By Lee Polevoi
Procurement professionals are always looking for ways to review and improve supplier relationships. And turning the page on a calendar year is a good excuse to level-set your evaluation processes for the upcoming year's supplier reviews. To assess your suppliers, try these suggestions:
Match the Assessment Strategy to the Supplier
There are a number of ways to solicit the feedback needed to help you evaluate a supplier's standing. The key is making sure you use the method that provides the appropriate information on the specific supplier. For example, the information you need to assess a parts supplier may be very different from what you need to review a services provider. Some of the more common methods include:
- Internal stakeholder surveys. Survey business partners who work with the supplier on their performance.
- Collecting key performance indicators (KPIs) from internal systems. Pulling data from financial, logistics, and other systems is an efficient method of collecting KPIs.
- Supplier meetings/interviews. These are very important for getting context on some of the data you collect and may shed light on new areas.
- Third-party reviews. It's increasingly common to have an outside consultant review your suppliers' performance and assist with scorecarding.
It's also important to decide how often you want to evaluate supplier performance — i.e., monthly, quarterly or annually — and match the information-gathering process to that timetable as well.
Devising a Supplier Scorecard
Supplier scorecards are an effective means for measuring supplier performance in the areas that matter most to your business. But deciding what KPIs should be included in the scorecard and what format you use can greatly influence the effectiveness of the scorecard. Also, KPIs should be updated each year to make sure you're tracking the supplier's current work. As a baseline, The Balance says a supplier scorecard should "use the vendor's contract terms as the list of measured items," or, in other words, "measure the key performance indicators that the vendor is bound to."
A few of the most common performance indicators (some of which were suggested in this Inc. article) include:
- Quality management process. What quality does the supplier deliver and how do they make changes when they need to improve quality?
- Competitive pricing. Ensuring that the price you committed to when you signed the contract stays intact during the life of the contract.
- On-time delivery performance. Whether it's physical parts or service delivery, tracking delivery to forecast or expectation is always a good indicator.
- Supplier response to requests for quotes, special requests, etc. Responsiveness to requests can say a lot about how the supplier views the relationship.
- Financial metrics. A supplier's financial stability and ability to meet the terms they agreed to should be tracked over time.
- Expertise. A good supplier should not only fulfill their contractual obligations, but bring new ideas and suggestions to the relationship.
- Communication. Does the supplier keep you apprised of any issues, challenges, or successes? This shouldn't be overlooked in the evaluation.
- Sourcing capabilities. If a second- or third-tier supplier drops the ball, your business is affected. So track your supplier's ability to handle those issues.
- Inventory management. For manufacturers, Inc. suggests a detailed review of "inventory accessibility." A supplier with 24/7 assured delivery is generally more useful to businesses than "the manufacturer with a lot of raw material inventory and an eight-week lead time for raw material."
Whatever criteria the scorecard measures, it should be designed to be user-friendly for all employees who interact with the supplier. Built-in timelines and milestones related to those criteria are also essential for the most effective assessment.
Establish Goals for the Next Supplier Scorecard
When you discuss the scorecard results, you can work together to establish goals for the next scorecard. Let your supplier know what your expectations are for specific metrics on the next scorecard so they can work to achieve them. A scorecard review is also a good time to let them know that you welcome their input on supply chain process innovations and other creative solutions to any logistical issues that crop up.
Agree on an Early Warning System for Unsatisfactory Performance
A good supplier will want to know if and when their performance fails to meet your standards. If you're using a scorecard (or even better, a real-time dashboard) to track performance, you can let them know as soon as possible when KPIs start to slip below acceptable ranges. It's in your company's best interest to identify red flags and correct them as early as possible, rather than wait for the next review and jettison the supplier relationship to start all over again with another supplier.
Factor Performance into Contract Renewal Agreements
If a supplier scores high in your evaluation process, it may inform your pricing discussions or negate the need for extensive contract renewal negotiations. However, if the scorecard shows lower performance, that may also change your approach to contract negotiations. A healthy supplier relationship always allows for honest discussion of rates or one-off services and requests, as the need arises.
Reverse Supplier Scorecards
Finally, remember to always keep up your end in supplier relationships. One way to do that is with a "reverse supplier scorecard" where you ask the supplier to rate you as a customer. If you ensure that their input won't impact their ability to win further business, the insights you receive from suppliers might surprise you. Maintaining open and honest communications demonstrates your good-faith part in the process and helps pave the way for future growth for all involved.
With all of these techniques, you should be ready to improve supplier relationships and performance. For more tips, be sure to visit Resources for Procurement Professionals on the Staples Business Advantage Resource Center.