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Supplier Performance Measurement Performance Measurement and Evaluation in the High-Tech Sector: Digital Camera Manufacturing Sector Performance measurement is the processes of quantifying the effectiveness and efficiency of action. The rationale underlying performance measurement is that, it is a form of a strategic control system which can be used to influence behaviour. Performance measurement is crucial for management and control. Control is achieved through performance measures and feedback to stimulate and influence action. A well-designed performance measurement system should provide feedback.

Importance of Measuring Performance Every organisation needs some kind of measure to compare and contrast current performance with previous performances, competitor performances or the industry standards, in order to improve. Moreover, without performance measurement and evaluation, a firm will be in a state of oblivion, naive of its own performance, both internally and externally. Performance measurement can identify opportunities for improvements and identify poor performances. Thus, enables management and corrective action to be taken. For example, identification of poor performance will drive management to identify and investigate root causes of poor performance, and subsequently drive further strategic decisions on whether the source can be eliminated or solved. It enables continuous improvements. Performance measurements and evaluations can also facilitate management to motivate and guide employees and to be used as a basis for rewarding employees. Essentially, performance measures are implemented to monitor performance and to stimulate future actions.

Importance of Evaluating and Measuring Suppliers Performance As firms are moving towards outsourcing, they are increasingly integrated and competing as a supply-chain rather than as one individual company, the need to evaluate and measure suppliers performances is important. This is especially true in technology-intensive business environments. Effectively, supplier performance evaluation enables the creation of competitive advantage through strategic management of suppliers. The digital camera manufacturing (DCM) market operates in the high-tech sector. The environment is characterized by high-growth and constantly evolving market. It is a technology-intensive environment, where fierce competition is primarily driven by innovation and intellectual capital. Competitive advantage lies in the knowledge, expertise and skills of organizational members, and the companys ability to innovate. The high levels of research and development invested in products and processes drive the importance of low cost operations. The final products are characterized as high-value product, which consist of an integration of smart, cutting-edge technologies, electronics, software and other high-value
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components. Products are constantly evolving and developing, with constant emergence of new products. The short product lifecycle drives the importance of speed to market. Thus, competition is also based on timeliness to market.

Performance Dimensions and Indicators in the High-Tech, Digital Camera Market Industry Traditionally, performance measurement can be defined in terms of: Asset management, Cost, Customer service, Productivity, and Quality.

However, due to the complex nature of operations, competition and environment of the industry, traditional performance measures are insufficient for the fast-paced, knowledgebased environment. Appropriate and accurate performance evaluation measures and indicators which reflect the nature of operations and its environment are critical. Thus the following performance dimensions and indicators are identified to have been commonly used within the high-tech, digital camera manufacturing industry: 1. 2. 3. 4. 5. 6. Competitive performance (e.g. sales growth and market share), Financial performance, Manufacturing capability, Innovation capability Supply-chain performance Environmental responsibility

These performance measures are commonly used by manufacturers and external stakeholders to benchmark a companys competitive abilities within the industry. Benchmarking is the formal process of comparing the attributes of one organisation to those of another. However, as the focus was on suppliers evaluation measures, the following will selectively concentrate on the performance measures used by manufacturers to assess their suppliers performances: financial performance, manufacturing capability, innovation capability, and environmental responsibility.

Financial performance measures Financial performance measures the financial stability and asset management of a company (i.e. supplier). Asset management measures the efficiency or the management capability of the supplier to generate cash from investments (i.e. returns on investment). The high-tech industry are capital-intensive, hence asset management is particularly important.
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Financial performance indicators: i. ii. iii. Profitability the ability of the firm to generate profit Capital risk and structure gearing, the extent to which the firm is financed by debt over equity Cash turnover measures the firms efficiency in the use of cash and its liquidity

According to Canon, evaluation of suppliers financial performance is crucial to ensure the supplier has a strong financial standing and can ensure business stability and continuity with Canon. This is particularly important as supply-chain members within the DCM industry, especially suppliers producing key components, are often closely integrated. In the event of these suppliers going bankrupt can adversely impact the companys operations and productions.

Manufacturing capability Manufacturing capability is the suppliers ability to produce a variety of products in flexible volumes, while conforming to product and quality specifications, within the time frame specified by the customer (Tseng, 2009). Manufacturing capability indicators: i. ii. iii. iv. v. Product yield rate the percentage of manufactured parts that meet the required design specifications. Manufacturing flexibility the ability to deal with different production processes and volumes Productivity Product quality level Cost efficiency measures the efficiency in the utilisation and allocation of capital and resources

Innovation capability Innovation capability of suppliers and partners is very important in the DCM industry as competition is based on innovativeness. Companies are increasingly and occasionally going into strategic alliances and joint collaborations to achieve mutual benefits from leveraging each others innovation capabilities. Manufacturers would seek suppliers with the innovation capabilities that it needs to add-value to its products. For example, Sony supplies sensors for Nikons cameras, for reasons that Sony is more competent in sensor development and design. Performance indicators: i. ii. Numbers of patents owned reflects creative and development capability, Ability to obtain critical technology and patents reflects ability of a company to implement advanced technologies within its processes and products,
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iii.

Research & development (R&D) expenditure ratio reflects a companys emphasis on, and commitment in, research and innovation.

Environmental responsibility Environmental responsibility measures assess a companys awareness and efforts in its environmental commitment and responsibilities towards the environment and its sustainability. This is a prerequisite. For example, Canon is very strict in ensuring all suppliers and partners in its value chain (and potential partners) to comply with its Green Procurement Standards. Suppliers environmental responsibility effort is a critical supplier evaluation dimension in the big three of the DCM industry, Canon, Nikon and Sony. It is a prerequisite for suppliers to have an Environmental Management System and to be ISO14000 accredited in order to supply and partner with these manufacturers. Evaluation of Suppliers Environmental Management (EM) System: i. Construction of Suppliers EM system evaluation: Availability of a well-defined and well-documented internal policy, The communication of internal policy to all employees, Compliance with industry law and regulation within the high-tech industry, Preventative measures on pollution Operations of Suppliers EM system evaluation: Use of prohibited substances

ii.

Evaluation also includes the evaluation of suppliers production processes and the impact of these processes on the environment.

Rigorousness and frequency of Evaluation The rigour, variety and frequency of supplier evaluation will or may differ based on: 1. The stage and intensity of buyer-supplier relationship (e.g. suppliers long-established within the companys supply chain or new business transaction, transactional relationship or strategic alliance) 2. Type of supplier relationship (e.g. strategic partnership or transactional relationship) 3. The type of components the supplier is supplying (e.g. commodity components or critical components)

Evaluation of Suppliers Performance as a Basis of Strategic Supply-Chain Management Evaluation of suppliers performance is especially important when a firms final product is (directly or indirectly) influenced by suppliers performance.
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Evaluating suppliers performance can facilitate in the strategic management of supply-chain in 4 inter-related areas: 1. 2. 3. 4. Facilitates Supply Base Optimisation Facilitates Relationship Management Facilitates in Supplier Development Programmes Facilitates Rewards and Recognition

Facilitates Supply Base Optimisation Supply base optimisation is the process of determining the optimum number and the right mix of suppliers to maintain. Evaluation of suppliers can assist in managerial decision-making and selection processes on which suppliers to keep, to replace and/or to remove.

Facilitates Supplier Relationship Management In the digital camera manufacturing industry, a firm will have a number of suppliers of different types. Each firm in the industry manages a portfolio of relationships. These relationships need to be managed and balanced accordingly. Supplier evaluation is the basis for supplier classification (e.g. the ABC classification). It can provide answers to questions and facilitate decision-making: i. ii. iii. iv. Who are our critical suppliers? How can the relationship with these suppliers be managed? Who are the commodity-component suppliers? How can the relationship with these suppliers be managed?

Supplier classification categorises suppliers, and from which builds the foundation for supplier relationship management and development.

Facilitates in Supplier Development Programmes Supplier performance evaluations facilitate the development and maintenance of supplier development programmes. Evaluation can identify opportunities for improvements and identify under-performing suppliers. Essentially, the feedback from supplier evaluations can identify candidates for development, and subsequently facilitate the decisions on how these suppliers ought to be managed and developed. Consequently, it enables the efficient allocation of resources in terms of investment (tangible or intangible); Investments in efforts and time of personnel sent to suppliers facilities for training and development, buyer-supplier team-working and collaborations,
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Investments in capital equipments, such as facilities, processes, and equipments The different types of investments will likely be based on the different types of relationship the company has with the supplier.

Facilitates Supplier Rewards and Recognition This could be an extension of the above (supplier development programmes). As stated previously, a well-designed performance measurement system should provide feedback. Feedback should be communicated to stimulate and guide actions for improvements and change. Outstanding supplier performances should be rewarded in order to motivate them for continuous improvements. Recognition could stimulate healthy and positive competition among suppliers in trying to perform at its best.

Evaluation of suppliers performance can also be seen as an essence of management and control for supply chain risk management and mitigation.

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