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The companies that are successful in the face of adversity are the ones that look at their suppliers and vendors as partners in mutual growth. Many analysts agree this is because the prices procurement teams negotiate today make a direct contribution to company savings and the quality of service they will receive in the future. Not to mention, many larger suppliers may be able to provide a level of strategic support, at times sitting in on meetings with your internal team and providing guidance + co-innovation.
That said, not all vendors will be able to provide this same level of value-add to your business. Therefore, it is up to your business to set up a system in place for evaluating, selecting and reevaluating the suppliers and vendors you are working with today, and are considering for the future.
Below, we have provided a step-by-step process to help teams effectively rate their suppliers and vendors, track their performance, and ultimately turn their strategic supplier management process into an ongoing system for supplier relationship management.
What is Supplier Evaluation?
Before going into the details, businesses must settle on some definition around supplier evaluation. We can define supplier evaluation as the process of examining and approving potential suppliers through quantitative and qualitative assessments. Suppliers may use any number of evaluation methods, although some of the most common are questionnaires, scorecards and third-party standard certifications.
It is worth noting that supplier evaluations are not a one-time event. Rather, they occur once or twice a year, or in the case of best-in-class organizations, every three months. Since this process occurs so frequently, businesses are encouraged to develop a process now, so that evaluations can be done easily and consistently in the future.
1. Establish Benchmarks
The management of vendor performance is an important part of strategic sourcing. Current standards, expected achievements, and strategic goals should all be part of your vendor relationship from the start. As a result, when you start your sourcing event, make a note of expectations in your initial request for proposal (RFP).
2. Determine Supplier Classifications
Most businesses have hundreds, if not thousands of suppliers or more. Therefore, it may not be realistic to evaluate all your suppliers, at least not right away.
For this reason, it becomes crucial for businesses to categorize their suppliers into groups, for example by geographical location or product type, and further classifying between strategic and nonstrategic suppliers. This ensures that businesses are gaining insights accurate to a specific supplier type, while simultaneously ensuring that efforts are being allocated appropriately in terms of strategic priority.
3. Create Your Supplier Scorecard
Once suppliers are divided into relevant categories, now it comes down to assessing them. Although factors may differ, some commonly evaluated criteria include:
Sustainability
- Environmental Impact
- Government Mandates
Quality
- Ability to Meet Product Standards
- Return history
- Third-party certifications
- Presence of Quality Control Standard
History
- Number of on-time deliveries
- Experience in the industry
- Positive customer recommendations
Cost
- Ability for a company to stick to its estimates (e.g. Unanticipated taxes or other surprise costs)
- Price compared to market rate
- Option to propose innovative financial approach (I.e. gain-sharing)
- Warranty
- Freight costs
- Quantity discounts
- Maintenance costs
- Packaging
- Disposal
- Payment terms
Service
- Adherence to Service Level Agreements (SLA)
- Customer support availability
- Policies
- Systems of customer satisfaction
Commitment to Growth
- Innovation/Creative Thinking
- Partnership mindset
- Feedback
Centralize Relevant Data
Since businesses likely manage hundreds, if not thousands of suppliers, it becomes necessary to ensure that all information is brought together in a single centralized location. Otherwise, it can be hard to determine which suppliers are excelling in terms of performance, and which might be missing the mark.
Often the simplest method of analyzing suppliers both in a one-by-one capacity and in comparison, is through a portal for data aggregation combined with a dashboard or reporting tool to transform these details into insights.
5. Select a Supplier Performance Management System
You'll need a system that's safe, efficient, and well-organized. Data from evaluations might be sensitive and must be maintained securely. The technology you employ should be easy and collaborative, allowing your performance review team to provide accurate and quick results.
You'll also want to pick a system that allows you to compare prior supplier scorecards side by side. Consider that results from one year might not easily translate into the next. Similarly, if a supplier was on thin ice during their last review but has taken steps to fix and enhance their service, your company can easily compare data to support confidence in continuing the partnership.
6. Enable Collaborative Feedback
While quantitative assessments based on your baseline KPIs are important, it doesn’t mean that qualitative assessments can be overlooked. Through the process of constant supplier-buyer communication and collaboration, businesses can ensure greater visibility into the root cause of a bottleneck, such as a single component taking longer to produce by a given manufacturer and setting back the development of the end product, the noticeable symptom.
7. REVIEW RESULTS
Understanding, communicating, and then executing the appropriate corrective action for improving supplier performance are all important aspects of measuring and evaluating suppliers. Companies must collaborate with suppliers to build action plans in response to assessments. To close the loop and reap the full benefits of the supplier performance measurement process, businesses are encouraged to use technologies that enable real-time visibility, to ensure that they can track and measure progress against these goals.
In the SAP space, analytics from SAP Analytics Cloud (SAC) can be surfaced on SAP Work Zone to help pinpoint data points about spend against a budgeted total or, average delivery times, as two examples, enabling decision makers to notice if and where progress is being made.
Supporting Ongoing Supplier Performance Capabilities
For any outstanding questions about evaluating supplier performance or learning how our team has provided support in the past. We encourage you to download our white paper below by filling out the applicable fields.
