The Complete Guide To Supplier Evaluation: How To Efficiently Manage Your Supplier Base
Most organizations tend to leave supplier management to chance, meaning they have no idea how their suppliers are performing and whether they’re profitable or at risk.
But what isn’t measured cannot be improved. And awarding additional business based on suppliers meeting performance goals can bring dramatic results.
Supplier evaluation is the process of assessing and approving potential suppliers through quantitative and qualitative assessments. This is done to ensure you only work with the best in class suppliers available.
There are 2 main reasons you should perform supplier evaluation:
For existing suppliers, it can help you uncover and remove hidden waste and costs and achieve sustainable procurement;
For new suppliers, it can set a threshold that can lead to higher-quality results.
There are several ways you can carry out a supplier assessment — questionnaires, scorecards, site visits, and third-party standard certifications. This can be done manually through emails, Excels, or on paper, or using a supplier management platform like Prokuria that automates the process and saves your team an enormous amount of hours.
The most important thing you should remember is that you should perform a supplier evaluation regularly (at least 2 times a year, but best-in-class organizations perform an evaluation every 3 months). Each time, you should check whether your suppliers get better scores than they previously got.
Supplier scoring means objectively evaluating your suppliers against predetermined criteria (the vendor scorecard). The more criteria a supplier meets, the higher their score will be.
Some of the most common supplier evaluation criteria include quality, pricing, delivery time, capability, and ethical sourcing.
Supplier scoring is also closely related to supplier segmentation and can be used to select suppliers to participate in RFQs, RFPs, RFIs, or Reverse Auctions.
There’s always a trade-off between keeping your scoring as simple as possible and obtaining all the relevant information for making the best decision.
At the same time, you also need to be transparent with your suppliers and let them know what you expect to receive from them, what they need to do to win your sourcing event, and how they compare to other organizations. This is especially important for the suppliers you reject.
All this takes a lot of time and effort if done manually. Not to mention that it might not be the most accurate way of selecting the best supplier. That’s why RFP automation is a must for any organization that wants to increase performance.
Using RFP scoring software saves you time and effort. Traditionally, procurement professionals spend a lot of time manually composing requests, going through RFP templates, and comparing suppliers and calculating response scores. By reducing the time needed to do all this, you increase the number of RFPs you can process yearly, thus increasing your revenue.
Software also makes it easier to eliminate suppliers who don’t fulfill your requirements from the very beginning and ensure transparency.
Not to mention, you eliminate guesswork. Once you enter the parameters and weights of different data fields in the RFP, the software can rate each supplier and sort them based on their overall scores. If specific requirements are important to you, you can sort suppliers using that requirement as a filter and only select the companies that are the best fit for you.
Some suppliers will have great scores, some won’t. Before you decide to end your business partnership with a supplier, you should first make sure you’ve done everything you could to save that partnership. This means discussing your expectations, what they should improve, and coming up with a supplier development program.
Supplier development is the process of working with the suppliers whose scores are low, on a one-to-one basis, with the goal of improving their performance. At the end of this process, you should have a detailed plan of action, along with a deadline by which they should implement each change. This is the supplier development program.
For example, let’s say a supplier provides excellent quality products, but these products always arrive too late, delaying your entire supply chain. You could stop doing business with that supplier, or you could collaborate with that supplier and find a solution so that products arrive on time. This second option is mutually beneficial.
Correct supplier segmentation can help drive and deliver increased value for your supply chain. Some organizations segment their suppliers by how much they spend with them, the general thought being the more we spend with them, the more important they are for our organization.
However, this is not always the case. How much you spend with a supplier is no clear indication of whether that supplier is a strategic partner for your organization. And this is why you should perform a proper supplier segmentation — to determine the role in helping to deliver value to the end customer a supplier provides.
Supplier segmentation is the process of dividing suppliers into distinct groups based on needs, characteristics, or behavior. This process incorporates:
preparing supplier segmentation teams;
reviewing supplier segments;
identifying opportunities with suppliers;
developing product/service agreements;
generating supplier/cost profitability reports.
Suppliers who are vital to your organization need a higher level of engagement. By classifying each of your suppliers using pre-agreed criteria, you can decide upon the appropriate level of attention needed to ensure that they deliver superior service/products.
Supplier segmentation can also provide insights into your supply base regarding the extent each vendor is important to your business operations. This enables you to develop a closer working relationship with key suppliers at all levels (executive, operational, and transactional).
Last but not least, by categorizing your suppliers, you can also identify your level of exposure to risk. For example, many organizations depend on a single source of supply for critical goods and services. If that source is unable to fulfill its offering, you’ll also be unable to satisfy your customers.
Determining the supplier risk means measuring how likely it is that a supplier will fail to deliver their commitments to you. Risk is usually tied to dependency — if your project relies heavily on one supplier, then the risk is high.
That’s why some companies choose to mitigate risk by diversifying their supplier portfolio. If another supplier can get you the product you need when your “main” supplier fails to do so, the impact on your supply chain is minimal.
Each supplier has its own shortcomings they should work on, and this is where supplier segmentation comes in handy. Shipment delays are very risky because they affect your whole supply chain. On the other hand, a not so great customer relationship doesn’t pose as many risks.
If not properly managed, supplier risk can result in:
Discontinuity of essential goods or services
Key supplier financial failure
Avoidable cost increases
Product contamination and recall
Critical technology failure or cyberattacks
Environmental pollution or safety incidents
Legal non-compliance, regulatory lapses, or supplier fraud, and more.
These are the 4 steps you need to follow to evaluate your suppliers. Are you ready to achieve sustainable procurement by uncovering and removing hidden waste and costs? Do you want to automate your supplier evaluation process? Try Prokuria today!