Vendor performance evaluation guide: Tips, tools and resources
Vendor performance evaluation guide: Tips, tools and resources
In any procurement team, measurement, evaluation and optimization are at the heart of success. So, it’s important to ask the question: How are things going with your vendor partners — really? Luckily, the vendor performance evaluation process helps answer this question with definitive quantitative data.
So, if you find yourself asking common questions about vendor performance, like ‘Are my vendors delivering the expected ROI?’ and ‘Are my vendors providing deeper value as partners?’, you’ve come to the right place.
In this post, we’ll explore the definition of vendor performance and why evaluating it is an important part of procurement and strategic sourcing. Next, we’ll share tips for building an effective vendor review process. And finally, we’ll offer an example of a vendor evaluation form.
A vendor performance evaluation, also called a vendor evaluation form or a vendor review, is a scorecard-style document and process used to measure the success of an existing supplier relationship.
The importance of vendor performance management
Essentially, the purpose of the vendor performance evaluation process is to ensure you receive the best possible value for your organization. While this is a core function of the procurement team, vendor performance management has a wide-reaching impact.
Indeed, it makes no difference what industry you’re in. From small nonprofits to large international corporations, vendors play a key role in success. Thriving organizations treat them accordingly — as key contributors who share a stake in growth.
3 big benefits of regular vendor performance evaluations
1. Establish benchmarks and goals from beginning to end
Vendor performance management is a critical aspect of strategic sourcing. Ideally, current benchmarks, predicted outcomes and strategic goals should be an integral part of your vendor relationship from the beginning. Accordingly, call them out in the background section of your initial request for proposal (RFP) when you kick off your sourcing event.
Then, with vendor performance management, you can track progress and measure success at preset intervals. Using this strategy, every deliverable is agreed to and reinforced at multiple stages of the RFP process. Afterall, your organization has invested precious time and resources into choosing the ideal vendor. Vendor reviews close the loop, verifying that you’re getting what you need and want out of the investment.
The purpose of vendor performance management mirrors the purpose of internal performance reviews. As employees, we’re most likely to improve when we identify our shortcomings. Likewise, knowing where we thrive and which skills are most valued by our business can motivate us to new heights. In the same way, vendor evaluation can lay the groundwork for a stronger partnership.
Alternatively, without a vendor review program, you may fall behind on current trends, notice a lackluster performance and find a general lack of accountability.
As Joanne Spencer, Gartner Senior Director Analyst, explains:
“Relationships with strategic vendors are increasingly key to business performance. When managed badly, large strategic vendors can become complacent, slow moving and intractable.”
With regularly-timed reviews, you’ll be on the same page with your vendors. Indeed, you can share results, provide feedback and collaborate on ideas for adding even more value.
3. Support cost avoidance and cost reduction efforts
Vendor performance management is also a key part of smart financial management. Specifically, a vendor review program can help you with both cost avoidance and cost reduction.
Not all vendor relationships can last forever. Indeed, it’s common for organizations to outgrow a vendor or to find new ways to solve problems that make a current relationship obsolete. In this case, regular vendor performance evaluations help identify partnerships that have run their course.
Similarly, staying up-to-date on the latest vendor capabilities, integrations and innovations is always a good idea. Then, when a new challenge arises, you can review existing resources and supplier solutions to see if there’s an opportunity to work with a proven partner.
Often, vendors offer solutions that serve a number of different use cases across different departments. By expanding your engagement, you reduce or remove procurement and onboarding costs and can increase scope while negotiating for a volume discount.
How to create a vendor review program
Decide what KPIs you want to measure
The first step of effective vendor performance reviews is establishing key performance indicators (KPIs).
Your organization’s unique processes and needs dictate what you measure. As Carolyn Brown in Inc. explains,
“For a business owner who is looking for a shipping company, the biggest concerns might revolve around what is that supplier’s on time delivery track record, how many trucks they own, how many accidents have their drivers reported and what certifications do they hold.”
Let’s use a financial services organization to illustrate. When they evaluate third-party software it’s a component oftheir financial wellness program. Their vendor review categories should include data security, uptime, effectiveness in feature delivery and more.
No matter what type of vendor you’re evaluating, there are a few key qualities that you should look for:
Value for your investment (ROI)
Commitment to growth and feedback
Financial and operational stability
In addition to this, your quarterly or biannual vendor performance evaluations are also a good time to check in on your vendor’s progress with their sustainability, supplier diversity and risk management initiatives.
Ask these questions when reviewing vendors
Is the product or service what you were promised?
In the simplest terms, is your vendor meeting your needs and delivering services to the level you expect? Forbes explains,
“You will ask yourself: ‘Has the supplier provided the goods or service to the specified level?’ This can be measured in terms of defects per part or rejected parts per order or through some either technically defined amount. A more advanced practice is to measure a variety of value-adding activities that the business wishes to encourage. Would you like your suppliers to improve their customer service to your clients? Build in customer satisfaction into the contracts and make payment partly based upon review.”
Also as part of quality, consider company size accommodation. Is your vendor the right size for your organization and its needs? Don’t forget compliance and legal adherence. Is your vendor maintaining any required certifications or regulatory requirements?
Does the vendor meet deadlines?
Think about delivery this way: You can order the most delicious dish at the finest restaurant in town, but if it never arrives at your table or arrives at your table cold, quality is irrelevant because you’re hungry and disappointed. Delivery matters to your business too.
How are the products or services being delivered? From a manufacturing perspective, this includes product design, material quality and final outputs. Service-based providers can be evaluated on criteria like professionalism, consistency and other specific metrics.
Does the vendor deliver the correct product in the correct quantities and to the correct location? From a service-based standpoint, are the services to spec, meeting the request and on the established timeline? Ultimately, how is your vendor meeting your demands?
Is the vendor friendly, understanding and responsive?
When you invest in something, you want the cost to be worth it. But, you also want the customer service to match.
When you call or email, do you receive a friendly, prompt, helpful and informed reply?
If you’re reaching out to place an order, how streamlined is the order process?
When you’re making a change request, is it received and acted upon quickly?
How dedicated is your account management team or liaison?
Does your vendor do little things to go above and beyond to create a memorable, positive partnership?
Even when it’s smooth sailing with your supplier, are they actively looking for ways to help your business achieve its goals? For example, if you’re evaluating a software vendor, when was the last time your customer success manager introduced you to a new feature? Are they knowledgeable about the very latest in your industry? All of these questions will help you form the larger picture of the health of your supplier relationship.
Does the relationship have a future?
Even with ideal vendors, things sometimes go wrong. We’re all human and everyone has critical feedback sometimes. It can be hard to hear, but it’s what your supplier does with your feedback that can make or break the relationship. When you come across an issue with your vendor, do they understand it, receive the feedback and do their best to turn it into a positive experience?
It is a lot easier to collaborate, communicate and grow from roadblocks together than it is to try to switch vendors. Also, it is likely more cost effective to maintain an existing relationship rather than start all over.
Beyond being receptive to feedback, it’s important that your vendor shares your vision for the future of your organization. Are they able to adapt and scale to serve as your business grows and your needs change?
Establish your supplier performance scorecard
It may be tempting to give a vendor the boot because their shipment was late last month — but one recent mistake shouldn’t cancel out 11 straight months of right-on-time delivery. Conversely, a rockstar customer service team can’t make up for frequent downtime in a software service your clients rely on. This is why a supplier scorecard is important. To establish equity and ensure a diplomatic, fair evaluation. Your scorecard can take many forms. Again, Carolyn Brownexplains in her Inc. article,
“You can craft a survey where you ask your own employees to answer questions and to rate suppliers and vendors. Review how many corrective actions you had to issue a supplier or vendor, how many products you had to scrap or return because the supplier or vendor failed to meet specifications, or how many customer complaints you received due to a bad part or service from a vendor.”
Select your vendor performance management system
Just as important as the metrics themselves are the method in which you’re gathering them.Workplace inefficiency comes with a hefty price tag, so resist the urge to settle into the dangerous ‘this is the way we’ve always done it’ trap. The way in which you conductdue diligence can make or break the performance review.
You’ll need a system that is secure, streamlined and organized. Evaluation data can be sensitive and needs to be stored safely. The system you use should be simple and allow for collaboration, paving the way for accurate and timely responses from your performance evaluation team.
You’ll want to choose a method that allows you to create a side-by-side historical supplier scorecard comparison too. If a company received a 10 in quality last year, but just a five in your latest review, this change in score should trigger a crucial conversation. Similarly, if a supplier was on thin ice during their last evaluation, but they have taken steps to correct and improve their service, your organization can maintain the relationship with confidence.
If you’re still using hard-copy binders and forms, forwarding version after version of an Excel spreadsheet or chasing down team members for their responses, consider a secure, innovative cloud-based solution.
Sample vendor review templates
Creating a vendor review template from scratch may seem intimidating. Luckily, we’ve gathered a few real-life examples to help speed up the process.
Remember, in addition to improving the RFP process, you can use an RFP management platform for any information gathering need. For instance, you can create vendor profiles to proactively gather supplier updates. Or, you can streamline the vendor performance evaluation process with vendor self-reviews and collaborative internal reviews that engage stakeholders.
With more categories to consider, this performance evaluation template is slightly more in depth. In addition, it provides a helpful guide to scoring each vendor. Additionally, the form provides a place for vendor comments. This enables the process to be more collaborative while creating a complete picture for your records.
It can be helpful to have vendors assess themselves to evaluate their understanding of your organization’s needs. In this example, vendors must evaluate their sustainability performance.
Concluding the vendor performance evaluation process: Act on the results
When your evaluations are complete, it’s time to make a game plan for your next steps. So, based on the vendor scoring, how do you decide which vendor relationships to maintain and which to change?
If the data indicates that there is significant room for improvement, it’s time to decide. Consider sending out a request for information (RFI) to your current vendor as well as their competitors. This is a good way to gather preliminary information, while also giving your existing supplier the opportunity to address your concerns. After evaluating the results, it may be time to end the contract and select a new vendor that better fits your needs.
If the vendor review shows that things are going well, report the good news. Thank your vendor for serving you with excellence. Invite them to join you in thinking strategically about how you can take things to new heights. And carry on with confidence.
Originally published on October 3, 2019 — Updated December 16, 2021