Punitive Measures Don't Work On Suppliers

Feb. 23, 2007
An agreement spelling out expectations is key to good relationship.

In a study of 100 top retail and consumer goods companies, the Supply Chain Consortium found that 67% of participants impose financial penalties on suppliers and 55% reduce order volumes with suppliers due to poor performance. On the other hand, 58% of the same companies rate their compliance programs as ineffective or only marginally effective.

"It is clear from the survey results that there is a need for sound supplier relationships based on joint expectations," said Bruce Tompkins, Tompkins Associates principal and author of the "Supplier Collaboration Report."

Survey respondents note their top strategies for improving supplier performance:

  • Establish expectations with a formal Service Level Agreement (SLA) or less formal written guidelines, depending on the supplier's performance and history. More than 50% of respondents have an SLA with one or more suppliers.
  • Focus on collaboration, improvement initiatives and information sharing. Many companies have already achieved improvements in on-time delivery and inventory reduction. Now the focus has shifted to more collaborative efforts, including order lead time reduction and the sharing of inventory and forecast data.
  • Measure, monitor, and evaluate suppliers based on carefully selected performance measures. Formal performance scorecards, adopted by 57% of companies, are influential in enhancing accuracy and speed to achieve the "perfect order."
  • Hold suppliers accountable for performance with a balance of punitive and incentive-based expectations.

Other key findings include:

  • 33% of SLAs are developed to cover supply chain issues only, while 67% are comprehensive business agreements.
  • 61% of companies surveyed meet with their suppliers on a monthly basis to discuss performance and 29% meet quarterly.
  • 90% of companies that assess financial penalties to suppliers have done so in the last 12 months.
  • 72% of participants monitor the performance of suppliers with respect to shipment of the correct products and shipment of the correct quantity.
  • 66% of participants do not have a formal improvement suggestion program with their suppliers, and 76% do not receive feedback from suppliers on the effectiveness of their internal processes.

The Supply Chain Consortium is comprised of more than 100 retail and retail supplier companies. Its advisory board includes supply chain executives from Campbell Soup, Whirlpool, Ingram Micro, Molson Coors and The Coca-Cola Company.

Supply Chain Consortium

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