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.
Vendor performance evaluation basics
What is vendor performance evaluation?
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.
Build a better RFP using this quick and easy example. Download the template and get started now.
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.
To explore the RFP process in detail, download the ebook: The RFP process guide.
2. Build stronger, more innovative partnerships
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 of their 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
- Partnership mindset
- Complaint history
- 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.
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 Brown explains 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 conduct due 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.
This short and sweet fillable PDF template is a helpful template example that scores vendors on customer service, delivery, sales and support and overall satisfaction.
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.