Too many suppliers, no time, lack of information.
No structure. You’re always just reacting.
Does that sound like your Monday morning?
I have been in your shoes.
When my company merged with another business, basically overnight I had twice as many suppliers to manage. And as you can guess, I didn’t have a clue about half of them.
Just imagine what that could mean:
I might walk into a negotiation with some vendor and it could go like this:
Me: “Hello. Tell me about your product line and target market”
Supplier: “Uhm … We are one of your suppliers”
Or I would start negotiations with some company ABC Ltd and wouldn’t know that we already had a large contract with another company ABC Systems Ltd which was from the same group.
Not a good basis for a successful negotiation!
And it was just because I didn’t have good data about our vendors.
It became clear to me: without a vendor scoring system, I would lose control sooner than later.
And the last thing I wanted was to look dumb when our VP would approach me with questions about our supplier base:
- How much have you improved and reduced your supplier base?
- Who are your strategic suppliers and which one do you want to discard?
- How much savings have you generated thanks to the merge and benchmark of 2 supplier lists?
- The CEO wants to meet 3 strategic suppliers for an event dinner. Which ones should he invite and why?
- What share of your spend on your long-tail suppliers?
What are the suppliers with the biggest risk we should mitigate?
Which suppliers have the biggest negative cash impact?
But the worst question I had is this one: How many suppliers can you reduce in the next 6 months? Knowing that you are not even sure how many suppliers you really have since the merger.
I had to build a supplier rating system from scratch
My goal was to establish objective performance measurements for suppliers. I didn’t just want to assign random scores based on gut feeling – I mean, what would be the value of this?
The scoring criteria had to pass the following tests:
- They had to account for all performance aspects of our relationship with a supplier (not just pricing and product quality)
- The criteria had to be supported by my colleagues and accepted by our vendors
- The criteria had to be clear and easy enough to track (I had a tight agenda)
- The criteria should give us a powerful and comprehensive tool for making supplier-related decisions
So my goal was clear. Having worked with vendors for over 7 years at that time, and over 12 years on vendor management on complex projects, I had a good understanding of the factors that distinguished great suppliers from not-so-great ones.
But I had never written down what makes a good one from a bad one.
It was just floating around in my head.
In a tedious process of several weeks (see my story below), me and my colleagues came up with a suitable list of vendor scoring criteria, and we built an actual scoring dashboard using those criteria (you can get my supplier scorecard dashboard here).
Our vendor scoring system was very effective:
I renegotiated prices with our key vendors and was able to achieve savings of 7% and more.
We cut our supplier base by 30% without compromising on product or service quality.
And more wins like these!
So the thing is:
You may be in a similar position as I was a few years ago.
You may be unsure about which scoring criteria you should use to assess your suppliers.
I’m here to help you.
In this article, I will provide you with an overview of all possible criteria that came across my way, and will point out the most usual ones.
Some are obviously industry-specific, as you will see.
Supplier rating criteria: These are the areas you need to look at
You want to look a the entire relationship with your suppliers, and not just the product side.
We are basically practicing Supplier Relationship Management (SRM).
Here are the areas:
- Profit in trading / Competitiveness otherwise
- Price positioning
- Price accuracy and validity (transparency and predictability)
- Market intelligence. Knowledge of technology trends (market awareness, providing guidance and leadership, technical leader)
- Accuracy and quality of the information provided (accuracy and quality of product information)
- Credibility and legal commitment (commitment to contracts)
- Portfolio breadth and depth
- Technical expertise and support
- SLA (Software)
- Risk (Software)
- Maintenance support
- Spare parts
- Proprietary products
- API (Software)
- LTS (Software): Long-term support (patches etc.)
- Claim management
- Technical audit findings
- Support of industry norms (ISO…)
- Claim Management for quality issues
- Adherence to regulations (e.g. REACH, RoHS)
ESG (Environmental, Social and Governance):
- Results of social/environmental audits
- Country of origin
- Lead time impact on cash
- Payment terms
- Credit Risk
- M&A risk with competitors
- Contract duration
- Non-compete agreement
- IP protection
- PDM support and skills
- Data maintenance effort (for integrations)
- Delivery Lead time and date
- Quantity delivered / completion
- Logistics data available (package or pallet size, weight, etc.)
- Shipping documents accuracy
- Claim Management (for supply chain issues)
- Import / Export competencies
- Pick 4 categories (and you can merge the one less relevant to you)
- Pick 4-6 criteria per category
Supplier rating criteria: A breakdown by industry (with examples)
Here are lists of the most important criteria used for supplier scoring.
List #1: General scoring criteria, applicable to any industry/environment
List #2: Vendor rating criteria for manufacturing
List #3: Vendor rating criteria for trading businesses
List #4: Vendor rating criteria for software businesses
List #5: Vendor rating criteria for large corporations
General supplier rating criteria for almost any environment
- Profit in trading/competitiveness: The margin you achieve with the supplier, all costs included (rebates, transportation, cost of storage etc.). Usually measured as a percentage of profit or a percentage of the manufacturing costs.
- Market Intelligence Technology: This is a qualitative criteria. For example, how much insights do you get on market trends, on R&D or even on what other competitors do
- Claims & Warranty: Usually a % of goods returned. You order 100, you return 2 which are deficient -> 2%
- Norms: This is really specific to your environment. But you may have to follow ISOxxx, and your customers expect that all you suppliers as well respect ISOxxx
- Claim Management for quality issues: Do you have a dedicated service? What is the average response time?
- Payment terms: The later you pay, the better. You surely have a standard payment terms (60 days for example. Any one below is bad, anyone above is better.
- Credit Risk: Here you follow the risk that the supplier disappears from the surface of the earth. IT can cause much more trouble than just losing a delivery, it can stop everything for just a screw. Every country has its own scoring system.
- PDM (Product Data Management): You like to know what you purchase as much as I do? And you want it in your system, always up-to-date. This is what you measure: is data provided, in which form and with with data enrichment
- E-Procurement: % of Purchase Orders / invoices / Receptions done electronically
- OTIF – On Time in Full: % of Purchase Orders which came to you On Time in Full (see Wikipedia for a definition).
- Logistics data available (size, weight,…): This is sometimes linked to PDM, but usually goes into another system (the system of your supply Chain). % of products you know the size/weight on ordering.
Vendor scoring criteria for manufacturing businesses
If you are working in a manufacturing environment, the following criteria may apply to you:
- Services: especially for equipment like machines or asset management. Do you get service included in your contract?
- Maintenance: do i have maintenance information and support for my installation?
- Spare parts: how long do I get spare parts for sure, pricing, details, drawing, references…
- Certification: this goes towards things which are electrical usually, and/or in contact with workers. Safety first
- Regulations: this is linked with certification, but barely the minimum legal. Does your supplier support you in complying?
Audits: Well surely you are audited from your customers, and you shall as well audit your suppliers. You get a score from audit (A to F usually)
- M&A risk with competitors: how high is the risk that this company ends-up in the arms of your worst competitors? Is it for sale? Is it key for you?
- Contract duration: Usually a contract should at least cover the expected duration of product lifecycle. Example: a supplier should contractually deliver the wheels as long as you manufacture the car. Else…
- IP protection: Whom belongs join technology? Is he sharing the same technology to competitors?
- Delivery Lead time: in use if manufacturing is done Just-in-time. This has a high impact on warehousing and handling goods
- Claim Management (for supply chain issues): Dedicated service for Supply Issues? Tracking number available?
Vendor scoring criteria applicable for trading businesses
If you are involved in a trading business (example: retailer, ….), consider using the following additional criteria:
- Price positioning: Usually premium / mid / low. You would need either a mix if you are a large trading business or focus on your core positioning
- Price accuracy and validity: Price valid for at least one year for instance. No Raw material dependencies.
- Portfolio breadth and depth: The more you can single source, the better. Usually number of SKUs (Stock Keeping Units)
- Expertise: since you are a trading company, you rely mainly on your supplier for product knowledge. He better have some himself, and offer training, webinars, technical support on site…
- Audits: Well surely you are audited from your customers, and you shall as well audit your suppliers. You get a score from an audit (A to F usually). There are production audits (producing as promised with great steel and plastic?) and social audits (Children working in the factory?). You may need both separately.
- Packaging: the amount of plastic, recycling,…
- Lead time impact on cash: Importing might look cheaper, but it has a huge impact on cash. Monitor the cash impact on % of costs (Month of delivery x costs of money / 12)
- Contract duration: Usually a contract should at least cover the expected duration of product life-cycle. Exemple: a supplier should contractually deliver the wheels as long as you manufacture the car. Else…
- Non-compete agreement: You address a customer and realize that your supplier sells directly to him? Better change…
- eCommerce: Even if you are brick&mortar, the support of your supplier in eCommerce is crucial for your survival. Branding, Data, advertisement…. All his support has impact.
- Maintenance of data: Linked mostly to eCommerce and eCatalogues. Automation and accuracy of data update.
- Shipping documents accuracy: You do not want to be called each week from your logistic hub? Better ensure your vendor is fulfilling your needs (labels, codes,…)
- Import / Export competencies: This is about delegating some paperwork to your vendors. Can he cover this for you and save you time and money?
Vendor scoring criteria for software companies
If you focus on software supply (SaaS,…) consider using the following additional criteria:
- SLA – Service Level Agreement (Software)
- Risk (Software): Cloud? On premise? Remote access?
- Proprietary product or Open Source? Can you check and adapt or are you doomed forever?
- API (Software): interfacing to other systems
- LTS (Software): Long Term Service. How long can you count on using this software version and compatibility?
Vendor scoring criteria for large corporations
If you work in a big organization, you will need to add the pull package on CSR (Corporate Social Responsibility). Consider using the following additional criteria:
- Audit results: Well surely you are audited from your customers, and you shall as well audit your suppliers. You get a score from an audit (A to F usually). There are production audits (producing as promised with great steel and plastic?) and social audits (Children working in the factory?). You may need both separately.
- Certification for environment: ISO14xxx and similar
- Packaging: amount of plastic, recycling,…
- Country of origin: Important if you have some black listed countries for instance in your local regulations, or if you are in Dual-Use business.
- CO2 Footprint
All in all, this is just a framework, not the absolute truth. The diversity of business models, the variety of branches, the huge variations of sizes of organization, the available data… all of those parameters will influence your choices on what are the ultimate criteria for a vendor performance scorecard:
One is for sure common to all of those criteria: they have only as much value as they are accepted by other departments and measurable. Only a couple of non-measurable qualitative criteria are “allowed”, else you may lose engagement of suppliers finding your performance scorecard unfair and biased.
A second though is: what was good for me may not be good for you. Help yourself in this listing, or even contact me to brainstorm 1 hour together on what best suits you. The answer is somewhere on your side.
Installing criteria is conducting change management. So communication is key: before, during and after. I insist on the BEFORE: Talk to your colleagues from the other departments like finance, logistics, etc. and listen to what they say about the supplier and what they would die to improve. But do not take for granted what they tell you: challenge them, challenge how they measure, challenge their needs and deep-dive to root cause. Do not fall for “we always have done it this way”.
Choosing vendor scoring criteria: Do not make this mistake
At some point, you need to decide which criteria you want to use for evaluation vendors. But this is not a decision you need to make on your own. In fact, you shouldn’t make this decision by yourself! This was my mistake when I first built a vendor performance measurement system for my company. I ended up doing the exercise twice. Here is the story:
My 1st attempt:
The scoring criteria were to become a standard in our business unit for assessing supplier performance, so I wanted to choose the right criteria: those which provided the most accurate picture of our suppliers’ performance, without using too many criteria because that would make the process confusing.
I chose the criteria by myself, and came up with weighting factors and priorities which I thought were most suitable. I was so proud of myself!
Then I tried to introduce the scoring system in my organization and faced massive pushback from colleagues.
“Why didn’t you talk to us? Your criteria are ****. We can’t properly measure these parameters, and these are not the ones we need”
For example, I had listed “service level” for warranties. And my colleague from Quality Management explained to me that this would be an idiotic KPI, because you can mix things such as weeks of repairing items or a couple of days to just replace a commodity.
My 2nd attempt:
I used my first set of criteria and fine-tuned them jointly with all departments
Build a set of criteria that both make sense and are measurable.
Ended up with a comprehensive view of detailed criteria, but all easily measurable so avoiding confusion
Astonished when my colleagues encouraged and support me to implement the scorecard criteria, having full commitment of my organization.