. Base Agreements on More Than A Handshake

Effective supplier performance management begins before you place your first order with a new supplier. If you want to ensure a supplier meets your expectations, you must make those expectations the basis for a formal agreement—one that's made in writing, clearly shows that the supplier understands what you need, and documents how performance will be measured and managed.
While making such agreements can be onerous, especially if you are running a smaller company, the effort is more than worthwhile.
While a handshake can demonstrate the best of intentions, a written agreement is the only way to enforce accountability after verbal promises have faded from memory and those that made them have moved on.

2. Take a Partnership Approach

There is no big stick in the arsenals of companies which excel in supplier performance management. Instead, these companies take a partnership approach, recognising that supplier management is all about relationships.

The following three principles, if followed, will help your company graduate toward best-in-class supplier performance management.

1) When selecting suppliers, ask not only what they can do for you, but also how realistic it will be to work with them for mutual benefits.
2) After relationships have begun, look for mutually beneficial ways to reduce total supply chain cost or maximise profitability.
3) By all means, agree penalties to discourage lackluster supplier performance, but reserve their application for when collaborative efforts fail. Even then, you should be sure your own organisation is not at fault, before leaning on suppliers with charge-backs or other penalties.

3. Be a Good Customer

Leave the "customer is always right" mentality to consumers. If you want to enjoy the best supplier performance possible, your company must take accountability for its role in the relationship. Don't expect to get the most from your supplier if your organisation:

· Consistently places orders requiring emergency handling
· Fails to meet the supplier's payment terms
· Delays handling of inbound deliveries
· Makes unilateral changes to payment terms
· Frequently changes orders after initially placing them
· Makes regular demands for price reductions and discounts
Your enterprise may be large and have considerable clout, but that doesn't excuse behaviours which limit your suppliers' willingness and even their ability to maximise performance. Instead, be prepared to take accountability and eliminate hurdles arising from your company's role in the buyer/supplier relationship.

4. Incentivise and Penalise

Sadly, even formal agreements can't be made solely on the basis of trust. You should agree mechanisms with your suppliers by which to incentivise supplier performance improvement and (as already mentioned) to penalise them for falling below agreed standards.
However, too many companies still weight the balance in favour of penalties, which merely support the maintenance of performance levels.
Supplier performance management should be about raising standards, not just maintaining them. To that end, your supplier agreements should place equal emphasis on rewarding great performance as penalising shortcomings.

Supplier Performance CAN Be Managed

You don't have to have direct control over something in order to manage it, especially when IT is a team of people. Good people-management is all about teamwork, leadership, persuasion and influence. All of those qualities can be applied to supplier performance management.
You just need to lay foundations via clear agreements, set great examples (by being a good customer), maintain collaborative rather than adversarial relationships, measure performance objectively, and make judicious use of penalties and incentives.
Let's face it, none of us has direct control over people, but many of us manage people extremely well using teamwork, leadership, persuasion and influence. Suppliers are people too ... Need I say more?

the junior

New member
Re: 4 Tips for Effective Supplier Performance Management

Very useful information, Thanks Rob.

I am planning move some part of our company's manufacturing to contractors for cables, PCB boards etc. I also currently have suppliers do similar work, but that is completely on order to order basis which generally includes that supplier provide all of the raw materials and send us the made product. However, since too many small electronic part come into play and even suppliers do not have it on hand the exact version of a part or from the same brand, I am being have to send raw materials from our own inventory to keep the job going.

My issue is how to manage this situation without upsetting the supplier for small amounts and what kind of strategy or policy should I apply to avoid paying more than I am supposed to and to avoid suppliers to rely on me to provide materials. Please note that my company does low volume of manufacturing.


Charu Sharma

New member
Re: 4 Tips for Effective Supplier Performance Management

Rob O'Byrne,
These are helpful tips, but I think the major challenge in this is to ensure the transparency and to track supplier’s record.


New member
Re: 4 Tips for Effective Supplier Performance Management

Hi Rob,

Thank you for these tips. They really seem insightful and precise. I would just like to highlight a few more points that I feel could be essential in improving some supplier performance management. They could be as follows -

Understand the needs of business because it is essential to understand the aspect of progress that your business wishes.

We also need to define measurements as Chiefly, this task consists to identifying measurement indicators like KPI (key performance indicators) by which you measure supplier improvement.

There are companies that provide supplier management services and this can be hugely helpful in implementing an effecient supplier performance management. We can always take data, insightrs, reports or essential information from these companies or their repositories. You can refer various directiories having supplier reviews and ratings and this can be essential for an effective supplier performance management. There are a few companies that provide quality and reliable information in this domain. Refer here.

I hope these referring to these reports, points or companies, I was able to provide some insight on making supplier performance management better or more effective.


The manager of a warehouse inside our village that gets their supplies from the farm in the mountain province (roughly 7 hours drive) said that treating the suppliers as a partner assures them of continuous supply of vegetables. The partnership is included in the procedure of the farm as during the planting season the quantity of vegetables for the said warehouse is taken into consideration. When there is a calamity their supplier helps in sourcing out vegetables from other farms. I guess it pays to give the supplier and customer a feeling that they are partners in the business.


New member
Honesty is a very good quality a supplier must have especially when reaching an agreement with their prospective clients in order not to betray their trust in them. It's never good to promise what you aren't absolutely sure of delivering because it's going to come right back to bite at you and eventually result in losing your customers.