Making the leap to incentivised supply chain performance in defence

At some point, defence organisations will experience poor or unwanted performance from a supplier, such as unexpected costs, poor quality, or late deliveries. It’s the inevitable result of complex, global supply networks pushed to be increasingly efficient. A recent example of this is the Dreadnought submarine build programme that has suffered late deliveries in 2020 extending its deadline by another year. Traditionally, organisations respond to such issues with lower performance ratings or by levying damages, but a more effective way to prevent them is through outcome based incentivisation strategies.

While contract measures for addressing poor performance are essential, a positive incentivisation approach will generate greater success for all. The Chartered Institute of Procurement & Supply says it leads to lower cost, early delivery, inventory reduction, increased sales, improved labour utilisation, and better technical solutions.

But how do you incentivise the supply chain?

In our experience, it’s about developing your approach to incentivisation, focusing KPIs on outcomes, and taking a measured approach to implementation.

Make the pipeline of work visible

By encouraging supply chains to improve performance with the promise of more business, everyone wins. Rewarding desired performance and behaviours inspires your supply chain to adopt and promote the characteristics and values that are important to you. It will also align their interests and goals with your own and encourage behaviours that develop cohesive teams.

Common methods of implementing this are future business awards, contract extensions, and promotion to preferred supplier listing status. This will elevate those suppliers who are performing best into a preferential position for future work across your organisation.

Focus your KPIs on outcomes

Tracking and rewarding performance can also demonstrate the value you place on outcomes. It can release contracting parties from typically constraining conventional KPIs that focus on cost, time, and delivery, letting them explore and achieve more meaningful targets, such as lower carbon footprints or better collaboration with your organisation. Ultimately, this can allow you to step back from micro-managing supply chains.

To understand what outcomes are important to you, take time to:

1. Draw from your organisation’s vision and mission statements.
2. Review which business objectives and contractual requirements are relevant to which outcomes you want to achieve.
3. Select KPIs that promote your needs and required behaviours and ensure they’re measurable and achievable by the supply chain.
4. Finally, instigate a simple yet robust mechanism for scoring how well a supplier meets the KPIs.

Throughout, it’s important to engage with your key stakeholders and supply chain to validate your approach and gain buy-in and sponsorship of your KPIs.

Implement a measured approach

Designing a measured implementation approach will help to embed your chosen KPIs and incentivisation method as business-as-usual. To do this, agree a learning period with your supply chain to foster the start of good behaviours and allow time for the new strategy to bed in. In their book, The Balanced Scorecard: Translating Strategy into Action, Kaplan and Norton indicate 16 weeks is sufficient time. This will help protect contractors from getting penalised while they get up to speed and ensure everyone starts on the right foot.

Incentivisation drives better supply chain performance

Rewarding good behaviours can be far more productive than penalising poor ones. With supply chain KPIs typically aimed at monitoring daily performance, cost reduction and production rate, it’s not surprising they drive traditional behaviours of ‘doing’ rather than ‘performing’. Setting an outcome based, incentivised KPI strategy, aligned to your objectives and needs, can better ensure that contractors understand what’s important to you. This will encourage them to achieve the correct work practices and, in doing so, automatically position themselves for future work. Better incentivisation brings your programmes lower cost, more assured delivery, and better technical solutions.