Evaluating vendors on performance can be a difficult task. Companies often rely on the subjective experience of stakeholders to determine whether vendors are providing good value, sufficient service, and quality products. But subjective experiences may cloud the objective truth about a vendor’s performance.
When deciding which vendors to use and how to negotiate with them, it’s essential to understand their reliability, cost-effectiveness, customer service, turnaround times, and the quality of materials they offer. Without objective data, decision-makers might choose based on familiarity or ease of implementation rather than considering the bigger picture.
Vendor scorecards offer a solution to the challenges of objectively evaluating vendors. With a vendor scorecard, users document the quantifiable aspects of working with a supplier. This data is invaluable in determining which vendors should earn one’s business, how to deal with current vendor issues, and how to improve supplier relationships for the best mutual outcomes.
This article covers everything to know when building an effective vendor scorecard program. It addresses all essential aspects of building a launching a program, including:
- What vendor scorecards are
- Why vendor scorecards are important for procurement success
- How vendor scorecards work
- The categories tracked in vendor scorecards
- The best metrics for building vendor scorecards
- All steps involved in creating a vendor scorecard
What are vendor scorecards?
A vendor scorecard is a vendor management tool used to rate the performance of your vendor partners. The data collected in the scorecard is instrumental for evaluating the effectiveness of existing vendors and identifying areas needing improvement. Users can also use this data to inform decisions on potential partnerships.
Some common metrics tracked using vendor scorecards include the following:
- Product or service quality
- Transaction reliability
- Contract compliance
- Total cost of ownership
- Operational efficiency
The criteria used to evaluate your vendors are derived from the objectives and business goals of your company. For instance, a company aiming for better contract compliance uses criteria such as the percentage of compliant transactions, security profiles, and exception rates to determine vendor scores.
How do vendor scorecards work?
Vendor scorecards contain objective criteria for assessing vendor performance data against predetermined standards. Completing a vendor scorecard yields a numerical score based on actual performance. This objective measure allows procurement professionals to make better decisions when selecting, renewing, or managing vendor relationships.
The scorecard should include a variety of criteria that align with the company’s specific objectives. Defining these standards in advance is essential to ensure accurate evaluations of each vendor. Vendors who achieve the highest scores effectively adhere to measured policies and procedures, such as offering high-quality products, meeting pricing requirements, or demonstrating ethical business practices.
Procurement professionals use vendor scores to make informed decisions when selecting vendors for contracts or projects. The information obtained from the scorecard helps them compare potential vendors and determine which is most suitable for the job.
Why use a vendor scorecard?
Establishing criteria for vendor performance is essential for maintaining a solid procurement practice. A vendor scorecard provides a uniform, easy-to-review way to examine these criteria and make decisions.
Using a vendor scorecard ensures organizations establish clear and transparent expectations for vendors while accurately measuring their performance over time. Scorecard-based vendor analysis also provides a consistent way to evaluate different vendors so that no single vendor is selected subjectively over other (potentially more competitive) options. This objective data helps eliminate bias and confirms that the best vendor receives the job.
Using scorecards offers organizations a range of benefits, including:
Increased objectivity: Make decisions based on facts as well as experience. Many buyers and procurement professionals build personal relationships with vendor contacts over time. These relationships may yield better collaboration and stronger negotiations. But data should back up every vendor relationship. A data-informed vendor review ensures your experience matches the measurable outcomes. The combination of data collection and relationship-building may yield even better results.
Reduced spending: Build a cost-focused vendor scorecard to reveal data on the cost efficiency of your vendor relationships. This allows you to compare the cost performance of your current vendors to alternatives and find the best deal for your company.
Improved vendor selection: Select new vendors using data on expected performance. Vendor scorecards enable you to make informed decisions based on data-driven metrics and benchmarking. They provide objective and measurable information on historical vendor experience to help you extrapolate future performance potential.
Stronger supplier relationships: Build meaningful vendor partnerships with actionable insights by using a vendor scorecard. With a clear view of each vendor, you’ll have the necessary tools to make future partnership decisions. This allows you to refine your vendor list over time.
Maintained contract performance: Analyze historical data on vendor contract performance to compare pricing, terms, and outcomes year over year. These data points enable corrective action and aid in negotiations.
Reduced risk: Use a balanced scorecard to assess the performance of vendors and identify areas of weak legal or regulatory compliance that could expose you to potential risk. Using the scorecard to track compliance performance over time helps organizations identify areas where risk is increasing and take steps to address it. You can also use the scorecard to note certifications or security profiles that translate to more secure transactions.
Improved sourcing: Establish strong metrics and expectations for vendors, and strategic sourcing outcomes naturally improve. The combination of initial due diligence, regular reporting, and access to data for negotiation and decision-making clarifies vendor decisions and incentivizes vendors to keep contract performance high.
What are vendor performance metrics?
Every metric is a numerical data point that indicates the progress of a program or process and can be used to aid decision-making. Vendor performance metrics measure several vendor behaviors to highlight that vendor’s value as a business partner. These metrics can include, but are not limited to, delivery and product quality, pricing, innovation, customer satisfaction, compliance, and supply chain risks.
When you measure vendor performance metrics, consider which aspects of the supplier process are most critical to success. Additionally, consider any industry-specific or company standards that guide sourcing decisions.
Vendor scorecards come in various forms, depending on the type of product or service being purchased. Tailor scorecard metrics to fit each specific vendor's goals and business objectives.
Metrics for vendor scorecard
Depending on the key performance indicators (KPIs) your organization seeks to develop, your vendor scorecard may focus on one or more specific performance areas. Here are some effective metrics in each evaluation category you may consider using when building your vendor scorecard:
Pricing and costs
Pricing is one of the most-sought metrics for evaluating vendors. While getting a fair price is important, other aspects of pricing products and services exist. Consider incorporating some of these metrics into your program for deeper insights:
- Pricing compared to benchmarking
- Purchase price variance
- Procurement ROI
- Total cost avoidance
- Total cost savings
- Volume discount percentage
- Purchase order cost
Delivery metrics measure how reliably a vendor gets goods to you. They look at things like how much delivery costs, how quickly goods arrive, the number of delivery exceptions, and overall damage rates. These metrics help you know if the vendor is doing a good job getting your items to you.
- Cost of delivery
- Delivery speed
- Damage rates
- On-time deliveries
- Order lead times
Vendors must be tracked for efficiency, including how easy it is to get desired items, how long it takes to turn orders around, the number of broken or damaged items, and any instances of late deliveries. Tracking vendor performance metrics reveals if the vendor can meet demands.
- Fulfillment compliance (on-time delivery)
- Order accuracy
- Number of delivery exceptions
- Returned item rates
- Number of backorders
- Number of substitution items
Tracking quality control metrics is essential for ensuring consistent quality when buying goods and services. Quality control metrics track damages, returns, replacements, and any other issues that may occur during delivery. These metrics reveal if the vendor delivers necessary items reliably and safely.
- Fulfillment compliance
- Returned item rates
- Damage incident handling
- Return costs
- Replacement rates
- Defective items as a percentage of total order
- Quality of goods received
Compliance metrics are used to track whether a vendor meets the legal, regulatory, and security expectations or requirements set by the customer. These metrics indicate how well a vendor adheres to the terms and conditions of a deal, abides by regulations or laws, and provides sufficient security guarantees for products and data.
- Contract compliance percentage
- Service-level agreements (SLAs) compliance percentage
- Regulatory compliance incidents
- Security questionnaire rating
- ISO or similar standards compliance
- Data security breach handling
- Breach incident totals
When to use a vendor scorecard
Building a vendor scorecard program early in the partnership as part of a continuous improvement approach allows you to establish a record of supplier performance. Creating a regular cadence of vendor performance reviews makes it easier to spot problems before they become major issues.
Regularly evaluating your vendors also allows you to identify areas where suppliers exceed expectations more quickly. Depending on the vendor relationship and contract value, quarterly, half-yearly, or annual vendor scorecard reviews may be most appropriate.
Steps for building a vendor scorecard
An effective vendor evaluation program doesn’t need to be overwhelming. Every program boils down to general evaluation principles: Know what you want to promote, understand how to measure it, track progress regularly, and adjust as needed. Use the five steps below to launch any vendor evaluation program quickly and easily.
1. Outline desired results
Understand what you want from a vendor to build a successful evaluation program. The outcomes should identify what success looks like, how it will be measured, and ultimately how it will benefit the organization.
A clear understanding of desired outcomes allows for developing meaningful vendor evaluation criteria. This process helps to ensure that only the most qualified vendors are chosen for future business collaborations.
2. Define KPIs for success
Once you understand the goals of your evaluation, establish KPIs that indicate success. Document what quantitative data points to successful relationships, and use those to establish internal benchmarks for performance.
3. Build a grading system
Determine what you consider to be a successful grade with pre-determined numerical thresholds. Some scorecards use a “Green, Yellow, Red” rating system for at-a-glance evaluation across several metrics and vendors.
4. Document metrics
Create a file for vendor scorecards organized by the evaluation period. Store all subsequent scorecard updates together for easy reference and comparison over time. Commit to a regular review cadence according to your data needs, compliance requirements, or contract value.
5. Review and evaluate
Compile the data from all your vendors and scorecard results to get a better high-level view of overall performance. Use the data from this synthesis of the information to lead decisions on vendor expectations, compliance, and future contract decisions.
Vendor Scorecard Template
Download our free vendor scorecard to make objectively evaluating vendors easier.
"*" indicates required fields
Best practices for using vendor scorecards
Start simple and build
Although endless parameters are available to derive insights about vendor performance, consider keeping things simple — at least at first. Building a simple initial vendor scoring system allows you to evaluate and refine your program, explore new methods and their impacts, and evolve an effective program that remains accessible and easy to use.
The above metrics and steps for evaluating vendors may provide all the detail you need to make effective decisions. Add complexity as desired rather than starting with a kitchen-sink program or mimicking programs used by other companies. Vendor scorecards are flexible enough to be tailored to individual needs and even to individual vendors.
Use external benchmarks
Using external benchmarking in your vendor evaluations ensures you get the best performance from your suppliers. External benchmarking allows you to compare and contrast the performance of different vendors against industry standards, giving you an objective measure of their effectiveness. This approach also helps identify areas where your vendors may need to improve.
Consider using decision matrices
Decision matrices are invaluable tools for evaluating vendor performance, as they allow a comprehensive and quantitative assessment of a given supplier. By weighing each factor on a matrix according to its importance to business needs, decision-makers can create a comprehensive evaluation tailored to their specific requirements. Such matrices also provide a clear visual representation. Two matrices to consider are the Kraljic matrix and the weighted decision matrix.
A Kraljic matrix is an analytical tool for evaluating the purchasing power of a business in regard to its vendors. The matrix uses four categories to identify which products should be given priority when negotiating with suppliers.
Leverage items: These are items whose purchase price carries a relatively high proportion of total supply chain costs yet have a low strategic value to the organization. They are typically characterized by a low risk of supply disruptions and more evenly balanced bargaining power between suppliers and buyers.
Bottleneck items: Bottleneck items are strategic purchase items that offer relatively high profitability but carry significant risk. They represent high-value purchases that require careful consideration and negotiation with the supplier. They often involve long-term contracts, expensive materials, or complex production processes. Due to the importance of these items, any variations in quality or availability may constitute a major disruption to a company’s operations.
Routine items: These items have low price sensitivity and low supply risk. They include simple commodities (such as paper, wood, or steel) with consistent demand and predictable production costs. These items are typically considered low value but may be necessary to produce higher-value items.
Strategic items: Strategic items have high importance and high cost. Use careful consideration when purchasing these items, as they require resources, negotiation, and management. These items are typically higher value to the organization and can significantly impact the bottom line.
Weighted decision matrix
A weighted decision matrix is a tool used to consider multiple aspects of an evaluation that do not share equal importance to the outcome. It compares and evaluates the relative importance of different criteria by assigning weights to each criterion and multiplying them by the rating for each option. This allows for a comprehensive evaluation of each option based on all criteria, which helps identify the most suitable one.
Using a weighted decision matrix in a supplier scorecard allows the user to identify essential criteria in a range of pertinent categories.
Tie performance to incentives
All effective programs find ways to incentivize desired performance and actions. For vendor performance, it’s important to identify desired outcomes and behaviors and tie them to vendor incentives (or, when appropriate, penalties). Incentives can range from preferred terms to expedited payment terms or multi-year agreements. Tying performance objectives to incentives gives purchasers greater control and visibility into vendor performance.
Conversely, using reasonable penalties for vendors that cannot meet the established expectations is an effective way to improve overall performance and ensure that vendors continue to deliver results. Penalties provide incentives for suppliers to adhere to guidelines. Implementing them as part of vendor scorecards helps mitigate long-term problems by promoting timely and consistent performance.
Use Order.co to improve vendor performance
Maintaining strong vendor performance is an important and complex aspect of procurement. Procurement software like Order.co makes the process easier by centralizing your procurement process in one data-rich, easy-to-use platform. Order.co offers:
- Historical data on purchases to inform price benchmarking, procurement planning, forecasting, and future contracts
- Access to thousands of high-quality vendors for more competitive pricing and vendor selection in every supply category
- Reporting features to contextualize spend by item, category, or vendor that helps Finance make data-informed decisions for better outcomes
Download this free template to start your vendor scorecard program. This easy, Excel-based template provides the framework and guidance to quickly create effective scorecards for all your most valuable procurement categories.
Schedule a demo to see how Order.co can simplify buying for your business.
"*" indicates required fields