If you work with a number of suppliers, you probably know which ones are good and which ones are not-so-good. But do you have a formal system to evaluate and manage them?

I would strongly advise to put a supplier evaluation system in place if you have more than 10 regular suppliers. It could be part of a vendor management system IT solution, or it could be in a simple Excel spreadsheet.

In this article I will outline what makes up such a system.

A few common performance indicators

Cost — Are they competitive? More expensive, or cheaper, than the market for similar products? Is it workable for your company? Is it under control or increasing sharply?  It is often interesting to see how prices of their key product(s) have evolved over the past 5 years.

Quality — If they are constantly delivering substandard quality products, there is no way to keep working with them.

How to track the number of quality issues? Your quality department probably issues major and minor NCRs (Non Conformity Reports). It is interesting to see how the ratio [number of NCR] / [number of orders] has evolved over the past 3 years.

It is also interesting to see if the same NCRs come back again and again — that’s a sign that the supplier is not listening to you and not improving.

On-time delivery — If you are in the promo item business it might be the most important performance metric you look at! Here you can track what percentage of batches are sent late, how late they are on average, and whether the supplier communicates about the delays in advance or at the last moment.

General attitude — It sounds a bit fuzzy but it does have an impact on your bottom line. If a supplier is flexible and tries to accommodate the ups and downs of your business, or if they dedicate the best engineers to a new product development that you think will move the needle for your company, you need to show them some appreciation and treat them as partners.

Suggestions for savings — It might make sense when you work with suppliers that have a strong engineering department. My partner David Collins told me of a great example. A supplier of exhaust pipes was required to anodize both the inside and the outside of pipes. They did tests that showed pipes usually don’t rust from the inside. Anodizing the pipes only on the outside saved their customer millions of dollars every year.

Some other KPIs might make sense for your business. For example, auto makers rate their suppliers on their technological advances.

Classifying suppliers based on their performance

Many companies classify their suppliers, for example among groups A, B, C, and D, where:

• A means the supplier’s performance (quality, cost, timing…) is consistently good, the attitude is good, and they should be developed in the future.
• D means the supplier’s performance is often or always bad and they should be terminated as soon as a better alternative is found. The procurement staff needs to look for a replacement.

The challenge lies in putting a number on each performance indicator. Ideally the total score determines what category a supplier falls into, and the total score (not only the FOB price) is what purchasers look at when selecting what supplier get what order.

For instance, in the excellent SCORE system (developed at Chrysler before their acquisition by Daimler), suppliers were given points. If they collected some points based, for example, on suggestions that turned out in serious savings, they could get selected even if their price was a bit higher than that of competitors.

Formal reviews

Once you have collected these data, you should communicate them to your suppliers regularly.

Regular reviews should take place every 1-3 months, to ensure each supplier knows where he stands and what he needs to work on. It is important to keep the pressure on.

It is also good to give formal feedback to the supplier’s top management on a yearly basis. Bad suppliers should clearly get the message that they are about to lose the business.

Does this apply to all suppliers?

You might need a simpler system for suppliers that sell small amounts (maybe only grade them on cost, quality, and delivery). And you might not give them regular reviews.

It makes sense to focus your good purchasers’ attention on the big-ticket items. But maybe junior purchasers can spend 6 months managing the smaller suppliers? In aggregate they do not get a negligible amount of money.

What do you think?