SMB Guide to Measuring Vendor Performance

“If you cannot measure it, you cannot manage it.” – Peter Drucker

Regardless of the business you are in, your vendors are an important component of your company's success. Having a formal system to track and evaluate vendor performance is essential to maintaining smooth operations, particularly during periods of crisis. Most small and mid-size businesses we speak with do not have a structured approach to measuring vendor performance. With time at your disposal, this is a great time to examine your vendors and see how you can evaluate their performance.

First, it is essential that you have a vendor rating system in place. There are many ways you can rate and classify your vendors. I find that simple methods, like this 3-point rating scale, are the most effective to evaluate your suppliers:

1 = Unacceptable: Failed to meet the agreed standards/obligations.
2 = Satisfactory: Met the agreed standards/obligations with minimal issues.
3 = Exceptional: Exceeds in all essential areas of timelines, quality and overall performance of work.

Here are a few vendor performance indicators you could deploy to rate your vendors' effectiveness. For this article, I am giving an equal weighting to each of the four indicators mentioned below. I recommend that you adjust the weighting for each indicator depending on its importance to your business. Take into consideration the impact on the overall profitability, agility and competitiveness of your business.

1. Lead time management (25%)

During such unprecedented times, lead time tracking is the first and most crucial metric that you should use to measure your vendors. This is critical as a few delays could derail your business significantly.

Here are some pointers you can use to measure vendor lead time performance:

• Check the frequency of delays from your vendors. Is it often or is it a one-off occurrence?

• Check and review the reasons for the delay. This will give you insight into what factors are impacting your vendors’ operations.

• Check if the delays are across specific vendors, specific regions or a type of product to help you understand where your attention is needed.

• Track and measure logistics delays too. This could be delays in clearance, shipping, paperwork, etc.

2. Quality of product (25%)

Ask yourself the question, "Has the supplier met agreed standards in delivery of goods or services?". Have a look at your internal receiving and inspection process. Do you have effective quality check measures in place?

Here are a few things that you can track to measure product quality:

• Number of defective products/parts per shipment and per vendor

• Number of damaged products/parts per shipment and per vendor

• Frequency of damage and faulty packaging

• Frequency of products not meeting agreed standards

• Frequency of under or over deliveries

• Financial impact of poor quality products – on the revenue side (due to loss of business) and from a cost perspective (due to lost time)

3. Service levels (25%)

Have you ever measured the service level of your vendors? Most of the time we forget to do so; we are so focused on the products and services that we forget to review vendor performance and its impact on our business. Again, this is a great time to start tracking and measuring service levels from each of your vendors. As a first step, you should ensure you have vendor relationship agreements with each of your suppliers.

Here are a few questions to ask yourself to evaluate vendor service levels:

• When you communicate with your vendor, do you get a prompt, friendly, helpful and informed reply?

• How efficient are their order and shipment processes? If you don’t have a clear understanding, now is a good time to find out.

• Do you get prompt alerts and reminders for order delays, deviations, etc.?

• When you submit a change request, how quickly and efficiently do they incorporate those changes and confirm back to you?

• When was the last time your vendor asked how they could be of help to you and your business?

4. Pricing (25%)

I am sure pricing discussions take up most of your focus, effort and time with your vendors. Pricing is no doubt crucial. However, you should use price as leverage ─ a game changer to negotiate in the context of other key performance criteria.

While measuring pricing of your vendors, here are a few things you should include:

• Negotiate the value adds you will get for the standard or special price.

• Have a clear agreement of what is included in the price.

• Check the frequency of price changes and revisions made by the vendor. Most importantly, check the reasons they provide for the price hike.

• Review vendor invoices and shipping documents carefully to ensure pricing, calculations, discounts, etc. are correct. If you see patterns of errors, miscalculations or omissions, have a discussion with your vendor to resolve the issue.

• Keep track of how often you receive invoices from your vendors that do not match your order or with the shipping details they provided you.

Needless to say, it is absolutely crucial that you have a strong business management software to track and measure performance of your vendors. It is essential that you set up these indicators in your software and make them available for review via dashboards. You could also set up business alerts to notify you of deviations as they occur.

Should you need advice and guidance on how to implement your strategy for vendor performance management, feel free to connect with us. We wish you all the best in optimizing and disrupting your supply chain process to drive efficiencies and profitability for your organization. Do let us know how these indicators have helped you become more agile.