How to Improve Supplier Performance Without Damaging Relationships

Procurement teams are under pressure to do it all, from managing risk and reducing costs to supporting ESG initiatives and facilitating supply continuity. But delivering on these goals doesn’t happen through intention alone. In my experience, it starts with supplier performance management. When performance expectations are unclear or inconsistently managed, even the most entrenched supplier relationships can become challenging.

A strong supplier performance management framework is a competitive advantage. According to a 2024 McKinsey analysis, companies with the most advanced procurement practices earn profits at least five percentage points higher than those with less developed approaches. Similarly, a 2024 Focal Point report found that businesses investing in supplier relationship management outperform peers through greater innovation and risk mitigation.

In this article, I’ll share how procurement teams can use clear expectations, collaborative problem-solving, and meaningful metrics to strengthen supplier performance management and drive long-term value.

Start With Strategic Clarity

Supplier performance management should always be aligned with an organization’s business strategy and take different supplier roles into account. For example, a commodity supplier will typically be measured on cost and delivery, while a strategic partner providing high-spec custom components might warrant a more in-depth supplier performance evaluation. Supplier performance metrics and performance thresholds should be tailored accordingly.

Procurement teams often make the mistake of applying broad performance standards across all vendors. However, a one-size-fits-all approach can miss meaningful improvements that aren’t captured by generic metrics. Instead, metrics should be tailored based on risk categories, such as lead time sensitivity, unit cost, quality tolerances, or volume. Grouping suppliers by these attributes helps teams measure what matters and evaluate performance in a way that aligns with actual business impact.

Use Scorecards Intelligently

A supplier scorecard—a tool used to track and evaluate supplier performance based on key metrics—can help show these important distinctions among suppliers and is essential to any supplier relationship management (SRM) framework. To be optimized and actionable, scorecards should be thoughtfully designed and actively used.

One common pitfall is allowing one-time disruptions or outlier events to dominate a supplier’s performance profile or distort the perception of their capabilities. Let’s say a supplier misses several deliveries due to a natural disaster. Because this is a one-time event that falls outside the supplier’s control, it should be excluded from performance calculations—particularly for OTIF (on time, in full) metrics—as it doesn’t reflect the supplier’s true ability to consistently meet delivery expectations.

Scorecards should also be iterative and evolve as regulations and your requirements change. For example, if a supplier ships from inventory that predates a process improvement, you need to differentiate those batches in your quality assessments.

In addition to the metrics your scorecard captures, be strategic about how you can use scorecards to enhance your supplier relationships, not damage them. Ultimately, smart scorecards help procurement teams identify and prioritize where to apply attention and focus, and offer both external context for supplier conversations and internal guideposts for decision-making. The best procurement teams use scorecards as conversation starters, not to punish underperformance or penalize suppliers without the full context.

Prevent Performance Breakdowns

Performance issues often stem from insufficiently designed and managed supplier validation and onboarding processes that fail to identify suppliers who may not have what it takes to perform at the stand your operation requires. Even a best-in-class supplier can fall short without proper onboarding into your company’s work flows. Yet organizations often underestimate how long it takes to fully integrate a new supplier into their workflows, especially in complex, high-spec environments.

Procurement teams should treat onboarding as part of the supplier selection and validation process, which should be treated as a key development step that includes establishing collaborative norms and validates cultural fit as well as more technical capabilities. This is the time to align on shared goals, define how supplier performance tracking and monitoring will work, and establish communication protocols that support transparency. When done right, onboarding sets the stage for long-term success, so scorecards and KPI's proactively guide the relationship from day one rather than assigning blame after something goes wrong.

Collaborate to Solve Problems

It could be said that the root cause of underperformance represents a misalignment between a supplier's operating practices, how its output is measured and used downstream, and the buyer’s requirements.

In one engagement I led, the supplier provided a large number of highly technical part numbers that many of the client’s products relied on. We sent a quality manager and engineer overseas to learn the supplier’s inspection methods and, in the process, discovered that the client’s gage calibration practices were more advanced than we anticipated. Each team adopted the other’s stronger practices where possible, and together we created a shared inspection operations playbook. The process not only improved quality but also built a stronger partnership between the teams on both sides.

Through this experience, I learned that hands-on collaboration doesn’t just improve performance temporarily, but helps both the buyer and supplier build a shared, ongoing ability to solve problems and improve together. This applies in other contexts as well. From documentation and training to equipment and gages, supplier performance improves when both sides are aligned in required outcomes and how to achieve them, and willing to co-invest in resolving gaps.

Standardize and Clean Your Data

No performance management program can succeed without usable data. Unfortunately, even the largest and most well-known companies struggle with data quality and availability.

For example, I’ve seen global companies fail to accurately track supplier performance metrics simply because the supplier’s name is spelled differently across facilities. Or, they’re pulling materials from multiple factories under one vendor record with no way to segment performance. That makes it impossible to isolate and analyze specific issues.

It doesn’t matter how robust your tools are if the inputs are garbage. Clean data, such as standardized vendor IDs, synchronized part numbers, and traceable records, is the rare but necessary foundation for any supplier performance management solutions initiative.

Use Tools to Support (Not Replace) Thinking 

Many companies still use Excel for tracking supplier performance management, and while it lacks system integration, it’s often the best starting point. Unlike more advanced tools, Excel is decoupled from the applications that generate supplier data, and that data almost always flows only one way: into the spreadsheet. Despite this, Excel remains a powerful and flexible option, and because of tradeoffs with other tools, it often becomes a permanent (if time-consuming) solution.

I always caution against falling for software that promises turnkey transformation. Procurement software vendors are often startups, which means you may be buying into something that will look very different in three years. Even mature tools can become liabilities if they don’t integrate cleanly with your existing systems.

I always caution against falling for software that promises turnkey SaaS-based transformation. Innovation moves fast in the SaaS world, which means the product you adopt today may look completely different in a few years as the vendor evolves their roadmap. Many organizations have been forced back to Excel when these tools no longer integrate well with their existing architecture. Even mature tools can become liabilities if they don’t integrate cleanly with your existing systems.

Make Metrics Meaningful

Metrics matter, but they need to be relevant and context-controllable. For example, if a supplier makes 1,000 shipments per year and has 10 quality issues concentrated in a single batch, is that a systemic problem or a resolved blip? Likewise, if lead times slip due to customs delays, is that the supplier’s fault or a signal to reevaluate shipping methods or warehouse buffers?

Effective procurement teams avoid rigid thresholds and take a dynamic approach. They segment performance data by SKU and time periods with sufficient granularity to identify trends.

Formalize Your Evaluation Programs

Most procurement organizations need formal scorecard systems, especially if required by their quality systems, such as ISO (a set of international quality management guidelines) or AS9100 (a quality standard specific to the aerospace industry). These systems help standardize expectations and provide the necessary common language across stakeholders.

But success is about interpreting data as much as collecting it. That means ensuring scorecards reflect what's most critical to your business. Different categories may require different templates, and those templates should reflect real business drivers like quality, price, delivery, innovation, ESG compliance, or even documentation responsiveness.

It’s important that teams across the business interpret these metrics consistently. Procurement, quality, operations, and finance should all understand what each supplier performance management KPI means and how it’s measured. That shared understanding helps transform scorecards from a reporting formality into a practical decision-making tool.

Proceed With Caution When it Comes to AI

Artificial intelligence is rapidly transforming procurement, embedding intelligence across the entire process and unlocking significant potential.

Here's how key AI applications are being adopted:

• Generative AI & Conversational AI: Assists with tasks like drafting contracts, automating supplier communications, and enabling natural language queries (e.g., "Which suppliers missed delivery windows last quarter?"). These solutions leverage LLMs, chatbots, and copilots.
• Predictive & Prescriptive AI: Drives smarter decisions through demand forecasting, supplier risk assessment, and spend optimization. This often includes real-time flagging of issues like late deliveries or budget overruns, enhanced by copilots for analysis or AI agents for automated action.
• Computer Vision & Sensory AI: Enhances quality control for incoming goods, automates inventory monitoring, and facilitates document processing (with agents triggering actions or copilots aiding human review).
• Autonomous Systems & Robotics: Streamlines routine operations through Robotic Process Automation (RPA) and intelligent material handling, frequently driven by agentic solutions.

Collectively, these applications boost efficiency, reduce costs, and mitigate risks. However, AI's effectiveness hinges on the quality of its data and human interpretability. Procurement professionals must understand how these systems make decisions and validate their inputs. The next generation of leaders will need fluency in data validation and prompt design, alongside negotiation skills, to successfully embed AI in supplier performance management long term.

Final Thoughts

Improving supplier performance requires clarity, consistency, and collaboration. When suppliers understand how they’re being evaluated, when their actions are clearly considered, and when metrics reflect the realities of production and logistics, performance improves. And when performance improves, value follows via controllable costs, improved product performance and customer service, stronger market reputation, and more predictable profitability performance.

Whether you’re managing global supplier networks or onboarding your first strategic partner, strong supplier performance management best practices make the difference. That means clean data, relevant metrics, shared expectations, and a commitment to mutual success.

In procurement, supplier relationships are too critical to settle for anything less.