If your organization depends on vendors to provide customers with products and services, it’s critical that you have a process in place to ensure your vendors are consistently delivering value. That’s where vendor performance management comes into play.
The basics of vendor performance management
Vendor performance management is the process of collecting, analyzing, and continually monitoring data related to your suppliers and their level of quality, reliability, and other key metrics that impact your organization’s success.
“Some people refer to this process as a scorecard,” says Diane Narwid, vice president of HomeRoots. “Regardless of the name you choose for it, vendor performance management provides key insights into what your supplier does well and which areas they may need to improve upon.”
The importance of vendor performance management
Narwid’s company is a B2B wholesale home furnishings manufacturer that buys products and sells to professionals all over the world, while maintaining a strong focus on customer satisfaction. This requires staff to ensure vendor performance is top notch, as any failures or persistent issues — late deliveries, out-of-stock products, etc. — will negatively impact customers.
“The ultimate goal is to have a well-oiled machine, where we don’t have to spend too much time confirming that our vendors are delivering to our expectations,” says Narwid.
Practicing vendor management can help you in a few ways:
- Benchmark data for comparisons. Tracking key performance indicators (KPIs) with your vendors gives you the data needed to compare them to their peers. “This is an incentive for your suppliers to remain competitive, lest you switch to a new one,” Narwid explains.
- The ability to identify issues early. Say you’ve rated your vendor’s performance at about 96 percent for the last six months, but it dips to 90 percent in month seven. You’d immediately ask if there’s a problem in a certain area. “If there is, you can take action to remedy the situation before it gets any bigger,” says Narwid.
- Time savings. Narwid notes that while it may seem like vendor performance management adds more tasks to your schedule, it actually frees up time. Tracking performance ensures a consistent vendor experience, which means your plans stay on track and you avoid fighting fires internally and externally. “You can use this time to focus on strategy and other important business areas,” Narwid explains.
- Bottom line improvements. All the above elements positively contribute to the bottom line. “Plus, vendor performance management is beneficial to both sides because the more successful your company, the more orders you can place with the supplier,” Narwid says.
Vendor performance management: 4 areas to measure
1. Inventory health
“Since we’re working in e-commerce, it’s critical that vendors have available stock for us to purchase,” says Narwid. This means she must track in-stock percentage, which is based on her team’s sales projections.
If a vendor regularly runs low on stock, that’s an indicator of poor inventory health. Narwid is then unable to purchase the quantity of stock she wants, lowering her ability to fulfill orders as expected. The negative results would be dissatisfied customers, lower ROI on ad spend, and more.
“Ideally, our suppliers are always 100 percent in stock, but they must maintain a minimum of 90 percent for us to be satisfied,” she says. “If it’s lower, then we’ll have a discussion to seek a resolution.”
2. Delivery time
Delivery time considers two things:
- The lead time a supplier promises vs the actual time required to deliver the product
- The historical variance of the vendor’s promised time vs its actual time
For example, say the supplier guarantees the product will leave the warehouse in three days, but it actually doesn’t leave until day four.
“While this isn’t the end of the world, what if it takes seven days? In addition, keep in mind how frequently these delays occur. Compare these figures to their peers month to month, with respect to any market-disrupting events — the pandemic is a relevant example,” Narwid explains.
3. Quality
“We measure quality across two main aspects: product return rate and customer complaints,” says Narwid. She admits that both can be contentious because customers may return items or complain for reasons outside of the supplier’s control.
However, returns and complaints can act as signals to investigate supplier activity. “We also make sure to consider these aspects in relation to other metrics,” she says.
4. Margins
Product margins can also be contentious. For one, while returns eat into margins, the preceding point illustrates how challenging it can sometimes be to identify who or what is at fault for a return. Additionally, a company may set margins that are too low to begin with.
“Again,” Narwid explains, “we consider other metrics to make a determination of overall vendor performance.”
Regardless of your chosen metrics, you can support your vendor performance management with Jotform, an easy-to-use form builder and information collection tool. Jotform has numerous vendor-related templates you can use to track and analyze supplier performance data. Get started with a Jotform template today.
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