How to use a supplier scorecard: Guide, examples and best practices
How to use a supplier scorecard: Guide, examples and best practices
For procurement professionals, the job isn’t over when the contract is signed. In fact, it’s really just begun. Building vendor relationships is a key skill and managing vendor performance is crucial. For many, a supplier scorecard provides a way to bring objectivity to the vendor evaluation process.
Supplier scorecards enable businesses to quantify, track and manage a vendor’s performance. In this blog post, we’ll explore everything you need to know about supplier scorecards. First, we’ll establish the definition, purpose and use of supplier scorecards. Then, you’ll discover a step-by-step guide and templates to help you create your own scorecard. Finally, I’ll offer vendor scorecard best practices.
What is a supplier scorecard? Everything you need to know
Supplier scorecard definition
A supplier scorecard, also known as a vendor scorecard, is a document that allows a business to measure the performance and effectiveness of a vendor over time.
The scorecard breaks down supplier performance into categories and factors that can be quantified. For example, a supplier scorecard may include metrics to grade product quality, vendor delivery, cost and customer service.
What is the purpose of a supplier scorecard?
While there are a number of benefits associated with using supplier scorecards, the primary goal is to monitor and manage vendor performance. Consequently, using scorecards is a crucial element of the vendor evaluation process and vendor management practice.
Scorecards are a key tool for vendor management. The data gathered from the document enables organizations to maximize return on investment (ROI) and minimize risk. Further, tracking vendor performance improves outcomes by enabling businesses to:
Ensure buyers and vendors are working to achieve the same goals
Calculate total procurement cost of a product or service
Identify any gaps or supply chain risks that can be mitigated proactively
When is a supplier scorecard used in the procurement process?
Following the RFP process, final vendor selection and contracting, the procurement team onboards the new vendor. Ideally, the onboarding process includes an overview of the vendor evaluation process. It’s a good idea to establish and agree upon vendor-specific evaluation metrics at this time. Formalize these key performance indicators (KPIs) early while negotiations and contract details are fresh in mind.
After onboarding, most businesses conduct vendor evaluations on a quarterly basis. This generally includes the basic supplier scorecard and due diligence questionnaire (DDQ). Then, more detailed annual review compiles and explores data to find any insights or opportunities to optimize the relationship.
Who uses the scorecard?
Generally, strategic sourcing managers and procurement managers are the primary administrators of the supplier scorecard. However, stakeholders from other areas of the business may contribute to the process. In addition, the scorecards are used to report vendor value and supply chain health to executives within the business.
How to create a supplier scorecard
The construction of your supplier scorecard will depend on the type of engagement. However, it’s important to make sure that your scorecard template format is versatile enough to be used for most vendors. That way, you can compare performance across multiple categories and avoid keeping track of dozens of different templates.
Throughout the process, keep it as simple as possible. Remember, each scorecard represents an investment of time and effort, both for you and your stakeholders. Ideally, you want to find the perfect balance so the scorecard is easy to complete but also gives an accurate picture of the supplier performance. For most, the scorecard is a way to optimize the relationship, not overhaul it completely.
3 steps to creating your own vendor scorecard
1. Gather guiding documents
First, collect your original RFP discovery documents, the vendor’s RFP response and the contract. Put the research that went into these documents to good use in guiding your evaluation. If you used weighted scoring for your RFP, look at which factors were given the most importance. Then, explore the contract to see if it establishes any service level agreements (SLAs). Make a list of these items as you find them.
2. Determine performance categories and priorities
Using the list you’ve just created, consider which factors determine the success of your project. For each item, ask yourself: If the vendor doesn’t perform this function well, will it cause problems? Does this impact the larger business?
After answering these questions, select the most important factors and group them together by category. Generally, a supplier scorecard will include at least three categories that include quality, delivery and service. Within each of these categories, try to limit it to three measurable items to keep things simple.
3. Apply your grading scale
Now that you know what you’re going to track, you have to decide how to grade. If you’re just starting with vendor evaluations, you may consider focusing on yes or no questions. Were deliveries on time? Were they accurate? Is the quality acceptable? Sometimes, questions are more nuanced. For instance, were interactions with the vendor professional and courteous? In this case, a scale from one to five may be more appropriate.
Regardless of how you choose to score vendors, it’s important to define what constitutes a good score and what would earn a bad score. These definitions help to ensure that each reviewer rates their interactions using the same criteria.
This template from the Purchasing Power Procurement blog uses five primary categories to measure vendor performance. These factors include cost and contract, innovation, quality, support and delivery. The template is easy to follow and allows you to assign a weight to each category.
Procurement publication Supply Chain Quarterly’s article on supplier scorecards provides examples of categories and metrics. In addition, the publication provides a helpful vendor scorecard example that focuses on how vendors align with business goals.
This presentation from the University of California explores sourcing analytics, including how to create and use vendor scorecards. In addition, the document offers definitions, guidelines and examples.
Northrop Grumman uses a highly sophisticated supplier scorecard. Consequently, they provide a helpful guide with everything a vendor or evaluator needs to know. This guide provides a rubric for scoring for each evaluated category and sub-category.
Vendor scorecard best practices
Start simple and develop your scorecard over time
I’ve mentioned it before in this article, but it bears repeating: if you are implementing a new vendor evaluation process, keep simple. Certainly, it’s easy to get overwhelmed by the amount of data that could be collected and analyzed. However, it’s better to start small and build rather than taking on too much.
Be transparent with your vendor contacts
Vendor management is much more than simply tracking metrics, it should be about growing a partnership and building a relationship. So, be as clear as possible with your vendors. Make sure they understand how they are being graded. Further, explain what steps you will take if your expectations aren’t met.
Scale your evaluations according to the vendor’s importance to your business
Don’t make extra work for yourself. The supplier who provides the office coffee doesn’t need to be measured by the same standards as the one who delivers a key component to your product. Certainly both are important, but a supplier scorecard probably isn’t necessary for all of your contacts.
Ensure data accuracy
Unfortunately, supplier scorecards are only as reliable as the data that’s entered into them. As procurement continues to undergo digital transformation, the adoption of tools like vendor management systems, RFP software and e-procurement grows. These systems integrate with one another and deliver real-time vendor data and insights. While there is no doubt that this technology will change the way procurement operates in the future, most businesses aren’t quite there yet.
To prepare for the future, explore insights and advice from procurement experts in the Future of RFPs ebook.
Data entry in your supplier scorecards should be done regularly. If only performed quarterly, immediately before the report is due, it will rely on memory. Therefore, it will likely be less accurate and subsequently less useful.
Engage internal stakeholders
Often, you, the buyer or procurement professional, aren’t the person within the business most engaged with the vendor on an ongoing basis. An article from Supply Chain Management Review puts it this way:
“Scorecards should not ignore the voices of internal customers. Accordingly, you may not have an accurate picture of how a vendor is performing. Managers at manufacturing plants, warehouses, distribution centers, and logistics hubs are often perfectly positioned to evaluate suppliers’ day-to-day performance.”
Indeed, department heads, system users and other internal stakeholders regularly interact with vendors. So, it makes sense to bring them into the process and engage to contribute to supplier scorecards.
Vendor management is a complex practice. However, supplier scorecards simplify the process by delivering objectivity, communicating expectations and providing a framework for evaluating vendor value.