How to evaluate your suppliers: key criteria & methods
- Robert
- Aug 12, 2020
- 5 min read
Updated: 4 days ago
Table of contents
In case you don’t have time to read the whole article, here’s a short video summary that contains the key points:
Your business is as strong as your weakest supplier. This is a reality many organizations face. Companies struggle significantly because they never implement proper vendor assessment protocols. Most organizations leave supplier management to chance, operating without visibility into performance, profitability and risk factors. As procurement professionals often note: what isn't measured cannot be improved.
What is supplier evaluation?
Supplier evaluation is a systematic assessment of your vendors. You're methodically examining their operations, reliability, and performance to determine if they deliver appropriate value. It involves asking critical questions: Can they maintain quality standards consistently? Do they meet delivery timelines? Are their pricing structures transparent and competitive? How do they handle unexpected challenges?
More formally, it's the process of assessing and approving potential suppliers through both quantitative and qualitative assessments. This ensures that only the best-in-class suppliers meet your organization's requirements. This approach isn't limited to new vendors, it should be applied to current suppliers as well, tracking ongoing performance, identifying cost reduction opportunities, mitigating risks, and driving continuous improvement.
Why is supplier evaluation beneficial?
Regular supplier evaluations provide multiple benefits, whether for new or existing suppliers. Here’s why it matters:
For existing suppliers:
Helps uncover hidden costs and inefficiencies
Supports sustainable procurement practices
Enables cost reduction and risk mitigation
For new suppliers:
Sets performance standards
Leads to higher-quality results
Improves long-term business outcomes
Understanding your suppliers’ capabilities and performance levels allows you to make better decisions for future products and services.
Methods and tools for Supplier Evaluation
Different organizational needs require tailored approaches. Most successful programs incorporate several of these methods:
Scorecard systems that quantify complex supplier performance into comparable ratings. These facilitate objective comparison across diverse supplier categories.
On-site assessments: Direct observation of supplier facilities provides insights impossible to obtain through documentation alone. One client discovered significant discrepancies between a supplier's described capabilities and actual operations during an unannounced visit.
Financial analysis: Research indicates 59% of procurement leaders consider financial stability a critical evaluation factor. A financially unstable supplier creates substantial operational risk.
Self-assessment questionnaires that gather baseline information about capabilities, processes, and compliance measures. These provide efficient initial screening.
Independent third-party audits that provide unbiased assessment of supplier operations, particularly valuable for high-risk categories.
Performance monitoring software that tracks metrics consistently over time, identifying patterns and trends human analysts might miss.
Reference verification. Conversations with existing customers provide practical insights into actual performance experiences.
Weighted evaluation models that align assessment criteria with strategic priorities. Not all criteria carry equal importance.
Standardized questionnaires that investigate specific aspects of supplier capabilities and operational practices.
Industry certifications that verify suppliers meet established standards.
Leading organizations conduct evaluations quarterly, while standard practice involves semi-annual reviews. Each evaluation should benchmark against previous performance to identify improvement trends or concerning declines.
Checklist for supplier evaluation
Even though the information we described above is important, it’s not easily quantifiable - it’s more helpful for establishing a good business relationship with suppliers.
For a more objective approach, when assessing suppliers, consider these essential criteria:
Quality consistency:
Do they maintain reliable quality standards? Examine defect rates, returns and quality certifications. One electronics manufacturer analyzed numerous quality metrics but discovered just two indicators that predicted 90% of quality issues.
Delivery reliability:
Can they consistently meet agreed timelines? Suppliers with on-time delivery rates below 85% typically require significant intervention to improve performance.
Total cost of ownership:
Beyond base pricing, what are the complete costs? Include shipping, maintenance, handling charges, and quality-related expenses. Analysis frequently reveals "low-cost" suppliers actually have higher total costs when all factors are considered.
Financial stability:
Does their financial position indicate sustainable operations? Financial assessments should include standard industry ratios, credit ratings and liquidity measures.
Technical capability:
Do they possess the expertise and equipment required?
Can they adapt to evolving specifications?
Communication effectiveness:
How responsive and transparent are they when issues arise? Communication breakdowns frequently precede performance failures.
Geographic considerations:
How does their location impact risk, lead times, and responsiveness?
Capacity and scalability:
Can they accommodate your current requirements and future growth?
Compliance documentation:
Do they meet regulatory requirements relevant to your industry?
Risk management protocols:
What contingency plans exist for disruptions?
Sustainability practices:
Are their environmental and social responsibility standards aligned with your organizational values?
Strategic alignment:
Do they understand your business objectives and support your competitive position?
Ethical standards:
Do they demonstrate ethical business practices throughout their operations?
Do they maintain appropriate relationships with all stakeholders?
Customer orientation:
Are they focused on understanding and meeting end-user expectations? Effective suppliers maintain awareness of market trends.
Organizational culture:
Do they promote collaboration, diversity and mutual respect?
Business strategy:
Are their growth objectives compatible with your requirements?
Production capacity:
Can they reliably produce required volumes?
Environmental impact:
Are they implementing responsible environmental practices?
Innovation capabilities:
Do they demonstrate leadership in technology and process improvement?
Legal compliance:
Do they adhere to contractual terms?
Are there conflicts of interest or legal proceedings that create risk?
The Process of Supplier Evaluation
Implement these steps for effective supplier evaluation:
Define specific requirements and objectives: Articulate exactly what you need from suppliers and how their performance will impact your operations. Organizations differ significantly in priorities.
Establish weighted evaluation criteria: Determine which factors are most critical for your business context and assign appropriate importance.
Collect comprehensive data through multiple channels: performance metrics, surveys, site visits, financial reports, and industry intelligence.
Apply consistent scoring methodology that enables objective comparison across suppliers.
Benchmark results against industry standards, historical performance, and alternative suppliers to identify relative strengths and weaknesses.
Provide structured feedback to suppliers regarding assessment outcomes.
Develop improvement plans for suppliers with strategic importance but performance gaps.
Implement data-driven decisions regarding supplier relationships based on evaluation results.
Maintain detailed documentation of all evaluations for continuity and trend analysis.
Review evaluation criteria periodically to ensure alignment with evolving business requirements.
Common mistakes to avoid in supplier evaluation
Implement these steps for effective supplier evaluation:
Define specific requirements and objectives: Articulate exactly what you need from suppliers and how their performance will impact your operations. Organizations differ significantly in priorities.
Establish weighted evaluation criteria: Determine which factors are most critical for your business context and assign appropriate importance.
Collect comprehensive data through multiple channels: performance metrics, surveys, site visits, financial reports, and industry intelligence.
Apply consistent scoring methodology that enables objective comparison across suppliers.
Benchmark results against industry standards, historical performance, and alternative suppliers to identify relative strengths and weaknesses.
Provide structured feedback to suppliers regarding assessment outcomes.
Develop improvement plans for suppliers with strategic importance but performance gaps.
Implement data-driven decisions regarding supplier relationships based on evaluation results.
Maintain detailed documentation of all evaluations for continuity and trend analysis.
Review evaluation criteria periodically to ensure alignment with evolving business requirements.
How to perform supplier evaluation with Prokuria?
Managing supplier performance manually can be time-consuming, especially if you have hundreds of suppliers. This is where supplier evaluation software like Prokuria comes in.
Prokuria makes it easy to evaluate supplier performance through a digital supplier scorecard.
Here’s how it works:
Score Suppliers:
Assign a score for each criterion based on performance.
Calculate Overall Performance:
Prokuria automatically calculates a final score based on the weighted criteria.
Export and Compare:
You can export the scorecard to Excel for easy comparisons and to track progress over time.
With Prokuria's supplier performance scorecard solution, evaluating suppliers becomes streamlined and more efficient. Whether assessing current suppliers or onboarding new ones, Prokuria simplifies the process, helping you stay on top of your supplier performance and make informed decisions based on data.
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