Supplier Performance Management: A Step-By-Step Guide To Evaluating A Supplier’s Performance

Many companies rely heavily on their supplier’s performance for various aspects of their business process. Whether your suppliers provide materials, labor, equipment, or services, it’s likely that they play a critical role in your business’s overall success. With so much on the line, you must depend on your supplier’s ability to be timely, deliver high quality, maintain a professional relationship and keep your best interests in mind.

If your business’s day-to-day operations involve a supplier, it’s important to prequalify and select the right man for the project initially, but also to continuously evaluate their performance throughout the partnership. Through the evaluation of a supplier’s performance, companies can ensure and maintain the best service while eliminating suppliers who fail to comply with performance requirements.   

Supplier performance management is a business practice that is used to measure, analyze, and manage the supplier’s performance in an effort to cut costs, alleviate risks, and drive continuous improvement for both yours and your supplier’s teams.

The businesses that have the best luck with suppliers have a formalized system in place to track and evaluate their supplier’s performance. Some might even credit the smooth operation and profitability of their companies to their supplier evaluation process.

Step One: Establish An Evaluation Criteria

It’s important to determine what characteristics your suppliers need to have, demonstrate, and maintain in order to continue doing business with your company. From the start of the relationship, they should be entirely aware of these characteristics and know that they will be regularly (monthly, quarterly, annually) evaluated based on them.  

Your business’s industry, processes, and specific needs will dictate the criteria used to evaluate the performance of your suppliers. Your criteria may include:

Accuracy

Has your supplier delivered the right goods or provided the right services? How often do you come across product flaws or service mistakes? If the success of your business hinges on the accuracy of your suppliers, this is an important factor to evaluate on.

Timeliness

Does your supplier do their very best to stick to your timeline? Now sure, depending on the industry, certain things might come up that are out of your supplier’s control. But if a supplier is frequently late with no explanation, it’s your business that suffers.

Responsiveness

Does your supplier respond to your inquiries or concerns? When you make an order, have a question, or need to address a concern, are you able to get in direct contact with a representative? Believe it or not, a supplier who prioritizes responsiveness can save you a lot of stress!

Capability and Flexibility

Can you depend on your supplier to meet and accommodate your needs on a regular and/or long-term basis? It seems like a no-brainer, but you’ll really want to ensure your supplier can meet your needs.

Quality Control

Does the supplier consistently provide you with the best quality goods and service? How is the service? Consider the owner, sales rep, delivery drivers, and accounts receivable. Are they people you enjoy and are comfortable doing business with?

You may have noticed we left a somewhat important factor off the list–cost. While cost is a big factor in choosing and evaluating a supplier, it should not be a factor you weigh the heaviest on. Instead, focus on the factors we’ve listed. Keep in mind, a supplier can have the lowest price but the lowest quality of work, too.

Once you’ve established criteria for evaluation, you can proceed with your evaluation process.  

Step Two: Classify Suppliers For Evaluation

If your supply chain is made up of multiple suppliers, each of whom covers a different aspect of your business process or has more of an influence on your business than another, it wouldn’t make sense to evaluate them all the same way.

Decide how to classify your suppliers and then evaluate them according to the effect they have on your business process. By divvying up suppliers into two categories, such as critical and non-critical or primary and secondary, you can devote more time to measuring the performance of your critical suppliers.

Step Three: Determine Roles In The Evaluation Process

Though it will depend on the resources you have available to allocate towards the process–this classification step will help you determine who in your organization should be responsible for evaluating which supplier. There likely isn’t a single member of your organization who gets the full picture of each supplier’s performance. Those who work closest to the supplier should complete the evaluation. From there, who will be responsible for reviewing and making decisions based on the evaluation?

Step Four: Lay Down A Method For Evaluation

There are a few techniques businesses will use for rating a supplier’s performance. Techniques include evaluation forms, surveys, system metrics, and software applications.

You might consider crafting a survey that asks your own employees to rate and answer questions pertaining to the supplier. You can review how many corrective actions and/ or warnings you had to issue a supplier. Look at how many products you had to scrap or return because the supplier failed to meet specifications. You may also choose to monitor suppliers through a periodical auditing process.

The bottom line is that you need to determine a method that will allow you to generate reports throughout the course of the relationship.

Step Five: Know When To Say Goodbye

As you monitor a supplier’s performance, you have to decide when to praise them and when to issue a red flag or part ways.

Be sure to show appreciation for a job well done. Continue to do business with suppliers who consistently demonstrate excellent performance.

If you have a supplier you feel isn’t performing to their full potential, or to your expectations, raise a red flag, issue a warning–whatever you feel is necessary. By giving a warning, you give the supplier an opportunity to correct the problem. Remember, it’s not about reviewing your supplier’s performance as much as it’s about helping improve your partnership.

Finally, there’s no reason to tolerate ongoing bad service or a partnership that isn’t mutually beneficial. You may have to let go of a supplier that is underperforming or a bad fit–that’s ok!

Now, of course, a prerequisite to evaluating your suppliers is prequalifying and selecting them. Prequalify the right supplier from the get-go, and you’ll mitigate the risk of selecting the wrong supplier.

See our Contractors Guide to Pre-Qualifying Suppliers for more on how a contractor can establish a pre-qualification process that leads them to the right supplier for their project.   

At the end of the day, the relationship you have with your suppliers is a business partnership. If both parties are working to make sure the partnership is a success, it will be!

Have questions? We’d be happy to answer them from a supplier perspective. Contact us here!