Supplier performance management is the practice of measuring and analysing the performance of a suppliers to understand the cost, quality and risk impact on the business. Supplier performance can have a direct impact on the profitability of a business as most companies depend on timely delivery, price reduction and service quality to increase profit. Hence, there should be an efficient mechanism to measure and improve supplier performance.
There are two key aspects of supplier performance management. The first is to know if the suppliers meet the performance targets as specified in contracts. The second is working with suppliers to identify performance gaps and improvement actions.
A business may work with tens to thousands of suppliers for parts, raw materials and services. Therefore, it is not realistic to manage the performance of every supplier. Hence, it is essential to segment the supplier base.
One method of segmenting supplier is the Kraljic Matrix. In this method, suppliers are classified based on their impact on profitability and supply risk. For example, suppliers that provide items with high profit impact and high supply risk are categorised as strategic suppliers.