Vendor scorecards, sometimes referred to as supplier scorecards or supplier management scorecards, are used across all industries, especially with larger organizations. As part of a comprehensive vendor management strategy, vendor scorecards can help ensure that arrangements between an organization and its suppliers remain beneficial to both parties as well as provide insights when improvements need to be made.
Why Vendor Management is Essential
In order to reduce risk and make sure the supply chain does not cause issues with daily operations and deliverables, many organizations utilize a strategy referred to as “multi-sourcing,” or outsource to multiple vendors/ suppliers. While these benefits are important, multi-sourcing can also lead to issues such as poor quality coding, insufficient documentation, and increased costs. In order to reduce these risks, the organization must oversee the suppliers.
What are Vendor Scorecards?
Vendor Scorecard Definition: In order to determine how any given supplier is operating and whether they’re delivering as expected, specific metrics can be tracked. These ratings come together in a vendor scorecard to provide a comprehensive outlook. While small organizations often track metrics by hand, larger companies with multiple suppliers benefit more from a vendor management system (VMS), which digitally tracks important data.
How Do Vendor Scorecards Work?
Each organization will have a different approach to creating a supplier scorecard, but there are some general concepts included in most systems.
- Key process indicators (KPIs) are identified. The KPIs should be chosen based on what criteria matters most based on the project at hand. They may include things like:
- Initial Cost
- Delivery Time
- Maintenance Costs
- Minor Enhancement Costs
- Project-Based Work Costs
- Guideline Compliance
- Responsiveness of Supplier
- Metrics are defined. Each KPI needs an objective way to measure it. For example, quality could be measured in the number of defects, in the amount of downtime or delays caused by application issues, or by the amount of money saved by a process. Being both objective and specific is paramount when determining measurements, as ratings are often given by many people and will need to be given consistently.
- Factors are weighted. KPIs can either stand alone or be broken into categories, such as costs, product quality, efficiency, and vendor quality. Weighing specific KPIs or categories ensures that the most important factors are reflected in a final grade.
- Rankings are assessed. It’s important to make note of a supplier’s overall rating as well as to identify specific areas for improvement, even if a supplier’s overall rating is good.
How Do Vendor Scorecards Help with Supplier Management?
By themselves, scorecards are nothing more than data. It’s what a leader does with this data that makes a difference.
Contracts: Service-level agreements (SLAs) should be in place with each supplier. SLAs lay out the minimum requirements a supplier must meet in order to be in compliance with a contract. Scorecards can be used to track whether suppliers are meeting their SLAs.
Negotiations: Having easily-accessible data regarding all potential suppliers for a project makes it easier to negotiate with a provider, as they are likely to want to outdo their competitors.
Benchmarking: Assessing a supplier throughout a project and providing the supplier with the data gathered can help them stay on track with goals and SLAs. It’s worth noting that some SLAs include penalties assessed to the supplier when service-level objectives are not met, so follow-up throughout a project ensures the supplier meets expectations.
Penalties and Rewards
Organizations have different approaches to assessing penalties or offering rewards based on performance. SLAs do not need to include penalties, but it’s a good idea to have a plan in mind for dealing with unresolved performance issues, such as giving the supplier less work or dropping them from the supplier list. Equally, suppliers that consistently meet or exceed expectations should be recognized for their achievements.
Approaching a Supplier About a New Vendor Scorecard Program
When handled properly, vendor scorecards can improve relationships with suppliers. Reputable suppliers want to know how they’re doing and want to provide the best possible products for their clients. However, it’s important to introduce a new vendor scorecard program with suppliers tactfully.
- The program should be discussed with suppliers prior to implementation in a casual manner.
- A formal notice and explanation of the program, KPIs, and metrics should be distributed to leaders of key suppliers prior to deployment.
- A meeting should be held with the head of each supplier to discuss any questions they have.
- Rollout of the program should be soft, perhaps with a grace period during the first reporting period. This enables the suppliers to take action on their own, without penalty.