Supplier Performance Management: Correcting Persistent Failure

Maintaining strong supplier relationships is critical to ensuring smooth operations, timely deliveries, and quality outcomes. However, even with the best planning, businesses can encounter suppliers who consistently underperform, leading to delays, subpar products, or missed targets. So, what’s the best way to manage a supplier that falls short of expectations? In this blog, we’ll explore a strategic, step-by-step approach to handling underperforming suppliers—from conducting performance reviews and addressing root causes to implementing corrective action plans and, if necessary, transitioning to new suppliers.

Whether you’re in procurement, supply chain management, or contract management, these insights will help you mitigate risks and drive improved performance from your supplier network.

1. Conduct a Thorough Performance Review

• Assess Performance Against KPIs: Start by reviewing the supplier’s performance against the key performance indicators (KPIs) outlined in the contract. Analyse data on delivery timelines, quality of goods or services, adherence to specifications, and customer service.
• Document Issues: Keep a detailed record of all instances of underperformance, including missed deadlines, substandard quality, and any other contractual breaches. This will provide a factual basis for further action.

2. Communicate Clearly and Early

• Initiate a Formal Discussion: Set up a meeting or conference with the supplier as soon as underperformance becomes consistent. The discussion should focus on the specific issues that need to be addressed, backed by evidence (e.g., data and reports).
• Use a Collaborative Tone: Frame the conversation as a problem-solving session, rather than a confrontation. The aim should be to understand the root causes of the underperformance and work together to find solutions.

3. Identify Root Causes of Underperformance

• Internal Issues: Determine whether the supplier is facing challenges related to capacity, financial constraints, staff shortages, or resource management. Sometimes, external market conditions (e.g., supply chain disruptions or regulatory changes) can affect performance.
• Contractual Misalignment: Ensure that the supplier understands the contract requirements. In some cases, underperformance occurs due to miscommunication or differing expectations around deliverables.
• Cultural/Communication Barriers: Consider whether there are communication or cultural barriers that may affect how the supplier is delivering on their obligations, especially with international suppliers.

4. Develop a Corrective Action Plan

• Set Clear Expectations: Agree on specific performance improvements, with clear deadlines and measurable outcomes. The expectations should align with the original contract or revised to address the issues.
• Use a Supplier Development Program: If applicable, offer support to the supplier through training, improved communication, or providing resources to help them meet the required standards. This could include sharing best practices or co-developing strategies for improvement.
• Document the Plan: Formalize the corrective action plan in writing, detailing the steps the supplier will take, timelines, and how performance will be reviewed moving forward.

5. Monitor and Reassess Performance Regularly

• Increase Oversight: Implement more frequent performance reviews and audits to track the supplier’s progress. This could involve weekly or monthly performance checks, with a focus on the areas where they have historically underperformed.
• Set Milestones: Agree on short-term milestones for the supplier to achieve as part of the recovery plan. These smaller goals will help ensure the supplier is back on track and will provide an opportunity to adjust the approach if necessary.

6. Apply Penalties or Incentives

• Enforce Contractual Penalties: If the supplier continues to underperform, consider applying penalties, such as financial deductions, as outlined in the contract. This sends a clear message about the importance of meeting performance expectations.
• Consider Incentives for Improvement: Sometimes, offering incentives for meeting or exceeding performance targets can motivate suppliers to improve. These incentives could be financial or future contract opportunities.

7. Consider Renegotiating the Contract

• Evaluate Contract Terms: If the supplier’s issues are due to unrealistic expectations or market changes, renegotiating the contract may help both parties. Adjusting pricing, timelines, or service level agreements (SLAs) could resolve the issues without ending the relationship.
• Include Performance Clauses: Ensure that performance-related clauses, such as KPIs, penalties, and exit clauses, are clear and actionable to avoid future ambiguities.

8. Consider Supplier Replacement

• Supplier Risk Analysis: If performance continues to decline, assess the risk to your business operations and the potential for financial or reputational damage. A persistent underperformer may become a liability.
• Terminate the Contract: If all attempts to improve performance fail, it may be necessary to terminate the contract and seek an alternative supplier. Ensure this decision is supported by contractual provisions (e.g., breach of contract or failure to meet SLAs).
• Transition Plan: Develop a contingency plan for transitioning to a new supplier. This plan should minimize disruptions to your supply chain, ensuring continuity of goods or services during the changeover.

9. Build Long-Term Resilience

• Diversify the Supplier Base: Avoid relying too heavily on a single supplier by diversifying your supplier network. This reduces the impact of underperformance by any one supplier.
• Use Performance-Based Contracts: In future contracts, ensure that performance-based clauses are emphasized, with clear metrics, rewards for excellence, and consequences for poor performance. This will set a strong foundation for supplier accountability from the start.
• Foster Collaborative Supplier Relationships: Building a strong relationship based on trust and collaboration can help address issues early and prevent them from escalating into consistent underperformance.

Examples of Corrective Action Success

• Supplier Development Programs in Manufacturing: Many companies in the automotive or electronics industry offer supplier development programs, where they work closely with underperforming suppliers to improve production processes and product quality. Toyota, for instance, uses its supplier partnerships to share best practices and ensure that all suppliers meet high standards.
• Incentive-Based Performance in Public Procurement: Some government contracts include performance-based incentives. For example, if a supplier exceeds expectations in terms of delivery time or quality, they may be awarded additional work or bonuses. This motivates suppliers to maintain high performance levels.

Effectively managing an underperforming supplier requires a combination of clear communication, performance monitoring, and strategic corrective actions. By working collaboratively with the supplier to identify the root causes of their challenges and implementing a corrective plan, you can often turn the situation around. If these efforts fail, having a backup plan, including contract termination and supplier diversification, ensures that your organization’s needs are met without compromising on quality or service.

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