The ultimate blueprint for an effective vendor evaluation system

If vendors are causing problems in your purchasing, follow this blueprint for an effective vendor evaluation system and build a healthy vendor roster.

Three people meeting for vendor evaluation system

You know you need to keep a healthy vendor roster, but how deep can you go in vendor evaluation without interrupting the streamlined purchasing process you have worked so hard to develop? The answer is to create a vendor evaluation system which:

  • Effectively monitors the ups, downs and relative consistency of vendor performance
  • Asks the right questions to generate meaningful vendor performance insight
  • And becomes an integrated part of your purchasing process

The objective of a vendor evaluation system

As your business grows, more vendors are added and handled by an increasing number of purchasing employees. The challenge of identifying and nurturing relationships with the right vendors therefore gets increasingly complex.

You have to both safeguard the company from destructive vendor relationships while also identifying and nurturing relationships with those vendors who add value and help you grow.

The prospect of implementing a new procedure can be daunting, so we’ve developed three easy steps to create a vendor evaluation system to help you do what you need to do with minimum pain or fuss.

Step 1. Organise your vendor roster

Stick figures with different colours and letters

Organisation is the first step in developing an effective vendor evaluation system.

This breaks down into some simple administrative tasks:

Categorise vendors by description. For example, if your company plans events, you work with caterers, performers, florists, speakers, photographers and venues. None of these categories can be compared to each other because they don’t contribute to the final product, the event, in the same way. Florists and balloon suppliers, however, could both be considered ‘decoration suppliers’ and comparing could prove useful when you have to pull off a budget event or a quick turnaround.

The categories you designate should be specific to your business and enable purchasing employees to quickly discern which vendors supply which products or services. It will also serve the evaluation process so you don’t compare apples to oranges.

Rank vendors within categories. Any purchasing employee can instantly differentiate critical vendors who have come through for them and those who have not. However, you don’t want employee after employee to learn through trial and error. Ranking:

  • Enables you to address changes in vendor relationships following a review
  • Communicates to all employees the level of involvement vendors have in your business

Prior to implementing a vendor evaluation system, you can look to the amount of business employees are directing to certain vendors and place them under one of the following ranks:

  • Critical. These vendors handle the majority of your business because they consistently come through for you.
  • Second string. These vendors fall second to your critical vendors. It may be simple reasons such as higher costs. They are often looked to for comparison estimates giving them the opportunity to become critical.
  • Waiting in the wings. These vendors may have performance issues or not offer the same type of value to your business. They remain on your roster because there will be times when they have the product or service that serves a very specific need or circumstance.
  • No longer an asset. These vendors have performance issues which have not been remedied and offer little value in their products and services. They might remain on a roster so as to communicate to employees that they are not to be used.

You can use colours, numbers, letters or words to help your employees identify which level a vendor is operating at within your vendor network. It’s important to both define and communicate what each rank means to your business so you can assign vendors appropriately based on your evaluations and adapt purchasing behaviour.

Step 2. Establish standards and a way to track performance

Checkmark and boxes

Tracking vendor performance requires all-hands-on-deck so that poor or remarkable performance isn’t overlooked. You need the employees who are conducting transactions to provide first-hand feedback through:

  • Surveys. Put together a survey using questions based on key performance indicators and multiple choice ratings for easy feedback.
  • Scorecards. You can also rate each question on a numeric scale to get a composite vendor score by which to gauge performance.

A survey or scorecard will ask specific questions about a transaction to give insight into the vendor’s performance. These questions might include:

  • Were the representatives friendly, helpful and informed?
  • Are invoices and receipts accurate and clear?
  • Did the invoice match the purchase order?
  • Were orders delivered on time and products undamaged?
  • Do they appear knowledgeable in our industry?
  • Did they seem to understand our business?
  • Do they offer solutions to obstacles?
  • Do they come up with new ways they can serve our business?
  • Did the vendor offer the lowest price?
  • Was the lead time reasonable for what they provide and for our needs?
  • Were any items damaged?
  • Was the quality of the purchase in line with what we paid for?
  • Did they have what we needed?
  • Did you have to compromise on what you needed?

This list is a start, but you also need to develop questions specific to your business and vendors. Then, following a number of transactions with a vendor, you will be able to base decisions on indicators like the number of:

  • Quality issues with a product or service
  • Delivery delays
  • Products damaged on arrival
  • Times a vendors provided the best cost
  • Times vendors came across as knowledgeable about your business and needs

These indicators provide valuable insight into what each of the vendors in your network add to your business. With this information in hand, you can move on to maintaining a healthy vendor roster.

Step 3. Maintain your vendor evaluation system

Tick mark and cross mark on a scale

Organising your roster and putting criteria in place isn’t enough. If your surveys and scorecards are generating valuable information, you need to finish the process by ensuring that information is regularly reviewed and acted upon. To do this:

Insert guidelines. Vendor evaluation is about creating an orchestrated cycle. It’s important to implement a timeline of when employees should submit feedback following a transaction and when that feedback will be reviewed whether monthly, quarterly or otherwise.

It’s also worth implementing trigger metrics such as the number of poor indicators that warrant a special evaluation or the number of positive indicators that should promote a vendor. This way, employees have a way to recognise when vendors fail to meet or exceed standards.

Elect an auditor. Appoint an individual employee, small team, (or take it on yourself if necessary) to evaluate the data from your surveys or scorecards effectively and act on the results. The auditor is tasked with seeing the big picture and has the power to:

  • Promote a vendor based on improved performance or an increase in involvement with your business
  • Demote a vendor based on continued reports of detracting value from your company through poor performance
  • Initiate special evaluations when your employees experience excessive delivery delays, poor customer service or a spike in the price of a product from a critical vendor.

The benefit of appointing a single employee or team is that they can exercise judgment about whether or not a change to the roster should be made based on both the feedback and the value the vendor has provided to your business.

Use a cloud-based tool. Store feedback and results in a cloud-based tool to ensure your evaluation system is both accessible and efficient. It makes for easy review and easy communication with employees who can adapt their purchasing behaviour to suit what your vendor roster tells them.

The benefit of an effective vendor evaluation system is that the entire department can easily recognise which vendors are critical to the success of your business and nurture the business relationship with those companies.

However, always keep in mind that the value added to your company by a vendor also depends on the quality of your purchasing process and negotiation skills. You want to ensure your employees add as much value to your company’s relationship with vendors as you expect the vendors to add to your business.

(Hat tip to Geoffrey Franklin for the photo)

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