A Quick and
Effective Guide
To Evaluating
Supplier
Performance
Introduction
Global products and international business spanning multiple suppliers and
myriad business rules lead to the pressing need to evaluate supplier
performance thoroughly. With companies going global and dabbling in a
plethora of products across different sectors, it becomes all the more
important to have a solid supplier performance evaluation plan in place. It
comes in handy for a variety of scenarios like the following:
 If your company is planning to go for a repeat purchase (when the end
customer is really happy and sends in additional similar orders)
 If your company is having multiple suppliers for the exact same category of
products (you must have gathered a good pool of suppliers over a period of
time) and wants to choose the best one for an upcoming big ticket order
 If your company is currently in the process of weeding out poor-performing
suppliers and adding more effective ones (which is paramount for creating
path-breaking products)
 If your company is initiating a regular (and often very important) cost-
benefit analysis
With customer expectations hitting the roof, suppliers play an integral role in
every organization's business environment. Supplier performance evaluation
stands for a focused, smart and effective plan of measuring, analyzing and
improving supplier performance and thereby reducing costs, increasing
efficiency, improving vendor relations, enhancing business performance,
preventing product issues and driving improvements in the supply chain.
Components of a Successful Supplier Evaluation Plan
Supplier performance evaluation is a process which requires companies to
follow a well chalked out plan incorporating all the key essential elements like
evaluation parameters, supplier classification, data collection, evaluation
method and feedback system and finally, an actionable improvement plan.
1. Establishing performance indicators
Irrespective of how sophisticated an evaluation approach is, the strategy will
not bear results if the important step of establishing key performance
indicators is neglected. When it comes to parameters of evaluation process,
following are the mandatory parameters:
 Price: Companies survive on negotiations and affordability is a big
influencer in supplier selection. Add multiple transactions to the equation,
and you get a big savings figure which when analyzed will help you calculate
savings earned over a period of time. Ordered price vs invoiced price is also
a good factor to evaluate a company's negotiation skills.
 Cost: This stands for the money spent on suppliers which encompasses the
actual invoiced cost along with the peripheral yet important costs associated
with delivery, storage, movement, packaging, disposal and final delivery of a
product.
Taking this wider range of factors into consideration will help
an organization get a deeper understanding of the total costs.
 Quantity: A quick look at the quantity placed and the final quantity received
will give a good idea about any variations. There might be situations where a
supplier might provide an ASN (Advanced Shipment Notification)
highlighting any variance between the quantity ordered by the buyer and
the quantity about to be shipped by the supplier (matched with the goods
receipt).
 Quality: Inspection checks are undertaken to look at tangible product
factors like defects, rejections, returns etc.
Percentage of incoming defects, MTBF (Mean Time between
Failure) and warranty claims are important elements of
consideration here.
 Service: Customer service can be gauged by looking into the different
modes of communication that are supported by the supplier and the overall
response time taken for resolving disputes/issues. A supplier's track record
is analyzed to understand how well he/she handles complaints or takes
corrective actions.
Additionally, companies can also look at a supplier's quality
management systems to gauge its preparedness / capabilities in
terms of incorporating continuous product improvement initiatives.
 Delivery: Timelines for delivering products as per the expectations set by
the buyer are good areas for analysis. Imagine a scenario where an
automaker is all set to get a special edition car ready for a launch at select
places. If the spare parts for the final product are not sent by the
supplier/manufacturer as per the timelines set, it can send the product
launch into a tizzy. Or worse, imagine the horror when a company dealing
with seasonal products is not able to push a high-demand product into the
market because of delivery delays.
 Payment methods/Payment terms: Business transactions are pretty
dynamic in nature and hence, suppliers that offer flexibility in terms of
multiple payment methods and agile payment terms score over rigid
suppliers with minimum options.
 Certifications: A supplier's qualification is backed by the various industry-
specific certifications and service grade documents that a supplier can boast
of. This factor will help companies understand a supplier's capabilities in a
better way.
 Value additions: This refers to a supplier's flexibility in responding to
changes, ability to solve issues, quality of account management, time taken
to respond to unforeseen requirement changes etc
 Innovation culture: In this ever changing business world, innovation plays a
major part in separating good suppliers from the rest. A culture seeped in
innovation ensures that suppliers are on their toes in responding smartly
and swiftly to changing business requirements.
A qualitative study of the suppliers' business processes or
practices is also a good indicator of innovation.
 Financial stability: Suppliers who stand in good stead financially are better
equipped to add best practices and invest in technology to come up with
better products. So if you spot one such supplier, our suggestion would be to
stick to them.
Sales, profitability and liquidity can be analyzed here.
 Contract compliance: Ultimately, suppliers that are compliant in their
business dealings and stick to terms mentioned in the contracts are good
people to work with. So here is definitely a point that shouldn't be missed.
The above areas are a good starting point to enable a wholesome supplier
performance evaluation. It will ensure suppliers become competent and
continue to remain so to be able to serve you better. This will in turn ensure
that you serve your end customers in a more holistic and improved fashion.
2. Classifying suppliers
Once you have zeroed in on the important parameters of evaluation, you
should classify your suppliers into different categories for better evaluation.
Either you could club suppliers based on their geographies or you could group
them based on the product types.
You could also segregate them based on the business
contribution level or criticality levels.
3. Centralizing and Integrating data
The next step is to have a centralized system where all the information
pertaining to suppliers is embedded. Since supplier information is present in
multiple business systems like procurement, finance, logistics, supply chain etc.
and these systems might have different rating scales too, it is important to
normalize the scales and also have a single source of truth for a more
wholesome analysis.
If you have too many suppliers and find it difficult to collect
information about every one of them, you can start off with a
specific category of suppliers and then move to the others.
You could also follow the Pareto approach, where 20% of suppliers usually
contributing to 80% of business can be evaluated on priority. The methods of
collecting information could be paper/web-based questionnaires, customer
satisfaction surveys, system extraction or site visits. Some organizations also
go for third party certifications and supplier evaluation tools like iPerform
which help provide a holistic view of supplier performance gaps.
4. Developing a solid evaluation approach
After the relevant information is collected, it is important to establish a suitable
evaluation approach. The first step is to select the evaluation period, which
could either be monthly, quarterly or yearly. Next is the actual method.
Companies incorporate multiple methods of evaluation. A few examples are:
 Supplier Scorecards where exhaustive supplier dashboards are created and
multiple supplier KPIs are analyzed in detail.
 Contract Management where contracts come equipped with all the SLAs
and key metrics that suppliers need to score well on.
 Six Sigma targeting process issues and defect elimination and Total Quality
Management systems focusing on involvement of each stakeholder in
process improvement initiatives also come in handy.
More such methods are being developed as we speak.
5. Collaborating with suppliers for review/feedback
As per The Supplier Performance Measurement Benchmarking Report by
Aberdeen (2002), 26.6% of organizations following a formalized performance
measurement program were able to drive supplier performance improvements
in the areas of quality, delivery, lead times and responsiveness. Also, 61%
enhanced performance can be generated through buyer-supplier collaboration
where the focus is on identifying areas of improvement. The review meetings
(focusing on performance metrics, past performance, action items, timelines,
required support etc.) can be conducted monthly, quarterly, half yearly or
yearly (depending upon the organization's needs). There are quite a few
organizations who pledge a portion of their savings generated from such
improvements back to the specific suppliers. This strategy acts as win-win
solution for both the parties.
6. Creating an actionable plan
Post the discussion, organizations can send across performance report cards to
suppliers, highlighting specific action points to plug any performance gaps.
Priorities can be set and timelines can be mentioned to ensure
that the action items are taken care of in a seamless fashion.
The aim should be to foster communication, devise feasible action items and
track measureable improvements.
It is also important to track the action items on a regular basis and revise
targets/goals if necessary. An organization should also ensure to recognize and
disengage with /reward a supplier (as the case might be) so that the evaluation
is fruitful.
Tapping into emerging technological aspects of
Supplier Evaluation
Companies that evaluate suppliers by a defined, quantifiable process have
better visibility into costs, performance, risks, quality etc. As the focus on
supplier performance evaluation increases, companies are investing in
emerging practices like automating supplier performance tracking for quicker
collection and analysis of information. Increased focus is seen on developing
supplier performance metrics and creating supplier heat maps for identifying
superior suppliers. Supplier ranking systems are being created, performance
benchmarks are developed and data exporting tools are designed. Companies
are also investing in customized dashboards with real time simulation features
embedded with instant score generation and KPI creation. Good supplier
evaluation tools also come equipped with drag-and-drop features which help in
creating quick stakeholder surveys and dashboards. A good mix of quantitative
and qualitative data help in aiding companies make informed decisions.
Organizations are increasingly moving towards standardizing evaluation
metrics to be in line with the organizational goals. As the next step, some
organizations are also looking to standardize KPIs based on product category.
Technological landscape is evolving to include advanced softwares which can
predict supplier performance based on historical data, aiding the supplier
selection process. This would help identify good and bad suppliers well in
advance, post which programs can be created by the organizations for assisting
lagging suppliers. Forward-focused views related to supplier KPIs can provide
trends and signal supply-related risks so companies can change their strategies
accordingly. Supplier heat maps help in such cases since they can quickly
highlight good and bad suppliers based on various parameters.
Supplier performance evaluation, when handled in the right manner through
the optimum combination of people, processes and technology, can work
wonders for an organization by helping it identify performance gaps and devise
strategies to plug them. Just like any other process, it is an ongoing activity
which will help companies reap benefits in the long run.
About us
Zycus is a leading global provider
of complete Source-to-Pay suite of
procurement performance
solutions. Our comprehensive
product portfolio includes
applications for both the strategic
and the operational aspects of
procurement - eProcurement,
eInvoicing, Spend Analysis,
eSourcing, Contract Management,
Supplier Management, Financial
Savings Management, Project
Management and Request
Management Our spirit of
innovation and our passion to help
procurement create greater
business impact are reflected
among the hundreds of
procurement solution
deployments that we have
undertaken over the years. We are
proud to have as our clients, some
of the best-of-breed companies
across verticals like
Manufacturing, Automotives,
Banking and Finance, Oil and Gas,
Food Processing, Electronics,
Telecommunications, Chemicals,
Health and Pharma, Education and
more.
AutoClass
iAnalyze
iSave
iCost
Financial Savings
Management
Spend
Analysis
iManage
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iRe est
eInvoicing
One
View
iSource
eSourcing
Procure-to-Pay
eProcurement
Sup
plier Network
Supplier
Management
Contract
Management
iSupplier
iPerform
iContract
Authoring
iContract
Repository
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