Sourcing and Procurement
Best practices in vendor performance analysis
Businesses rely on their vendors and suppliers to maintain steady workflows, and if a supplier is inconsistent or found lacking, this could severely affect the business. Periodically monitoring vendor performance helps manage vendors efficiently and ensures that your organisation gets the most out of existing supplier relationships. Keeping a close eye on the performance and reliability of your organisation’s vendors is a great way to keep procurement processes working efficiently and profitably. Modern vendor performance analysis tools have made it possible to closely monitor and evaluate a supplier’s performance and ensure that it meets or exceeds the market standard.
How do you perform a vendor analysis?
The first step is identifying relevant vendor performance review KPIs. Depending on your organisation and the industry, these may include:
- Payment terms
- Product quality
- Delivery performance
- Price change frequency
- Financial stability
- Communication lag times
Once the relevant KPIs have been established, an organisation must have a stepwise approach in place to examine and accurately analyse vendor performance. Below are some of the best practices for vendor performance analysis.
- Define business goals: Clearly defined organisational goals go a long way towards helping cross-functional teams understand business requirements. This ensures that decision makers take the right calls when selecting suppliers and negotiating deals.
- Have an evaluation process in place: With business goals in place, the next step is establishing a process to evaluate vendor performance based on the above-mentioned KPIs. This process gives you the ability to differentiate between high-performing and low-performing suppliers.
- Communicate with the vendors: Communicating the performance analysis results with suppliers can highlight problem areas and enable them to take corrective action.
- Set internal benchmarking standards: Clearly established goals for improvement help set standards for vendor performance analysis. Internal benchmarking is a great way of establishing the criteria to assess vendor performance.
- Monitor regularly: Accurate analysis depends on regular reviews and suggestions for improvement. To achieve the best results, vendor performance data must be collected and evaluated regularly for a smooth and accurate analysis process.
The benefits of vendor performance analyses
There are several benefits to having a robust vendor analysis and management system in place. We have mentioned some of the most important ones below.
- Reduce wasted resources: Organisations that fail to regularly assess vendor performance lack the information needed to properly manage their suppliers. This can result in unnecessary expenses for procurement departments, which end up relying on guesswork when selecting and retaining suppliers.
- Manage risk: Periodic monitoring of vendor performance helps you in developing a robust risk management system to insulate your organisation against risks related to the quality of products acquired from vendors.
- Improve transparency and visibility: When department heads have access to real-time supplier data, they can use this information to make sound business decisions when it comes to retaining high-performing suppliers and terminating relationships with underperforming ones. This ensures that your organisation maintains lasting relationships with high-quality vendors.
- Reduce hidden costs: Supply chain inefficiencies can bring unexpected expenses, which can severely affect an organisation’s bottom line over time. A sound understanding of a supplier’s business practices can mitigate the risk of facing these hidden costs, and the insights gained can enable organisations to help their suppliers identify and reduce wasteful practices in their processes. This helps cultivate strong relationships with vendors and ensures high-quality goods and services at lower costs.
The significance of vendor management
A modern vendor management system provides detailed insights into every aspect of business relationships with vendors. With such a system in place, organisations and their suppliers can continuously work on improving the quality of their products and services through constant communication, leading to improved customer satisfaction. A well-managed system can also automate invoice processing to circumvent hurdles such as language barriers, currency exchange rates, and cultural differences when dealing with suppliers in various countries, as well as ensuring that they are paid on time. A comprehensive vendor management software solution can streamline supply chains and simplify multiple business processes, ultimately saving time and money.
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