Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Supplier Evaluation — Definition and Process Explained
As taught in the Supplier Relationship Management Course / ★★★★★ 4.9 rating
What is supplier evaluation?
- Supplier evaluation is an instrument used to measure the effectiveness and suitability of suppliers to your company.
- A regular supplier evaluation has many benefits, including your supplier’s improvement in performance.
- Supplier evaluation also helps companies choose and select the best partners.
What is Supplier Evaluation?
Supplier evaluation is the process of assessing and approving potential suppliers through both quantitative and qualitative methods to compile a list of the best available suppliers.
In procurement, this formal assessment measures suppliers against various criteria—such as product or service quality, price, financial stability, delivery times, and customer service—to determine if they meet the organizational needs.
The goal is to create a best-in-class, low-risk portfolio of suppliers that can drive cost reduction, risk mitigation, and continuous improvement.
Furthermore, supplier evaluation is a continuous process for procurement departments. It not only acts as a pre-qualification step in purchasing but also serves as an ongoing mechanism to monitor and assess the performance of current suppliers, ensuring that the organization consistently partners with the most reliable and efficient 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.
Supplier Evaluation Process
Supplier evaluation process encompasses a series of systematic activities that help organizations identify, assess, and monitor their suppliers. Here are some key elements of the process:
1. Defining Criteria
Before starting the evaluation, it’s essential to establish clear criteria. These criteria may include product or service quality, price, financial stability, delivery times, production capacity, and the level of customer support.
Example:
Imagine you’re evaluating suppliers for raw materials. You could define your criteria as follows:
Product Quality: Must meet or exceed industry standards and have relevant certifications.
Price: Should be competitive compared to other suppliers, with transparent pricing.
Financial Stability: Requires a solid financial background, evidenced by good credit ratings.
Delivery Times: Must have a proven track record of on-time deliveries (e.g., a 95% on-time rate).
Production Capacity: Should be able to handle your volume requirements, with room for growth.
Customer Support: Needs to offer prompt, reliable support in case of issues.
2. Data Collection
Information about potential or current suppliers can be gathered from various sources, such as internal databases, market research, previous collaborations, surveys, and references from other companies.
Example:
Suppose you’re looking to evaluate a new supplier for office equipment. You might collect data by:
Internal Databases: Reviewing past purchasing records and performance reviews of previously used suppliers.
Market Research: Investigating market reports and industry publications to identify potential suppliers and trends.
Previous Collaborations: Analyzing the outcomes of past collaborations with suppliers in a similar category.
Surveys: Conducting surveys among your procurement team to gather feedback on supplier experiences.
References: Asking for recommendations or references from other companies in your industry to verify supplier reliability.
3. Quantitative and Qualitative Analysis
- Quantitative Analysis: Data is evaluated using numerical values, scoring systems, or indices, enabling an objective ranking of suppliers.
- Qualitative Analysis: Subjective factors such as flexibility, innovation, and communication skills of the supplier are considered.
Example:
Imagine you are assessing three potential suppliers for raw materials:
For Quantitative Analysis, you assign scores based on:
Price: Supplier A (8), B (7), C (9)
Delivery Times: Supplier A (9), B (8), C (7)
Production Capacity: Supplier A (7), B (9), C (8)
For Qualitative Analysis, you evaluate:
Flexibility: Supplier A is very accommodating, Supplier B is average, Supplier C shows high flexibility.
Innovation: Supplier C often suggests process improvements, while Supplier A and B are more traditional.
Communication Skills: All suppliers provide clear communication, but Supplier B stands out for their responsiveness.
4. Ranking and Selection
Based on the analysis, suppliers are ranked, and those who best meet the established criteria are selected. The goal is to create a portfolio of suppliers with whom the best possible cooperation is achieved, minimizing risk.
Example:
Imagine you have evaluated three potential suppliers for raw materials:
Supplier A: Scores high on delivery times and flexibility but has slightly higher prices.
Supplier B: Exhibits balanced performance across price, quality, and delivery.
Supplier C: Offers competitive pricing and innovative approaches, but its production capacity is moderate.
5. Negotiation and Setting Terms
After identifying the most suitable suppliers, negotiations take place regarding the details of the partnership, including pricing, delivery terms, warranties, and other relevant conditions.
Example:
Imagine you have selected Supplier B and Supplier C as your top choices for raw materials. During negotiations, you might discuss:
Pricing: Negotiating a discount for bulk orders or long-term contracts.
Delivery Terms: Setting clear expectations for delivery times and penalties for delays.
Warranties: Agreeing on warranty terms for product quality and service performance.
Other Conditions: Outlining terms regarding returns, after-sales support, and any exclusivity clauses.
6. Continuous Monitoring and Review
Supplier evaluation is an ongoing process. Once a partnership is established, it’s crucial to continuously monitor supplier performance through key performance indicators (KPIs) and conduct periodic reviews to ensure consistent quality and service.
Example:
Imagine you have finalized a long-term contract with a supplier for raw materials. To continuously assess their performance, you might:
Set KPIs: Establish metrics such as on-time delivery rate, product defect rate, responsiveness to inquiries, and compliance with safety standards.
Regular Reviews: Schedule quarterly or bi-annual meetings to review performance data, discuss any challenges, and plan improvements.
Feedback Loop: Create a system where both parties can provide feedback, ensuring that any discrepancies are addressed promptly and collaboratively.
Adjustments: If a supplier consistently falls short in a particular area, you can work together to implement corrective actions or re-evaluate the partnership if necessary.
The overall objective of the process is to ensure collaboration with the best available suppliers, contributing to cost reduction, risk mitigation, and improved overall business efficiency.
Pro Tip: Don’t just evaluate suppliers at the start—embed continuous performance reviews into your procurement cycle to ensure long-term value and accountability.
⭢ Ready to elevate your supplier partnerships? Learn how in our Supplier Relationship Management Course.
The Benefits of Conducting an Evaluation of Suppliers
Although the main reason for evaluating your suppliers is to see their suitability with you and your goals, there are other reasons why it’s important. Here are the main benefits of supplier evaluation:
1. Enhance the visibility of the supplier’s performance
When organizations do not have the data to check their supplier’s performance, supplier management will tend to be based on assumptions.
If the organization monitors its supplier’s performance, the supplier will be obliged to do its best.
2. Mitigate risks
Insights into the supplier’s performance can help reduce business risk, particularly their key suppliers’ increasing dependency on organizations.
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 Evaluation Checklist
General Notes
Supplier Performance Evaluation Framework
We have prepared a supplier evaluation form that you can read here, and below is a summarized version:
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. Centralize 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.
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.
Conclusion
Supplier evaluation is a critical process in procurement that helps organizations select the best partners for their business. It involves assessing various aspects of a supplier’s performance, such as product quality, pricing, financial stability, and delivery times.
Supplier evaluation is essential for ensuring standards are met, mitigating risks, improving supplier performance, and aligning business practices.
To effectively evaluate suppliers, organizations should establish performance indicators, classify suppliers, centralize data, collaborate for feedback, and create actionable plans based on evaluation findings. Implementing these steps can lead to better supplier management and ultimately benefit the organization’s supply chain and business performance.
I have created a free-to-download editable supplier relationship management scorecard template. It’s a PowerPoint file that can help you evaluate your supplier’s performance effectively. I even created a video where I’ll explain how you can use this template.
Frequentlyasked questions
What is Supplier Evaluation?
Supplier evaluation is a process in which the organization monitors and assesses the performance of its suppliers.
Why is supplier evaluation needed?
Supplier evaluation is needed to make sure that the suppliers of the organization are complying with the standards and requirements.
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.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
