Vendor Evaluation: Process, Criteria, Methods & Tools

Misunderstandings, missed delivery timelines, and quality issues can be everyday events for many businesses dealing with suppliers and vendors. While such incidents are sometimes beyond our control, we can often overcome these hurdles. The solution is to evaluate relations with vendors and suppliers and ensure continuous improvement in their performance.

This article discusses vendor evaluation as a process and everything you must learn about its criteria, methods and tools of evaluation.

What is vendor evaluation?

Vendor evaluation or vendor performance evaluation is a structured process that helps assess and evaluate the performance of existing vendors and suppliers to a business based on pre-specified categories, parameters, scorecard-based tools, or other methods. This is one of the key responsibilities of the procurement department of any organisation.  

Example: Let us assume "Fast Fashion" is a retail garment store. It sources clothes from multiple small garment manufacturers. One of its suppliers has been "Needles and Threads" for the last few years. Fast Fashion has mixed experience with its suppliers and wants to improve its sourcing line. So, it evaluated its suppliers, including "Needles and Threads," using standard criteria or parameters. This process of evaluation is Vendor evaluation. 

Based on the assessment of vendor performance, "Fast Fashion" can help suppliers work on their weaknesses or discontinue relations with suppliers who fail to improve their performance. Vendor evaluation is similar to employee performance evaluation but conducted using different parameters.

Different methods of vendor evaluation 

Some of the standard methods of vendor evaluation are: 

Categorical method 

This is a qualitative approach to supplier classification across broad categories. An organisation creates a set of categories specific to supply, like on-time delivery, quality, response time, costs, etc. A supplier's performance under each category is rated in broad qualitative categories, like Excellent, Good, Satisfactory, Poor, and Very Poor. Such an approach to supplier evaluation is easy to implement and comprehend.  

Weighted scoring method 

This type of evaluation requires setting up a scoring mechanism for suppliers' performance under each category, like delivery, quality, response time, and costs. In addition, each category also gets a specific weightage. Such weightage is assigned based on the category's significance in the customer organisation's business. For example, timely delivery by suppliers is more important for an organisation than cost fluctuations. So, following the weighted scoring method, the ‘'delivery timeline’' as a supplier's performance category will get higher weightage than the ‘'costs’' in vendor evaluation. 

Cost-ratio method 

In this method, an organisation evaluates its suppliers based on the total costs of doing business with them. Total costs may include product costs, administrative expenses for managing a supplier, transportation, and quality assurance costs. The cost ratio is the total costs calculated divided by the total value received, which is the sales value of the organisation's product.  

PBA method 

PBA, or the Performance-Based Agreement approach, requires an organisation to set a well-defined and practical performance target. Suppliers are assessed and evaluated based on the achievement of these targets. Many organisations link payments and incentives to suppliers with their performance achievements. 

Commercial 

When considering the commercial side of any potential vendor or supplier, it's advisable to account for factors like the market share of vendors, their brand visibility, recognition in the industry and existing clientele.

Technical 

Such evaluation considers technology capability, scientific aptitude, intellectual property rights, and vendor technical compliance records. 

Records 

This involves evaluating vendors based on open-source information, such as financial records, press releases, etc.  

Before-the-fact 

Such evaluation happens before a vendor contract is signed or the project engagement begins. It involves gathering information from publicly available sources and vendors' responses to RFIs and RFPs from the customer company.   

After-the fact 

This type of evaluation happens once a vendor contract is signed and the selected vendor has delivered their first shipment.

Vendor evaluation process 

A vendor performance evaluation process may differ depending on an organisation's evaluation method. For example, a scorecard-based supplier evaluation will vary from a PBA-based method. 

Here, we have shown a vendor performance evaluation process following the scorecard system: 

The scorecard system can be similar to the weighted scoring method discussed in the preceding section. The steps to implement such a system involve: 

1. Define the Key Performance Indicators (KPIs) for suppliers.  
2. Establish the scoring mechanism based on KPIs.  
3. Collect data for each supplier under performance evaluation. 
4. Analyse data, prepare scorecards and interpret performance.  
5. Provide feedback to suppliers with necessary action plans for improvements.  
6. Monitor performance continuously for reviewing performance improvements.  

Vendor evaluation criteria checklist

Vendor evaluation criteria refer to the set of parameters or metrics that can help objectively assess a vendor's performance. 

A standard checklist for evaluation criteria: 

Vendor evaluation scorecard

Using the weighted scoring method, we have shown a sample scorecard for vendor evaluation. The column named "importance" can contain weightage specific to each criterion.  

Vendor evaluation tools

Depending on the size and industry, organisations may use different tools for vendor performance evaluation. Some of the commonly used tools are: 

• Vendor management software like Clear Supply Chain Cloud
• Data collection tools, like survey forms
• Data storage tools, like spreadsheets, cloud database 
• Data analysis and visualisation tools, like spreadsheet apps
• Contract management system  

Benefits of vendor evaluation

The significant benefits of vendor performance assessment and evaluation on a regular and continuous basis are: 

1. Cost optimisation: It helps organisations obtain competitive supplies, avoid escalations, and reduce total procurement costs.  
2. Quality improvement - Vendor evaluation helps improve quality adherence and process efficiency.  
3. Risk mitigation - Helps anticipate and avoid supply disruptions and financial and other business risks associated with suppliers. 
4. Promoting innovation - Performance assessment and feedback can motivate suppliers to adopt collaborative business technologies and share knowledge. 
5. Stronger relationship with vendors - This involves improving communication, mutual growth and maintaining long-term business partnerships. 
6. Improved competitiveness of the business - Vendors are the key partners of any business. Better vendor performance can help any organisation improve their competitiveness in the market.