Vendor Management Scorecard Basics
Business people shaking hands during a management meeting
Creating or purchasing a vendor management scorecard is an essential component of effective Supplier Relationship Management (SRM). A vendor management scorecard is a tool that is used to measure the performance and effectiveness of vendors and suppliers that provide goods or services to the business.
How the Process Works
The vendor relationship process typically begins with the creation of a request for a proposal or the request for a quote (RFP/RFQ). The interaction can also begin with other documents or advertisements requesting vendor respond. In all cases, the client is able to objectively evaluate the capabilities and resources of the vendor.
When the best vendor for the task is selected, a contract negotiation process begins. The contract outlines all of the performance guidelines and expectations to which a vendor will be legally bound to adhere.
Once the terms of the contract have been agreed to by the buyer and seller, a binding agreement is executed that summarizes the mutual expectations. The mutual expectations particularly relate to the frequent monitoring and measurement of the vendors’ performance. Regular and frequent communication is necessary in order to ensure a successful vendor management process.
Scorecards to Monitoring Vendor Performance
As outlined in many books and websites on the topic of vendor management best practices, one of the key performance criteria is a process to monitor the performance of the vendor. To do this, it is necessary to have a vendor management scorecard. Regardless of the size of the business, a vendor management scorecard should address specific criteria.
Depending on the size of the business, perhaps a simple vendor management scorecard spreadsheet will be sufficient. For larger projects or businesses, there are many commercially available vendor scorecards available.
Vendor Key Performance Indicators
The scorecard should measure the key performance indicators (KPI) to which the vendor is bound. An easy way to develop the items included in the KPI list is to use the vendor’s contract terms. Such items can include lead times for supplies, communication availability of the vendor, and their responsiveness to changes or emergencies.
In other words, build on the effort that was used to develop the terms of the contract to create a list of the most important items to measure with the scorecard.
Create Easy to Use Scorecards
The scorecard should be easy to use by all employees that need to interact with this tool. It does not matter how comprehensive the list of performance indicators is if the tool is too cumbersome and user-unfriendly. Although the scorecard will be complete in its definition of what should be measured, if it is not intuitive, nobody will use it—which defeats the purpose of having a scorecard.
Vendor Timelines and Milestones
The scorecard should have a corresponding timeline and set of milestones that are in sync with the performance indicators. That is, performance is a function of both times as well as quality. The two are not mutually exclusive. If a vendor’s product gets to your project on time but are of inferior quality they are useless. So, the scorecard should grade on time, as well as quality performance.
Informing the Vendor of the Scorecard
The scorecard should not be a surprise that a business suddenly decides to use with a vendor if they find that the vendor is under-performing. Ideally, the vendor has been made aware that their performance will be monitored and measured throughout the term of the contract. The measurement will be based on consistent and regularly scheduled audits or evaluations that are agreed to by both sides. This awareness should be created during the contract negotiation phase of the vendor relationship.
Use of Data Collected
The data that is collected and analyzed by the scorecard should be used to follow up with the vendor. Accurate data about the vendors’ performance is useless if the business does not take action with the vendor based on the scorecard conclusions.