In our previous newsletter, we shared 6 time-tested steps to help companies find the best suppliers. No matter how good they are, though, any supplier can face challenges that impact their performance, such as raw material shortages, natural disasters, or changes in government regulations.
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Suppose you found a supplier who provides high-quality materials at competitive prices. Later on, you notice that the supplier's lead time has been increasing due to unforeseen production issues, leading to frequent delays. These delays impact your manufacturing schedule and, ultimately, your company's ability to deliver products to clients on time. As a result, you receive customer complaints, which eventually affect your organization's reputation and sales.
To avoid this scenario, it's crucial to evaluate supplier performance regularly to identify and mitigate any potential risks early on. Then, you can work with potentially problematic suppliers to find solutions or explore alternative options for vendors.
In this newsletter, we'll provide you with actionable steps to evaluate suppliers effectively and ensure that they meet your organization's needs and requirements.
Step 1: Use the Supplier Segmentation Method
Supplier segmentation is a powerful technique for effective supplier management. It involves categorizing vendors based on specific criteria like product offering or strategic importance, making it easier to evaluate their performance and allocate resources accordingly. However, it's important to note that not all situations require this approach.
For instance, if a company only has a few suppliers, segmenting them may not be necessary as all of them may be critical to the company's operations. In this case, supplier segmentation can be skipped altogether.
On the other hand, if a company has dozens or hundreds of vendors and varying levels of dependence, segmentation becomes essential for prioritizing resources and focusing on the most critical suppliers.
A great way to start this process is by using the ABC analysis method. Using it, suppliers are sorted into categories &#; A, B, and C &#; based on their impact on company operations and the level of risk associated with their performance. Category A suppliers would be considered high-risk and high-importance, while category C suppliers would be low-risk and low-importance.
As an added bonus, differentiating them will also help you tailor supplier management strategies to each supplier group's specific needs and characteristics. Category A suppliers may require frequent communication and closer collaboration, while category C suppliers may only require occasional check-ins.
Step 2: Define Key Performance Areas
This is the stage when you start creating a supplier scorecard to evaluate vendor performance. To do so, you must identify the key performance areas the suppliers must excel in to meet your company's needs.
When choosing the performance areas, take into account the goods or services that the supplier provides, as well as such factors as each supplier's importance for business operations and their impact on your company's customer satisfaction.
Here are some of the various criteria that an organization may use to evaluate potential suppliers:
Step 3: Weigh the Criteria
Assigning weights to criteria is a crucial step in the supplier evaluation process. Not all performance areas hold the same level of significance in determining a supplier's overall performance. Weighing them enables the scorecard to reflect your organization's priorities and ensures that suppliers are evaluated based on the most important factors.
Here's an example of how to weigh the criteria in a supplier scorecard:
Let's say you are evaluating three performance areas: quality, delivery time, and price. You decide that quality is most important, followed by delivery time and then cost. Then you could assign weights to each criterion as follows:
When calculating scores for each supplier, you multiply their performance in each criterion by the assigned weight. For example, if a supplier scored 90% in quality, 80% in delivery times, and 95% in cost, the calculation would look like this:
(0.5 x 0.9) + (0.3 x 0.8) + (0.2 x 0.95) = 0.83
In this case, the supplier's overall score is 83%.
At this stage, it's also a good practice to determine what level of performance you expect from your suppliers in each criterion and what you want their overall score to be.
Step 4: Decide on KPIs
Once the key performance areas and their weights have been identified, develop specific indicators that can be used to measure the supplier's efficiency in each area.
KPIs should be specific, measurable, achievable on the supplier's side, and aligned with the company's requirements and expectations. For example, if product quality is a key performance area, KPIs would include supplier defect rate, compliance rate, and purchase order accuracy. Similarly, if delivery time is a critical factor, you might consider measuring on-time delivery rate, lead time, purchase order cycle time, and vendor availability.
Additionally, if you've decided to use the supplier segmentation mentioned in the first step of this article, consult with relevant stakeholders to identify specific KPIs for each supplier segment. For example, KPIs for category A suppliers might include on-time delivery rate, defect rate, and responsiveness to inquiries. In contrast, KPIs for category C suppliers may focus more on price and availability.
For more information about selecting the best KPIs and how to measure them, follow the link to our blog post.
Step 5: Collect Supplier Data
To ensure that your evaluations are accurate and reliable, take time to collect data from both external and internal resources. The more data in hand, the bigger (and clearer) picture you'll get on supplier performance.
Internal data can be obtained from ERP, quality control, inventory management, or CRM systems, and from feedback from internal stakeholders such as production, quality assurance, and purchasing teams. These sources can provide valuable insight into supplier performance metrics such as delivery times, defect rates, and customer satisfaction ratings.
You can find the external data in supplier reports and industry benchmarks or get it from trade associations and industry groups. These data sources will tell you information on best practices and performance benchmarks specific to a particular industry and insights into how suppliers compare to their peers regarding performance metrics.
Obtaining all of the necessary data to evaluate supplier performance can be a daunting task, especially when there are many sources of complex information to sort through. That's why many businesses rely on automation tools that help them keep track of all the important data in one place.
For instance, Precoro users don't have to worry about consolidating information because everything they need is readily available in the cloud-based system, including delivery times, ordering status, catalogs, contracts, and more.
Plus, Precoro's direct integration with popular tools like NetSuite, QuickBooks, and Xero allows for easy transfer of data like budgets, POs, bills, and vendor information.
Step 6: Analyze the Data
At this point, you should have all the necessary data collected, KPIs identified, and desirable performance targets set. Now you can calculate scores for each supplier, as shown in step 3, to determine which suppliers are meeting expectations and which ones need improvement.
Additionally, you can use the data to compare how suppliers perform against one another or against industry benchmarks. Doing so will open new ways to negotiate better terms, identify potential risks and opportunities, and inform future vendor selection decisions.
Using numerous spreadsheets will make the process of recording and analyzing supplier data quite slow; it might also cause you to miss important data. Instead, try using specific tools designed for supplier data analysis.
Take, for example, Precoro to Power BI integration: it allows you to gather and store information and key business indicators in your Power BI account, generate reports, and view info with convenient dashboards for visibility. Here's what else the integration offers:
Step 7: Take Action
After analyzing the data and identifying the areas where suppliers need to improve, it's time to decide on further steps in your supplier partnership. There are several ways to approach this depending on the severity of existing supplier issues.
For suppliers who are not meeting expectations, terminating the relationship should only be a last resort. To help suppliers improve, you can share data and insights with them and work together to develop action plans. This could involve providing training or resources, setting new performance targets, or revising contractual agreements to incentivize better performance.
Additionally, implementing a supplier management system could be a great option if you want to improve collaboration with your vendors while keeping track of their performance.
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For example, in Precoro, you can communicate directly with vendors within the platform and monitor how their performance changes over time. Plus, there's a separate portal available that suppliers can access to receive POs, send invoices for received orders, engage in the RFP process, and more.
Moreover, with the Supplier Module it's also possible to:
Educational Materials
If you missed our previous newsletter on choosing the best suppliers for your company, follow this link.
To learn the best practices for supplier management, visit our blog post or recent newsletter.
If you want to find out the basics of spend analysis, click on the links to our article or this newsletter.
To learn the key differences between direct and indirect spend, hit the link to our blog.
For a complete guide on accounts payable vs. accounts receivable, check out this material.
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Organizations conduct supplier evaluations both to qualify the potential suppliers and to assess relationships with the existing ones. Supplier evaluation represents one of the most important decisions in a company to remain competitive, especially in times like now when markets are changing very fast.
What is Supplier Evaluation?
In procurement, supplier evaluation means a formal assessment of suppliers to measure their performance against various criteria and determine if they meet the organizational needs. The objective is to create a best-in-class and low-risk portfolio of available suppliers for use.
Supplier evaluation is a continuous process for procurement departments and is also a pre-qualification step in the process of purchasing.
According to Hald and Ellegaard (), supplier evaluation is "the process of quantifying the efficiency and effectiveness of supplier action."
Thus, in simple terms, supplier evaluation means assessing whether a supplier is a good fit for your business or not. At the same time, also takes into account your current supplier base to measure their performance and uncover opportunities for cost reduction, risk mitigation and continuous improvement. Thus, effective supplier assessment is a holistic process that starts with aligning objectives, data, and analysis with suppliers in a transparent and fair manner.
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The goal of every procurement organization is to utilize limited resources most efficiently. This makes evaluating suppliers necessary to ensure the best contracts in terms of quality, costs, flexibility, and reliability.
The supplier assessment process might be challenging, but the benefits of finding low-risk sources of high-quality goods and services plus mutually beneficial, long-term business relationships outweigh the efforts needed.
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Some of the other benefits of supplier evaluation include:
The supplier evaluation process starts with evaluating your company's needs and developing the list of requirements to contact or discuss with the right suppliers. After this, a selection criterion is designed to evaluate the suppliers, including deciding a way to score the suppliers on these criteria.
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When evaluating potential suppliers, a market survey is carried out to identify a set number of suppliers which will participate in the request for a quotation or RFQ process. A variation of the second step is to gather a limited group of suppliers and make an initial bidders' list. This list comprises suppliers who satisfy the requirements. Then a request for information or RFI is sent to suppliers in the list to get more information about them. The RFI aims to know if the company is interested and gather enough information to make a rough evaluation.
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Once the bids or RFIs are received, the suppliers are evaluated, involving all of the company's stakeholders. In the end, companies are awarded as suppliers based on the results and negotiations.
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Most procurement professionals will agree that there is no one best way to assess suppliers. That's why companies use different approaches to see what works and whatnot. Irrespective of the approach, the final goal of the assessment process is to reduce risks and maximize overall value to the procurement organization.
It's important to mention here that the need for supplier evaluation does not end with supplier selection. In fact, after an association is established, it becomes necessary to track the supplier's performance over time. Ranking suppliers on various metrics helps companies figure out which of them are performing the best and where there is room for improvement.
Supplier assessment is a multi-criterion problem that includes both qualitative and quantitative factors. That is why developing standard selection criteria and applying them indiscriminately to any situation does not suffice.
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That said, supplier evaluation criteria should align with your company's mission, vision, and business goals. Additionally, it should also include factors like quality, cost and financial integrity, corporate social responsibility, communication, and cultural commitments.
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Assessing vendors and suppliers also requires reviewing the criteria that matter most to your organization. For example, for a healthcare company, data security is of utmost importance, and they also have to consider several compliance guidelines; hence, these criteria override other factors.
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But more than often, companies come across conflicting tangible and intangible factors where it becomes hard to make a decision.
For this reason, all relevant company stakeholders like procurement, engineering, logistics, production, etc., must be involved in the supplier selection process. Criteria for selection must be agreed upon among the stakeholders. Doing so ensures the right weight is allocated to each based on the overall importance, business priorities, and strategy.
The ability to create appropriate supplier evaluation criteria is linked to an organization's procurement performance.
According to Murigi (), 57.1% of the performance of the procurement process is directly determined by the supplier evaluation and appraisal criteria.
Usually, criteria like materials delivery, quality, cost, financial position, communication, and technology are the commonly used ones. However, there can be many other criteria, more important than those mentioned above, depending on the process. Hence, it's not easy to come up with one exclusive list.
Below we have briefly discussed some of the various criteria that an organization may use to evaluate potential suppliers:
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When determining which supplier to select, it suggested that organizations categorize criteria as follows:
Mandatory - As the name suggests, these criteria are mandatory, and a supplier must meet them to be on the bid list.
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Preferred - If a supplier cannot meet these, it doesn't necessarily stop them from bidding. However, these criteria will form the basis of supplier selection.
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Leading - Limit these to as few issues as possible. These issues will really differentiate suppliers and will separate the exceptional suppliers from the ordinary. These issues should have the highest weighting within the supplier selection process.
Supplier evaluation is a continuous process and ensures you keep your customers and your priorities on top. Following are the steps you can tick as you walk through the process to make sure you follow the best practices while assessing your suppliers:
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Do you wish to bestow your team with a supplier assessment template that can help your organization measure suppliers' reliability, suitability, and compatibility?
Every business requires insightful supplier evaluation to deliver the best value for procurement and undertake effective supplier risk management.
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Most companies use a formal supplier evaluation and qualification process to select suppliers and maintain long-term partnerships. But the entire process might seem difficult if you don't know how to assess your suppliers or lack the skills needed to conduct it.
To help you overcome this barrier, we have created a supplier assessment template that you can use to conduct meaningful evaluations. This template equips procurers with a harmonized approach to assess, manage, and communicate with their suppliers which in turn helps them identify efficiencies, realize cost savings and productivity benefits, and set the stage for innovation.
Hit the link below and download Ignite Procurement Supplier Assessment template to:
Download the Supplier Assessment form here.
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