Table of contents:
What is a supplier performance review?
For many companies, organizational performance is strictly linked to their own suppliers' performance. Without these third-party suppliers providing essential products and services, many of these companies would not be able to function.
The relationships businesses have with their suppliers are symbiotic and synergetic where all parties involved stand to benefit. Yet, if vendors don't meet expectations, the companies that rely on their products and services will also suffer.
As an essential tool in good vendor management, supplier performance reviews provide companies with the opportunity to assess their performance against their Service Level Agreements (SLAs), Key Performance Indicators (KPIs), and other set standards. It also enables organizations to track and assess the products and services supplied by third parties.
Supplier performance reviews help companies to periodically assess the quality of their vendors' performance, ensuring that they're only getting the most out of their investment, while also taking a proactive approach towards managing and improving supplier relationships.
What is supplier performance review software?
The price paid for vendor products and services isn't everything. Even if a supplier invoices you with the agreed-upon price, you still won't be hitting your savings target if their services are not up to mark or their goods are not of high quality.
Keeping track of supplier performance is critical in ensuring that your projected savings will come to fruition. Yet, managing and improving supplier performance is as essential to the overall efficiency of a business as it is challenging and time-consuming. By introducing automating into the mix through the use of supplier performance review software, businesses will greatly streamline and optimize the process.
Setting automated triggers based on predefined performance KPIs will classify suppliers into different tiers. Vendor performance is monitored and reported monthly.
Main benefits of vendor performance review solutions
Companies that regularly evaluate their suppliers' performance will typically experience several benefits. Depending on their specific industry as well as the KPIs that were used during the review process, organizations can gain better visibility into their suppliers' performance, identify and remove hidden costs, reduce risks, and gain a competitive advantage, among other benefits.
Among the most common supplier performance reviews benefits, we can include the following:
1. Increase Performance Visibility
When companies have limited insight into their vendors' performance, their supplier management process tends to be based on a lot of guesswork and "gut feelings." But by implementing the simple process of performance reviews, businesses will be able to score and manage their vendors with a far greater degree of accuracy.
In addition, this will also help by improving the company's own performance, especially when they award well-performing vendors with additional business in favor of the less performant ones.
2. Identifying and Removing Hidden Costs
Supply chain inefficiencies can often prove to be a major resource and profit sink for many organizations. Over the long term, these inefficiencies can pose significant business risks.
These risks can be either financial or operational and can escalate with geographic distance. Some of these risks can be avoided or mitigated through better and clear communication with suppliers.
By having a better understanding of their performance and business practices, companies can help their suppliers reduce inefficiencies in their own processes that can result in higher-quality services and lower costs. Moreover, a better understanding of supplier business practices can also enable organizations to drive waste out of their own business.
3. Leverage Vendors' Strength
Through a supplier performance review process, businesses can set new thresholds that can result in higher-quality products and services. With these, companies can plan better products of their own, based on a good understanding of their suppliers' enhanced capabilities, expertise, and performance levels.
Other benefits of supplier performance review solutions
There are several other benefits that supplier performance reviews can provide. Among these, we can include the following:
1. Aligning Business Practices With Suppliers
Professional vendors will want to align their business operations with the customers that share their business ethics. They also expect similar levels of excellence, show commitment towards corporate social responsibility, and are willing to work towards their own continuous improvement. Performance reviews can help achieve this level of alignment.
2. Improving Supplier Performance
While supplier performance reviews have numerous positive effects on the business that conducts them, the process can also be used to help with the continuous improvement of vendors' own internal processes.
In fact, the supplier evaluation process is more effective when it can also lead to an actual improvement in how vendors conduct their business. For this reason, performance reviews should be followed up by other activities such as supplier training and development, as well as various counteractive actions that can address the evaluation's findings.
3. Protecting and Improving the Brand's Reputation
It's not uncommon for brands to suffer a sudden drop in popularity that was not a direct fault of their own but of the actions, or inactions of their suppliers. Think about automobile recalls as a common example given.
By using supplier performance reviews, companies can enact corrective actions as soon as the first warning signs appear, instead of letting them become significant issues within the supply chain. In doing so, companies will not only be able to protect their brands' reputation but also improve it by only providing quality products and timely services to their customers.
When to use supplier performance review software?
Supplier performance reviews are typically carried out quarterly, bi-annually, and/or annually. The frequency of vendor performance reviews will largely depend on the type of services each supplier provides and the potential risks that they can pose to your business.
It's generally recommended to perform the initial supplier performance review shortly after the vendor has been onboarded. After this initial performance review, businesses can establish the appropriate schedule for ongoing reviews based on the supplier's overall risk level to the organization.
As a general rule when it comes to new service providers, the initial performance review should be performed within the first 90 days after the service was implemented. This will allow for enough time to pass so as to determine how each individual vendor is performing and work on their specific KPIs, SLAs, and implement the appropriate action plans.
If the vendor is not performing in accordance with expectations, each occurrence should be documented and used in the performance review. If these incidents create a risk, they should be addressed immediately by creating an action plan that has SMART (specific, measurable, attainable, relevant, time-bound) goals.
When talking about ongoing supplier performance reviews, they need to be performed in accordance with each vendor's type of service and the negative impact their service will have if the key performance indicators and service-level agreements are not met.
The frequency of these supplier performance reviews should be initially set between the business owner and the vendor. The review frequency shouldn't be changed if the vendor is not performing in accordance with expectations. Instead, action plans and incident tracking should be used for any performance issues between supplier reviews.
As a general rule of thumb, supplier performance review frequency should be done as follows:
Quarterly Reviews — Customer impacting and high-risk vendors
Semi-Annual Reviews — Back office, indirect customer-impacting vendors
Annual Reviews — IT, HR, facility, non-customer impacting vendors
How to implement supplier performance review software?
The first step towards implementing this process is to analyze your current situation. The purpose of this initial phase is to accurately determine where you stand, how your current supplier base is performing, and what necessary steps need to be taken in order to improve efficiency, build stronger vendor relationships, and streamline processes.
The next viable phase is to decide on a pilot project that will be able to satisfy all of your goals established in the previous step. Lastly, you will have to choose a procurement manager and/or team capable of seeing the project to fruition.
The supplier performance evaluation procedure is about reducing costs, increasing process efficiency and business performance, as well as driving improvements across the supply chain. To achieve this, your procurement team will need to follow these steps:
1. Establish the KPIs
The first phase is to create an actionable supplier evaluation plan that needs to include relevant vendor performance review KPIs. Among these performance indicators, we can include prices, costs, product quantity and quality, delivery times, payment terms, certifications, innovation, value additions, regulatory compliance, financial health, and more.
2. Classify Suppliers
Classify your suppliers based on similar categories such as geographical location or product type, among others.
3. Integrate and Centralize Data
The more supplier you have, the more important it is for you to bring all of your suppliers together under one roof. A supplier portal will achieve this goal.
4. Develop an Effective Evaluation Strategy
After choosing the desired evaluation frequency, it's time to move on to the method of evaluation. Some vendor performance review examples include supplier scorecards, contract management, and/or six sigma.
5. Collaborate With Suppliers for Reviews and Feedback
Constant collaboration with vendors can also bring out supply chain bottlenecks. It is essential to conduct regular feedback conversations to eliminate any such potential roadblocks.
6. Devise an Action Plan
Finally, create a feasible action plan for individual supplier relationships. This step will ensure closing the loop on your vendor performance review procedure by identifying any existing performance gaps and plugging them as quickly as possible.
How Prokuria can help, why is different?
Prokuria provides a whole suite of supplier management software tools that will help streamline and optimize your procurement processes. With them, you will be able to undergo supplier performance reviews that will keep track of your vendors' overall operations and efficiency throughout their entire lifetime.
With Porkuria, you will be able to classify your vendors into different tiers by using a combination of procedures such as Supplier Scorecards and Supplier Segmentation. Each of these methods will also help you in determining your vendors' efficiency, based on the KPIs or other standards you've selected.