Identifying commodity sector supplier performance measures | by Ayanda Nteta

Ayanda Nteta 2The bulk commodity sector provides exciting challenges for sourcing practitioners. This is based on the complexity of the sector; from price fluctuations, labour matters and global networks. Sourcing practitioners managing bulk commodities must contend with multiple and often competing variables. This leads to the question of what are the relevant supplier performance indicators for this sector.

Characteristics of commodity suppliers
Bulk commodity suppliers produce goods that are generally uniform, undifferentiated and compete primarily on price and availability (Boateng, 2015). The nature of bulk commodities entails a product that cannot easily be loaded in a piece-by-piece manner. Rather, the product would require en-masse handling of the multiple pieces of the product. The transportation of bulk commodities is often in large containers such as vessels, trucks or pipeline. This is based on the uneven and undifferentiated nature of the product.

Sourcing practitioners need to appreciate the unique nature of bulk commodities while understanding the global economic indicators that influence these commodities.

Furthermore, commodity sourcing practitioners need to understand the entire supply chain process of the commodity, as it is these supply chain processes that affect what should be measured. These characteristics present a unique challenge to commodity sourcing practitioners as they need to contend with relevant supplier performance indicators that ensure selection of sustainable suppliers.

Four key supplier performance measurements
There are four key supplier performance indicators that can be used to inform sourcing activities in this sector. The performance indicators identified can be used in the sourcing event, as well as a monitoring mechanism to ensure supplier performance in the execution of the contract.
  • Cost: These are the costs of the entire life cycle of the product.
  • Bulk commodities are a cost sensitive. Cost drivers in the entire lifecycle include storage costs, which are often specialised due to the nature of commodities, production costs, logistics and disposal costs (environmental disposal costs can be significant). Beyond the traditional cost structures, long lead-time in the supply chain process and high investment costs renders cost a comprehensive and significant performance indicator.
  • Quality: This includes product quality and the suppliers’ ability to produce a consistent product that performs and conforms to expected standards.
  • Cost and quality, though they are independent performance indicators, are inter-related. There is a correlation between the quality of commodities and the cost of the product, particularly in the bulk commodity sphere. With bulk commodities, a higher-grade product (higher quality) commands a higher price. Thus, the inter-relationship.
  • Logistics: Efficiency in logistics includes looking at the entire network. Logistics should include understanding the suppliers’ logistics network as it relates to the organisation to which goods are supplied.
  • Logistics in the commodity sector is an important performance indicator. Bulk commodity transportation requires en-masse handling of unified product. Measuring the suppliers’ ability to manage all logistics includes accuracy to deliver to the right location and on-time. Reverse logistics of bulk commodities also have a significant cost and inconvenience as the vessels to transport bulk commodities are often specialised.
  • Flexibility: This indicator related to the ability for the supplier to adapt, provide product flexibility and respond to customers’ needs.

In the commodity sector, ability for the supplier to adapt and provide product flexibility is important particularly in an ever-increasing customer-centric agile society where the demands of the customer are priority. Commodity production streams need to the flexible to meet increased or reduced demand. This is more difficult due to the extensive supply chain processes. However, this ability to be flexible is a performance differentiator. 
measure metrics
In identifying indicators, it is important to understand the commodity to which they relate. This informs what needs to be measured. In the case of bulk commodities, the sectors’ innate influencers are factored into the identified supplier performance indicators. Price fluctuations linked to international commodity indices, complex supply chain process, and specialised transportation requirements influence the suppliers’ ability to perform.

One should note, however, that cost, quality, logistics, and flexibility are core indicators. To ensure more effective sourcing events, practitioners need to drill down on the sub-elements of these, provide effective weights, and include more industry-specific indicators.

Furthermore, these indicators can also be used throughout contract execution, rendering cost, quality, logistics and flexibility relevant for sourcing events and beyond.

Ayanda Nteta (FCIPS, MBL) is an academic and Principal Associate at Bespoke CfSD Group - www.bespoke.co.za 

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Posted on August 19, 2019

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