Supplier Evaluation — Everything a Procurement Professional Should Know

A supplier’s evaluation is crucial in procurement. The evaluation helps the organization filter the potential suppliers to get the best partner for its business. However, how do organizations evaluate these potential suppliers?

In this article, we will discuss what supplier evaluation is. We will also check how organizations assess their potential suppliers and their importance in procurement. 

Once you are done reading this article, you will know how crucial supplier evaluation is for every business. Additionally, it will decrease the risks that you can bring to your organization by sourcing ineffective suppliers. 

What is Supplier Evaluation?

We know that you already have a hint of what supplier evaluation is due to its name. Supplier evaluation is a process in which the organization monitors and assesses the performance of its suppliers. The evaluation of suppliers is done either monthly or yearly. 

The assessment of the supplier includes a review of the supplier’s quality of product or service, price, financial stability, delivery times, and customer service. 

The purpose of supplier evaluation is to ensure that you will partner with the best suppliers available in the market. 

It is important to note that the supplier must have a clear understanding of the needs and requirements of the organization before conducting an evaluation. This will help the organization to know what areas its supplier falls short of.

The Importance of Supplier Evaluation

Supplier evaluation is significant to ensure that the suppliers of the organization are meeting the standards and requirements. It also allows the organization to identify any problems that can affect it greatly. 

Conducting regular evaluations will lessen the risk of non-compliance and ensure that the selected suppliers of the company are doing their best. 

Measuring and assessing the performance of the supplier is crucial to the reduction in costs, increase in production, and business performance. Overall, it is what drives the organization to continuously improve its supply chain.

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The Benefits of Conducting an Evaluation of Suppliers

1. Enhance the visibility of the supplier’s performance

When organizations do not have the data to check the performance of their supplier, supplier management will tend to be based on assumptions. 

If the organization monitors the performance of its supplier, the supplier will be obliged to do its best performance. 

2. Mitigate risks

Insights into the supplier’s performance can help reduce business risk particularly, the increasing dependency of organizations on their key suppliers. 

The risk can be financial or operational and it increases depending on the location or distance of the supplier from the organization.

3. Improve supplier performance

The goal of supplier evaluation is to ensure that the suppliers are still performing their best for the organization. Supplier assessment can be truly effective when it leads to continuous improvement activities that will enhance the supplier’s performance. 

4. Align customer and business practices

It is ideal that the suppliers should align with the customers and the organization by sharing the same business ethics. Through the evaluation, the supplier will be committed to sustainability and continuous improvement. 

Supplier Performance Evaluation Checklist

1. Establish performance indicators

Of course, the organization needs to establish a supplier evaluation plan to know the parameters it wants to assess. Without this, the organization cannot fully evaluate its suppliers or worse, reflect insights that are counter-productive to your business. 

The following are the parameters that organizations must include for an effective performance evaluation:

• Price – The organization can create a win-win situation with vendors who are able and willing to lower their prices. By lowering their prices, the organization would want to deal with them often. 

However, the organization must be observant. If there are any additional charges or surprise costs, then the organization must be wary of the vendor. 

• Cost – This can either be monetary or non-monetary when dealing with suppliers. It includes peripheral costs that are associated with movement, packaging, delivery, and disposal 
• Quantity – The organization can also consider the comparison between quantities ordered and received. Sometimes, the vendor will send a notice to confirm and explain anomalies in the delivery. 
• Quality – The organization must inspect the delivered goods to check any visible product defects, rejections, and returns.
• Service – This includes indicators such as the response time of resolving issues and client satisfaction engagement. 
• Delivery – This indicator focuses on the timeliness of the order process and the pre-delivery waiting period. 
• Payment terms – A fast payment method and terms are preferable to organizations than a slow payment process. 
• Financial health – Suppliers that have good financial health can provide for the needs of an organization much better.
• Compliance – You need to know how compliant your suppliers are in terms of their taxes, contracts, and procedures.

2. Classify suppliers

In order for the organization to classify its suppliers, it must classify them first into categories. One way to do this is by classifying them by their geography. 

3. Centralized the data

Many organizations have many suppliers across various functions. Bringing all of them into one centralized portal can allow you to manage and assess them well. 

4. Collaborate with suppliers for feedback

Not all evaluation or assessment needs to be quantitative. Constant collaboration with your supplier can bring out the bottlenecks more visibly. 

5. Create an actionable plan

After you have done the previous steps, the organization can start to create an actionable plan. This is necessary to ensure action against your findings to close the loop in the evaluation of the organization. Additionally, it helps to know the gaps in performance and devise strategies to fix them.

Frequently asked questions

1. What is Supplier Evaluation?

It is a process in which the organization monitors and assesses the performance of its suppliers.

2. Why is it needed?

Supplier evaluation is needed to make sure that the suppliers of the organization are complying with the standards and requirements. 

3. What are the indicators that the organization must include in its evaluation?

Some of the indicators that you need to consider are the price, quality, cost, quantity, service, delivery, payment terms, financial health, and compliance of the suppliers.