Supplier assessment: a top 10
Most buyers understand that supplier assessment can be useful. But what you can use supplier assessment for and what effects it can have is not common knowledge.
This is part 2 in a series of five blogs on supplier assessment. Part 1 was all about your own role in supplier performance. In this series of blogs, when we speak of a vendor rating system, it is based on the premise that a system has both the ability to use data from your own system and a survey tool, which can be used to ask (mostly qualitative) questions to your own organization. Such a system generates grades, which can be compared with each other.
The previous blog, part 1, briefly discussed the developments that makes supplier assessment more and more necessary and increasingly used; the growth of the number of transactions and interactions with suppliers often does not keep pace with the growth of the purchasing department.
Supplier assessment can then help to increase efficiency. But where in the organization will you find these benefits? And what effects will occur? Here’s a top 10 list of the main gains.
“Those guys from ‘Rubbish Inc’ have already delivered all the goods mixed up again,” says our head of Goods receipt. “And ‘Mangel GmbH’ has sent another set of wrong invoices,” reports the Administration. So all day, week in week out, such reports trickle into the Purchasing department. No buyer remembers all the reports, big or small, during the meeting with the supplier. Often the complaints of the collegues who shouted loudest endure, but a lot of small suffering is forgotten after a few days.
For an optimal customer-supplier collaboration, it is important that the supplier is well informed about the wishes and requirements of the customer. This is not always easy for the supplier, because wishes vary per customer. To ensure that he follows through on the agreements, it is important that he is regularly held accountable for things that go wrong.
Now, you can hire someone who runs through the company and takes note of what happens all day long, but a good automated vendor rating system is a lot more efficiently (and cheaper). Moreover, it saves the buyer the trouble of gathering information from all sorts of nooks, crannies, systems and departments, while the supplier is already waiting at the reception desk.
But the biggest difference is made by informing your suppliers that they will be assessed. And by sharing these assessments at regular intervals, you will see that many suppliers will start improve their service by their own accord, even without you having looked at the numbers yourself. If goods are scarce, for example, and it is known that suppliers are assessed by a customer, in three out of four cases will first serve the assessing customer.
The buyer also becomes significantly more effective with a properly set up vendor rating system, for two reasons:
You get to see exactly where things are going wrong with each supplier. With supplier ‘ABC’ I have to start talking about bad order confirmations, and with supplier ‘XYZ’ about poor paperwork on shipments.
You can additionally see if it’s bad that they’re making these mistakes. You add a weighting factor to the issues in the software in order for you to see exactly which issues cause the biggest problems and therefore need to be solved first.
Buy from the best, reduce whining
It becomes interesting if you have several suppliers within a product- or service group. Put them together and compare them. With a good supplier rating system, this is relatively easy to do. Wouldn’t we do ourselves a big favor to buy a little less from the company ‘Hopeless’ with a score of 4 and a little more from the company ‘Excellent’ who scores an 8?
Yes, but the ‘Hopeless’ company is so cheap. That’s true, but if price is only one of the evaluation criteria, and the weights are filled in correctly, it will soon become apparent that a low price does not outweigh all the problems ‘Hopeless’ causes. The result is that your own organization will be less burdened with putting out fires.
As I said above, you will see the biggest difference just after you’ve informed your suppliers that they will be assessed.
Reduction of suppliers
Virtually every organization has one: multitude of small suppliers. The goal of most buyers is to significantly reduce this number. Small suppliers create scattered purchasing power and, above all, they demand a lot of time. With a vendor rating system you can get insight into whether and how there is malperformance.
Because malperformance is the rule rather than the exception: to you they are just a small supplier, but reversely your company is often a small uninteresting customer for them. Small customers usually don’t get the same attention and love as the big customers, which is also reflected in the grades. And with these at hand, perhaps others in the organization, such as Sales and Production, can be convinced that it really is better to say goodbye to Tiny Ltd.
An enormous advantage is the reduction of error costs. Literally, because error costs are often underestimated. In this context, we’re only talking about errors caused by the supplier. The cost of correcting an incorrect invoice: 50 euros. Wrongly stacked pallet: 35 euros. Missing packing slip: 35 euros. Goods without indications: 40 euros. But also think of extra telephone calls due to incorrect delivery times and order confirmations, information that is not provided digitally, defects, failure to report the shipment, damaged goods or packaging, bad pallets, returns, interrupted production, missed sales, excessive safety stocks, etc. I do have an Error cost Calculation Model available for enthusiasts, where anyone, based on a number of assumptions, can quickly get a feel for the costs associated with supplier errors. I will send it to you with love.
A vendor rating system alone will not make all the errors disappear, but it can reduce them by, let’s assume, at least 10 percent. That alone makes investing in a vendor rating system a no-brainer. Threatening to recover the resulting costs from the supplier works wonders, by the way. Of course, you only really charge a fine in hopeless cases.
Reduce inventory and increase service levels
By far the most important reason for buyers and logisticians to start supplier assessment is the desire to measure delivery reliability. Does the supplier deliver on the day/time I requested and is the shipment complete? If not, I want to have something tangible to make him see that he’s screwing up and needs to start delivering more accurately. That usually works wonders. It works so well, in fact, that delivery times become more reliable, so that safety stocks are reduced, standard delivery times can be shortened and service levels can be increased. And less inventory frees up working capital and warehouse space.
Many organizations have committed to an ISO standard. One of the requirements is to have a system by which errors by suppliers can be noticed, corrected and checked again. It is the rule rather than the exception that when I talk to a company with such a ISO certification, they reluctantly admit that the supplier assessment is quickly completed the day before the audit, and then for only a few suppliers.
Once the audit is over, the assessments disappear into a drawer until the next audit. An indescribable waste of time and effort. It could have been used for something more useful, like setting up a real vendor rating system that feeds itself with data automatically.
Besides being a tool to improve quality, a vendor rating system is an argument machine. Arguments that can be used in negotiations. The balance of power usually tilts heavily toward the supplier side. He often knows his product and market many times better than the buyer, who has to buy a variety of stuff and services.
If he is lucky, the supplier has competitors, with competitive bids, but especially with premium brand suppliers it is always difficult to negotiate without valid arguments. Of course, you have to first think carefully about who you can use what information on, but throwing a report on the table always yields something. “Listen, your average score with us is now 5. On January 1st it has to be at least a 7. And if that doesn’t work I’ll still get a two percent discount from you, because of all the error costs and annoyance you cause us.” And a modern buyer adds: “And if you manage to turn that into a 9, then you can raise the prices by two percent. That’s an extremely good deal for us.”
Procurement Performance Measurement
Measuring your own purchasing performance has long been seen as something impossible. A buyer who returns to the office with an extra five percent discount is usually welcomed with applause. But perhaps his colleague had earned a ten percent discount, with two fingers in his nose. Perhaps raw materials have dropped so much that five percent off is really a joke. Or a buyer who comes home with a five percent price increase may have performed something fantastic. The supplier initially asked for thirty percent in a well-founded manner.
In the absence of a reference point, it is very difficult to compare. With supplier assessment, however, it becomes possible to track the performance of one’s own buyers and the overall team. And concrete, measurable goals can now be set for the future. How that works exactly will be discussed in detail in part 5 of this series: Purchasing Performance Measurement based on Supplier Assessment
With these measurable performances on hand, it suddenly becomes possible for procurement to better demonstrate the added value of procurement internally. Not everyone in the organization is convinced of this. Supplier assessment also proves to be an excellent tool for assessment interviews, by both sides for that matter.
The buyers’ paradise
A final possibility of supplier assessment that I would like to mention is the buyers’ paradise. How do you get there? Is it accessible to everyone? Unfortunately, only for the few, as will be seen below.
Now assume that you have multiple suppliers in a product- or service group, and that they are reasonably interchangeable. Also assume that you wouldn’t mind having a few less. Now list these suppliers, from good to bad, put them in a letter, anonymous or otherwise:
“Dear supplier. Behold this supplier situation in our organization. We have decided to rationalize and will be saying goodbye to the bottom two suppliers in six months. Good luck!”
The suppliers will be horrified and afraid of losing sales. But at the same time they will be interested, because there is revenue to be gained. So they will go out of their way to get higher on this, fortunately relative, list. So in theory, the buyer can sit back while the suppliers tumble over each other to offer one optimization after another. And all this happens without the buyer having to lash out at the dead horse himself. The system will work by itself and the supplier will auto-evolve. Market forces are the optimal form.
As mentioned, it is unfortunately only given to a few to get into Valhalla, because you have to meet a number of conditions:
- There must be a broad assessment, so that suppliers are assessed on all their relevant points.
- You must, as mentioned earlier, have several interchangeable suppliers in a group. Trading companies and retailers in particular can find themselves in such a situation.
- The rest of the organization should also think this is a good idea and not start crying when they actually say goodbye to Favo BV.
- You have to actually start saying goodbye to the bottom two suppliers after six months, otherwise they won’t believe you next time.
In my working life I saw it applied once. It almost went well: the results were phenomenal, but the buyer had only failed to get his colleagues and management behind his plans in advance. Soon after, he was the one looking for new opportunities….
This was part 2 of a series of five on supplier assesment:
- Your own role in the performance of your suppliers
- What can I use supplier evaluation for?
- What system can I use for supplier assessment?
- What data can I use for supplier assessment?
- Procurement performance measurement based on supplier assessment
E-mail for questions or the ‘Calculation model Error Costs’ to: firstname.lastname@example.org