In order to better monitor supplier compliance with contractual agreements, procurement departments use vendor rating. Vendor rating is the process whereby organisations evaluate their suppliers’ performance, such as reliability of delivery, price reliability, and communication. Based on the vendor rating results, supplier performance can be adjusted in good time and you can, for example, decide to enter into a contract with a different supplier.
In this blog you can read how a vendor rating works, what indicators can be used to evaluate suppliers, what steps you should take, and what the results are. We also give a number of practical examples.
Vendor rating… what am I to measure?
When you start with vendor rating, you are going to evaluate suppliers in terms of various indicators. For example, a supplier can be evaluated according to quantitative and qualitative indicators. Information about price agreements, contracts, etc. can be retrieved from ERP systems, the spend analysis or contract management software. This information tells you something about how well the supplier is fulfilling his agreements.
It is difficult to ascertain certain factors using software because they are based on the experiences and opinions of the employees who have worked together with the supplier in question. You can compile these factors by means of surveys among employees in the organisation. Experience shows that employees are more than willing to cooperate with a survey of this kind. Because buyers adapt their procurement policy and preferred suppliers based on the survey results, the employees who must ultimately work with purchased goods or services directly benefit from this.
In these surveys, you ask employees to award suppliers a score on the basis of such indicators as:
- Delivery time
- Response time
- Returns policy
By periodically repeating these surveys, you get a good picture of the performance of each supplier over the whole year.
Vendor rating method
Although every organisation evaluates its suppliers again according to other factors, there is a phased plan you can follow in order to apply vendor rating in your organisation.
- Define the goal you aim to achieve using vendor rating. You can read more about this in the line ‘Results of vendor rating’.
- Use vendor rating software to run your vendor ratings in an efficient and structured way.
- Determine which suppliers you intend to include in your vendor rating based on, for example, the ABC analysis or Kraljic Matrix.
- Determine the performance indicators by which you will evaluate your suppliers, and use objective and subjective information sources.
Vendor rating must be carried out periodically to get as complete and objective a picture as possible. Many organisations choose, for example, to perform a vendor rating among their employees every quarter so that they can get a good impression of a specific supplier’s performance at the end of the year.
Based on these results, contract performances are adjusted. One may decide to end the partnership with a supplier, or to negotiate to arrive at better price and quality agreements.
Take a look at these vendor rating best practices to successfully implement vendor rating in your organisation.
Which suppliers should I include in my vendor rating?
When your think that an average organisation can easily have to deal with 500 suppliers, you can well imagine that it is not feasible to include every supplier in a vendor rating.
Before starting your vendor rating, make a selection of the suppliers you are going to evaluate. You can do this on the basis of various analyses. The suppliers who may be interesting to include in a vendor rating could be:
- Suppliers with strategic products: these are products that are indispensable for your organisation and have a major influence on the operating result. In addition, these products have a high procurement risk; this means that they may, for example, be scarce commodities or they may emanate from a politically unstable region. Because these products are indispensable in the final production of your product or service, it is essential to include them in your vendor rating.
- Suppliers who account for a large proportion of the procurement turnover: these are the ‘Category A’ suppliers. Ideally, 20% of the suppliers account for 80% of an organisation’s procurement turnover. Like suppliers of strategic products, these are very important suppliers for your organisation. With a vendor rating you can check whether the quality is adequate, whether the suppliers are keeping to price agreements, and what experiences employees have with a particular supplier.
Results of vendor rating
Organisations use vendor rating to achieve a variety of objectives. Ultimately, the periodic implementation of a vendor rating provides feedback form all the organisation’s divisions, and a complete and objective picture of suppliers’ performances.
This means that the following results can be achieved with vendor rating:
- Better communication with suppliers
- A better relationship between the principal and the supplier
- A performance-oriented principal-supplier culture
For many procurement departments, the ultimate goal is to save on costs and to arrive at better contractual agreements.
Vendor rating per branch
Although vendor rating process is, in principle, organised in the same way for each organisation, branches have different objectives in mind when they use vendor rating.
The healthcare sector, for example, is characterised by its large workforce and the irregular shifts of its employees. Vendor rating is used in the healthcare sector to collect feedback from all the parts of the organisation. Thanks to the surveys that can be set up and shared in the VendorLink software, you can give employees the opportunity to provide feedback at a time convenient to them. This feedback provides buyers with insight into how suppliers are performing and whether a contract should be renewed or, conversely, cancelled.
In addition, ISO 15189 prescribes that medical and clinical laboratories have to develop quality management systems. By carrying out a vendor rating, a healthcare institution complies with the ISO norm.
Vendor rating software
To properly facilitate the vendor rating process, a software solution is essential. VendorLink’s vendor rating software offers you the possibility to carry out vendor rating periodically and automatically. In the VendorLink software you can compose your own surveys and share them with employees. Click for more information on our vendor rating software solution.