How can we improve?

There are two fundamental motives behind the need to improve. The first may be as a result of performance having fallen below acceptable limits. Alternatively a business, either unilaterally or in collaboration with its supply chain partners, may have a need or desire to improve performance in order to become more competitive or to increase profitability.

Applying penalties to suppliers may have a place where performance has fallen below acceptable contractual limits as a short term fix or where the buyer does not have enough leverage over a supplier for them to investigate underperformance and look to work together to improve.

The application of penalties is a direct indication that something has gone wrong. Generally it is in the interest of both parties to be more proactive and make the necessary changes in order to avoid problems from occurring. Carefully designed and continually monitored key performance indicators (KPI’s) facilitate this process. KPI’s can of course be used to trigger penalties on a supplier but the real benefit of KPI’s is to use them to identify opportunities to improve performance or to halt, and turn around, deteriorating performance.

Key indicators should be used to identify improvement opportunities, they may not provide the solution per se but rather act as a trigger for a more formal investigation into the key causes of underperformance and to engage in collaboration to identify, agree and implement suitable solutions. In this way KPI’s can be used to reward rather than penalise. Additionally KPI’s may also provide a stable platform on which to identify a divergence in customer-supplier strategies, needs and values. As such they can assist in the negotiation and agreement to terminate the relationship in a controlled manner in order to minimise disruption and pain to either party.

In 2016 Target, the sixth-largest US retailer by sales, “plans to tighten deadlines for deliveries to its warehouses, hike fines for late deliveries, and could institute penalties of up to $10,000 for inaccuracies in product information”.

Talking point

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This article is from the free online course:

Supply Chains in Practice: How Things Get to You

The University of Warwick