Project Management Foundations – Managing Supplier Performance

PM Foundations – Managing Supplier Performance
By Steve Hart

How you work with and manage a supplier on your project is directly related to the type of products and services you are purchasing from the supplier. These products and services may be resources performing specific services/roles, purchase of tangible off-the-shelf products (i.e., infrastructure, software licenses), or built to order products (e.g., custom software applications). In general, the larger and more complex the purchase, the more time and effort you will invest in the supplier management plan. In addition, the greater the dependence of the project’s success is on the supplier the more focused you will be on building a good working relationship with the supplier. In these cases, your goal is to transition from a pure customer-supplier relationship to a true partnership, where both parties have something to gain from the successful project outcomes.

Supplier Management Approach

Again, the supplier management approach will vary based upon the types of products and services purchased for the project. The following outlines the type of project related purchases, and the different supplier management approaches.

Resource Purchase – The supplier is providing resources to fulfill specific roles on your team for specified periods of time (or to complete specific deliverables). The following are the key elements of the supplier management approach for a resource purchase:

• Resource(s) are on-boarded as any other team member, with a defined role on the team and a related set of expectations/deliverables.
• Supplier performance is directly tied to the performance of the resources assigned to the team.

Product Purchase – The supplier is providing a standard product has been selected to meet specific needs of the project. The following are the key elements of the supplier management approach for a product purchase:

• The product is purchased for a pre-defined price.
• The product is delivered/installed based upon an agreed upon delivery schedule.
• The project team validates that the product works as advertised (based upon commitments during the purchase cycle).

Make to Order – Fixed Price – The supplier is delivering a product/solution that will be customized to meet the needs of the project at a fixed price (based upon a common understanding of the product requirements). The following are the key elements of the supplier management approach for a make to order purchase with a fixed price contract:

• The supplier commits to the timing of the delivery of a set of deliverables, including the final product, for a predefined price.
• The project team validates that the final product delivered meets the specifications defined in the contract.
• Any changes to the original specifications must be managed on a case by case basis.

Make to Order – Time & Material – The supplier is delivering a product/solution that will be customized to meet the needs of the project, and the purchase price will be based upon the actual time and materials required to deliver the custom solution. In most cases, the cost of the solution is estimated at the beginning of the project, but the final price is directly tied to the actual effort and resources required to complete the work. The following are the key elements of the supplier management approach for a make to order purchase with a time and materials agreement:

• The supplier commits to the timing of the delivery of a set of deliverables, including the final product.
• The project team validates that the final product delivered meets the specifications defined in the contract.
• Any changes to the original specifications must be managed on a case by case basis.
• The project team manages the effort and cost associated with the delivery of the product / solution (against the estimated cost/effort provide by the supplier).

The chart below summarizes the different supplier management approaches for each of the different types of purchases.

Figure 1: Different supplier management approaches

Project Management Approach

As the project manager you play a major role in supplier management. In the same manner the supplier management approach is aligned with the type of product and services purchased, the project management approach must be adjusted appropriately. The following outlines the key elements of the project management approach for each purchase type.

Resource Purchase:

• Supplier resources are managed in the same manner as other resources on the team. It is important to define roles, and establish accountability for deliverables/assignments. On an on-going basis progress and completion of deliverables are managed based upon established expectations of the role.
• Ensure that billings are accurate based upon the rate established in the statement of work, and the time reported.

Product Purchase:

• Ensure that product is received on-schedule.
• Ensure that the appropriate product validation is completed (the timing of this validation is managed based upon dependencies in the schedule for the product delivery/installation).
• Ensure that the amount billed is consistent with the contract/purchase order.

Make to Order – Fixed Price:

• Monitor progress of interim deliverables, tied to delivery of the custom product/solution. Key supplier milestones are built into the schedule, and tied to dependent deliverables.
• Ensure appropriate product validation is completed (against product specifications). Product validation deliverables are built into the project schedule.
• Changes to the product specifications, or the timing or cost of delivering the product, are managed using the change control process established for the project team.
• Ensure that the amount and timing of billings is consistent with the contract / purchase order.

Make to Order – Time & Material:

• Monitor progress of interim deliverables, tied to delivery of the custom product / solution. At a minimum, key supplier milestones are built into the schedule, and tied to dependent deliverables.
• Ensure appropriate product validation is completed (against product specifications). Product validation deliverables are built into the project schedule.
• Changes to the product specifications, or the timing or cost of delivering the product, are managed using the change control process established for the project team.
• The supplier effort and costs must be monitored and controlled on a regular interval. Earned value is a very effective metric for monitoring time & material contracts (effort vs. progress).

The chart below highlights the key elements of the project management approach for each of the different types of purchases.

Figure 2: Key Elements of the Project Management Approach for Type of Purchase

Supplier Management Best Practices

Best practices associated with managing supplier performance include the following:

• Make sure that supplier work and deliverables are clearly identified in the project plans (project management plan, schedule, and project budget). This includes:
  • Supplier deliverables are clearly identified as sections of the WBS.
  • An alternative to creating separate sections in the WBS for the supplier is to identify the vendor deliverables/activities with a separate activity code in the project schedule (preferably using a field that can be filtered to provide a view of supplier deliverables/activities).
  • Often supplier deliverables and activities are not reflected in as much detail in the project schedule, because the supplier is managing this work in a separate project schedule (this is particularly true if the work is performed off-site at a supplier location).
  • Generally, a separate cost category is created in the project budget (or a sub-category – line item) for each supplier. On the monthly cost updates, supplier costs are grouped together, and compared to the amount budgeted for the supplier.

• The approach and process for managing each supplier is clearly defined in the project management plan. This approach is mutually agreed upon with each supplier. In addition, the supplier is provided “the big picture” associated with the project, and how they fit into the project plans. Many of these expectations will be defined in the supplier agreement or statement of work. This includes:

  • Other project deliverables that supplier deliverables are dependent upon
  • Supplier deliverables that other project deliverables are dependent upon
  • Success factors associated with the supplier products and services
  • Acceptance criteria for the supplier products and services
  • Other project related processes that the supplier must comply with (status reporting, time reporting, financial reporting)

• Establish one change management process that is utilized for the entire project. Unnecessary confusion is introduced by establishing processes that are unique to suppliers.

• Product validation is reflected in the project schedule, with the appropriate level of detail. It is important that the supplier understands the timing of the product validation activities, in case they need to respond to any issues identified during this process.

Steve Hart, PMP is the Practice Manager responsible for project leadership & delivery services for the Cardinal Solutions Group in the RTP area. He has 25 years of project management and technical leadership roles, and has developed an extensive practical knowledge that spans a wide variety of industries, and project delivery approaches. Steve recently transferred to the North Carolina Chapter of PMI from the Dayton Ohio PMI Chapter, where he was active as the editor of the chapter newsletter, and PMP certification instructor. You can read more from Steve Hart on his blog.