You might have a powerhouse internal team and competitive products, but there’s no solid foundation for success if your partners aren’t pulling their weight.
When you measure performance with a vendor scorecard, you better understand the value of your vendor and supplier relationships. You’re also in a position to identify gaps in service and supply chain weaknesses that could be costing your business money.
With vendor scorecards, you track all these issues and more, unlocking the insights you need to ensure you’re only working with vendors that help you reach your business goals.
What is a vendor scorecard?
A vendor scorecard (also called a balanced scorecard or supplier’s performance scorecard) is a tool businesses use to evaluate and monitor the performance of their vendors. It typically includes a set of key performance indicators (KPIs) that measure various aspects of vendor performance, such as quality of goods or services, timeliness of delivery, responsiveness to customer needs, and overall cost-effectiveness.
By regularly tracking and measuring vendor value through these KPIs, businesses can gain valuable insights into vendor performance, identify areas for improvement, evaluate vendors, and make data-driven decisions about which vendors to work with and how to allocate their resources.
Here is a primary supplier scorecard that shows particular suppliers, the area, criteria, and rating scale, which all affect the overall rating:
But here's the thing: vendors aren’t on your internal team. So how can you ensure they're interested in helping your business be more successful?
With supplier scorecards, you can stay in control of your partnerships. A vendor scorecard is a document that evaluates vendors and looks at key performance indicators (KPIs). It tracks them to ensure you receive the expected service level agreements or product quality.
Why are supplier scorecards important?
In the U.S., most businesses risk wasting money on underperforming vendors: For example, companies that fail to track and measure the cost of cloud services overspend by 40%.
Companies can make informed decisions regarding vendor selection, supply chain processes, and resource allocation by using strategic sourcing managers and performing vendor evaluations through various metrics such as delivery timelines, total procurement costs, product quality, and customer service. The result is improved decision-making, reduced costs, and optimized profitability.
So if you’re a business owner or manager, it’s highly recommended that you consider implementing vendor scorecards as part of your overall supply chain management and vendor management systems and strategy.
How to create vendor scorecards
Creating a vendor scorecard is a straightforward process — but it requires a bit of tailoring depending on your business’s needs, which may be determined by size, industry, and budget. Here are the steps you can follow:
Step #1: Define your goals
The first step in a basic supplier scorecard is to identify your goals for the vendor scorecard. What are you trying to achieve with this tool? Do you want to improve vendor performance, reduce costs, or manage risks in your supply chain?
Once you have defined your goals for evaluating vendors, you can identify the KPIs that will help you measure vendor performance. Your KPIs should be specific, measurable, and relevant to your business objectives.
Step #2: Set your vendor KPIs
The next step is to determine the KPIs you will use to evaluate the performance of your vendors. Your KPIs should be aligned with your business objectives and provide a clear picture of each vendor's importance and performance.
Create parameters and critical metrics to establish what’s good, what's great, what's just sufficient, and what to do when the vendor isn’t meeting expectations.
For example, you could address three points regarding response times and on-time delivery:
- What’s an ideal response time?
- What’s an acceptable time?
- What response time would you consider problematic?
Once you have these criteria figured out, you can assign a rating, points, or other scoring techniques to assess each metric.
Step #3: Engage stakeholders
It’s critical to involve stakeholders in the vendor scorecard creation process. Stakeholders may include your purchasing, logistics, supply chain health and quality control, and finance teams.
By involving stakeholders, you can ensure that the vendor scorecard reflects the needs and priorities of your business. Additionally, involving internal stakeholders can help build buy-in and support for the scorecard across your organization.
Step #4: Track, measure, and repeat
Managing vendor performance is an ongoing process to achieve continuous improvement. The good news is that once you have everything set up—a scorecard, key performance indicators, and baseline metrics—you can track vendor and supplier performance over time.
This ongoing data collection will reveal which partnerships work for your business, what needs improvement, and what relationships you should let go of.
Then, as you make changes, the impact will reflect in your scorecards, giving you a never-ending flow of insights to help you optimize all of your business partnerships.
When tracking and measuring your vendor's performance, it's essential to keep an eye on the KPIs you identified in step #2. This will help you stay aligned with your goals and ensure that you are measuring the key metrics that matter most to your business.
As you collect data on your vendor's performance, analyze it to identify areas for improvement. If you notice any trends or issues, you may need to adjust your KPIs or engage with your vendors to address the underlying causes.
Finally, don't forget to redo the process. As your business evolves, your goals and KPIs may change, and you may need to engage new stakeholders or adjust your tracking and measurement processes. By continuously monitoring and improving your vendor performance, you can ensure that your business always gets the best possible value from your vendors.
The value of using scorecards to measure supplier performance
With a vendor evaluation scorecard, you aren’t flying blind to vendor and supplier performance. A scorecard is one more set of metrics your business has to keep track of, but there’s much to be gained in the process.
Identify gaps where suppliers could improve
You should always document any quality issues in a product or service. You can talk to the procurement team, the process team, or the vendor about improvements with proper documentation.
Even more critical, you understand how a vendor that doesn’t live up to your business standards is actually draining your resources.
Why is this important? Take this large IT company, for example: When they started tracking performance, they quickly realized that a trivial requirement missed by a vendor ended up costing $86,000 for internal teams to go in and fix later on.
It would be best if you had to know where the service gaps are so you can fix them, whether you’re dealing with you’re, poor-quality service or misalignment with business objectives.
Understand the return on supplier and vendor spend
By looking at price competitiveness metrics to compare vendors and measuring vendor performance and scores, you have data to determine if you’re getting a good return on your investment. If not, it might be worth renegotiating pricing or switching to another vendor to improve performance.
For instance, your business might use a particular raw material supplier because it’s well-known. They are slightly above average, but they have a solid reputation, and most of your orders come on time and in fair condition.
That’s all well and good, but these are all impressions of supplier performance. Here’s what you need to measure vendor performance accurately:
- How much more expensive are they, and how much could your business save with more competitive pricing?
- What’s the product quality like? Even if it's good, is it consistent?
- How often are your shipments late?
- How happy is your team with the service level?
- How much time does your team spend contacting them about delivery issues?
You can use your supplier scorecard to track your vendor's performance data like this and better understand the return you’re getting from your investments. That way, you can decide about switching suppliers or requesting service improvements based on documented facts rather than impressions.
Discover and quantify problems that could be costing your business a lot of money
Use your scorecard to understand whether vendors help your team operate more efficiently or not. For example, if too many employees are in meetings with a vendor, or too much time is spent on the phone or sending emails, your business could lose valuable productivity hours to a needy vendor.
Unnecessary meetings are expensive. Also, whenever your employees have to switch gears to call a supplier about a late order or check in with a vendor about a service issue, it could take up to 30 minutes for them to refocus.
Add up all that lost time in labor, and you can see how much your vendors cost.
Analyze supply chain risks
You can also use supplier scorecards to assess risk. Consider what risks matter to your business, and then create supplier scorecards with a risk score for each vendor. For example, you could create a supplier scorecard to assess the following:
- How well does a vendor adhere to privacy laws?
- Is there a risk of a customer data breach?
- Does the company give third parties access to non-public information?
- How safe are vendors’ systems and business premises?
With this analysis, you can pinpoint which partnerships could be problematic and why. Then, your business can take steps to mitigate risks, either through internal processes or by requesting that your vendor make changes. After combining risk analysis with performance analysis, you might also decide to switch to a new vendor.
Ultimately, with vendor evaluation scorecards, you track, quantify, and understand how effective every vendor is at meeting the needs of your business, so you have the data you need to optimize your partnerships.
Vendor scorecards enable win-win business relationships
Using vendor scorecards to measure performance, you can build stronger, more collaborative relationships with your vendors. By setting clear goals and KPIs, you can work with your vendors to drive continuous improvement, align your expectations, and ensure everyone is working towards the same objectives.
By engaging with your vendors and providing them with regular feedback on their performance, you can also help them improve their operations. This can lead to improved quality, increased efficiency, and reduced costs for both parties.
A vendor management system and scorecards can help you optimize vendor relationships, reduce costs, improve quality, and increase customer satisfaction. Investing in the right tools and processes can build a successful vendor management program that delivers real value to your business.
Form stronger vendor relationships with BILL
At BILL, we understand the importance of strong vendor relationships for small businesses. That's why we offer a range of tools and services to help you manage your vendors more effectively.
With real-time visibility, BILL can handle and track all your vendor payments for you.
Know how much you spend. Keep track of vendor's performance. Only get the best bang for your buck.