By Patrick McConville
The key to successful vendor management is tracking performance data to help ensure your suppliers are continuing to serve your business. Vendor scorecards are an effective tool to measure vendor performance, supplier management processes, and even your ESG strategy.
In this article, we’ll go through how you can use vendor scorecards to collect the data you need to monitor performance, improve service level agreements, assess partnerships, and conduct ongoing due diligence on stakeholders.
What Are Vendor Scorecards?
Vendor scorecards, also called supplier scorecards, help businesses to keep track of supplier performance. That way, you can make sure doing business with them still benefits you and gives you a solid return on investment.
As part of the monitoring process, you may look at metrics like the quality of products or services delivered, production times, costs involved, delivery, and the overall supplier relationship.
When you weigh all these factors, you can easily see if there are any gaps in your supply chain, potential risks that need to be mitigated, and whether your suppliers are still meeting your expectations and business goals.
Vendor Scorecards as a Competitive Advantage
Vendor scorecards are not only a great way of benchmarking supplier performance. If done effectively, they can also give you a huge competitive advantage. Continuous monitoring and evaluation mean continuous improvement which can help you meet your business objectives and increase your bottom line.
As suppliers are a very important part of your business, assessing their performance data is a way to ensure you are working with the best suppliers and using the right resources. Doing so can even help you keep improving your systems, processes, and supplier relationships since you are constantly reviewing what is working and what is not, in terms of your risk management processes and overall vendor management.
In addition, tracking vendor performance gives you a chance to renegotiate terms or fees if you find a supplier is not performing as well as they promised. The supplier scorecard is a record of data collected and evidence of success or lack of performance which you can present to the vendor to support your negotiations.
You can use the information to decide when to cut ties with a supplier and replace them with a new vendor, or when you’ve found a third party you’d like to continue working with and want to strengthen your bonds with them.
By always asking yourself whether you’re working with the right suppliers who meet your needs, you’re building a more efficient and successful business.
3 Easy Steps to Creating a Supplier Scorecard
Your supplier scorecard is subjective to your business. The ideal scenario is to have one (or a few) standardized scorecard templates. This way, you can easily compare and monitor supplier performance and take corrective action as needed.
Step 1: Come Up With Performance Categories
Performance categories or key performance indicators (KPIs) are very important, as they’re the key areas that you’ll use to measure the success or failure of your supply chain. You can label the performance metrics so that you can clearly see their level of impact on your business.
You could use the following performance key metrics:
This can be split into different sections such as the return on investment, currency exchange rates/ fees, additional charges. When you monitor the cost of working with a supplier, you are able to measure this alongside other factors such as pricing competitiveness and whether the product or service still matches the quality and efficiency you expect to receive based on what you are paying.
The most important thing is how much value your suppliers offer your company. You can assess whether the quality is consistent and compare it against other suppliers by routinely reviewing the product or service or seeking customer or employee feedback.
Environmental, social and governance (ESG) compliance relates to environmental malpractice, human rights abuses, fraud, or corruption. Monitoring vendor activity helps to ensure that they are in line with your practices so that you are not risking reputational damage, failure to meet sustainability targets, or non-compliance with regulations by working with them.
Good communication can lead to open discussions about improving services, negotiating more favorable terms and fees and enhancing standards. A strong relationship paves the way for honest conversations about what’s going well and what you can both improve on.
If you have poor working relationships with suppliers or effective communication deteriorates over time, you may want to consider this in your overall scorecard program.
The quality of the communication between you and your suppliers can be fedback by other departments to the procurement team. You can measure communication by tracking how quickly the vendor responds to queries or issues, how easy they are to communicate with, whether they provide reliable information when requested, and how well they cooperate with you in situations such as the onboarding process or when an issue arises.
You can measure delivery performance based on factors such as efficiency, on-time delivery, security of the delivery (whether goods get lost or safely arrive in the right place), and the effectiveness of the packaging if they are supplying goods. Or, for service providers, the service or deliverable should meet SLAs, be measured against the requirements and hit baseline quality expectations.
You can assess whether it still makes sense to work with a supplier based on legal elements such as regulation and compliance.
Over time, international rules and regulations change as new trade agreements are introduced and retracted. This means that doing business with a supplier at one point in time may no longer be cost-effective due to trade barriers or tariffs. For instance, U.S. companies must conduct OFAC sanctions checks on all suppliers to ensure they are not working with blocked persons or entities.
Ongoing risk management and mitigation is a highly important metric to include in score cards. It helps your decision making when considering whether to continue vendor relationships and in planning business objectives.
More specifically, you can measure risk through processes like an RDC screening, which allows you to focus on preventing criminal infiltration through automated vendor checks. This notifies you of risk factors such as cybersecurity threats or ESG non-compliance.
You can also use security questionnaires to vet vendors and measure whether there are third party risks associated. Asking questions during your due diligence process such as “What is your data protection policy?” or “What is your security remediation plan?” can help you assess security standards.
Step 2: Evaluate Supplier Performance Based on the Metrics
You can get information from the documentation you gathered in your onboarding process, this should be kept in a centralized location for ease of reference. You’ll continue to collect updated information after the onboarding process which you can use to update your scorecard.
You can review the contracts you have with suppliers, invoices, and communications by auditing internal chat boxes or messaging software to get everything you need to measure performance. You can use different scoring strategies to measure your KPIs which could include the following:
You can use a grading system to benchmark your supplier performance for each category. However you label your categories, the most important thing to do is to create criteria in which you can explain what each grade means for each KPI.
For example, high performance for the “cost” KPI could mean that the supplier’s costs are competitive when compared with other suppliers and that your ROI is at an acceptable level based on what they charge.
Alternatively, you could ask questions under each KPI to help you work out whether the supplier is performing to an appropriate standard.
For example, for the “quality” KPI, you could ask questions such as: “Is the product quality of a high standard?” or “Is the quality consistent?”
Step 3: Continue to Monitor
You need to regularly update your vendor scorecards, since they help your business run smoothly and act more competitively.
A useful way to remind you and your procurement team to do ongoing monitoring is by setting up automatic workflows that remind relevant team members to follow up every six or 12 months for instance, depending on the supplier. This time period can be shortened depending on the risk level of your vendor. You may wish to set earlier reminders for suppliers who received higher risk scores in your risk assessments.