Preventing Poor Vendor Performance

Vendor performance is usually measured through their compliance to specific, predetermined objectives and delivery targets.

Usually, an organisation will engage the services of a vendor to meet a specific need or solve a particular problem. Or perhaps they identified a market-related opportunity and wish to take advantage of it before the competition. At this juncture, they approach a vendor to help them seize that opportunity.

When they sign a contract with the vendor, they expect the vendor to  fulfil their obligations and get a profitable result. They wouldn't have gone into the vendor relationship if they didn't think they would get good returns on their investment.

Unfortunately, this isn't always the case. Sometimes things go wrong, there are unexpected obstacles to success, or a vendor is unable or unwilling to comply with the terms of the contract.

Nevertheless, there are several steps that can be taken as early as the contract signing stage to nip poor vendor performance in the bud before it rears its ugly head.

In fact, there are several ways to set up vendor relationships to give it a much better chance of success over a long period of time.

In this article, we will consider several ways that poor vendor performance can be avoided. We will also look at things to avoid that may cause vendor compliance issues in the future.

What is poor vendor performance?

Poor vendor performance can be defined in several different ways. Usually, it can be described as a vendor failing to deliver on their promises as described in their vendor agreement.  

The service delivery failure must be of such a degree that it damages the business operations of their client.

The vendor's performance is measured against the benchmarks set in the vendor agreement. Which means that vendor underperformance can be measured.

The further the vendor deviates from the  minimum performance standards set out in their contract, the more the vendor is said to be underperforming.

If you look at any vendor agreement, there are usually  several performance targets that are set for the vendor. So vendor underperformance can designate several levels of non-compliance. It can describe a single event of underperformance, or can be  an indication of low performance over a period of time.

Vendor performance is always unacceptable. The vendor failed to fulfil their contractual obligations and caused harm to your organisation.

The causes of poor vendor performance

There are many reasons why a vendor might underperform. It can range from a single event or action that limited their output, to a series of episodes that worked together to cause them to underperform.

Generally speaking, the  factors that cause underperformance fall into two groups: supplier-side and organisation-side causes of poor performance.

1. Supplier-side causes of poor performance

There are several factors that are supplier-side related that can cause a vendor to underperform:

• A vendor might be overconfident in their capacity to produce results. This causes them to overestimate their capabilities and expertise. When it comes time to deliver on their promises, they fail.
• Many vendors don't function well within an established supply chain, either due to inexperience or wilful mistreatment of the chain.
• Sometimes a vendor  doesn't quite understand  the requirements of the buyer and makes commitments they are unable to keep.
• Many vendors run into financial difficulty along the way and are unable to honour their contract.
• Often vendors have to deal with disruptions caused by workforce disputes and strikes.
• Often, vendor underperformance comes down to something as simple as poor communication or relationship skills.
• Many times a vendor is unable to stand up to unreasonable demands and agree to terms they will be unable to fulfil.
• Many vendors struggle to deal with changes to schedules or other setbacks.
• Sometimes the problem comes down to a vendor's inability to be resilient and agile. They don't have the grit or creativity to turn a problem situation into an opportunity.
• Vendors can suffer setbacks from factors out of their control. For example, their production facilities might be damaged or even destroyed due to an accident or natural disaster. Or there could be economic turbulence or violent conflict.
  

2. Organisation-side causes of poor performance

A vendor's underperformance may be caused by actions on the buyer's side:

• A good example here are unrealistic expectations.
• Another example is if   members of your team treat the vendor poorly while still expecting stellar results.
• Another factor is if your organisation fail to take vendor risk into account.
• If you're consistently late in paying your vendors, you impose financial difficulty on them that can lead to underperformance.
• Another problem is if you fail to comply with the ordering and delivery protocols set out in the contract.
• Another factor is if you don't properly address issues with regards to vendor performance every time they arise.
• It's also a problem if you fail to track the performance of each vendor on a regular basis and take corrective action to ensure that they fulfil their obligations.
• It's also a mistake if you don't verify the performance data that a vendor gives you to ensure that they line up with reality.
• Another problem is if you constantly send urgent orders to vendors, instead of anticipating consumer demand and planning your orders appropriately.
• Finally, it can cause vendor underperformance if your performance specifications are incomplete, inconsistent or imprecise.
  

Understanding why a vendor underperformed

Sometimes a vendor's underperformance could be limited to their dealings with your organisation. It could even just be limited in scope to their business dealings with buyers in your country or region of the world.

Alternatively, they could be underperforming with regards to all their vendor agreements.

Bad luck and misfortune can happen to anyone. But a vendor cannot blame bad luck if they underperform due to poor business practices, inexperience, a lack of focus, or a failure to track performance targets.

As soon as you discover that a vendor has fallen behind on their benchmarks and performance targets, you have to convene urgent meetings to discuss the situation.

You have to discover the foundational causes for the underperformance, determine the scale of the problem, as well as the person or group responsible for the shortfall.

Then you have to discuss possible solutions to the problem. Firstly, you have to figure out if there are ways to diminish the effect of the root cause of the problem. If that isn't possible, you need to work out how long the issue will persist, and how you're going to handle the fallout of the situation.

An important part of these discussions is to find out both sides of the story, so that you can understand the problems leading up to the underperformance.

In this regard, it might be necessary to bring in consultants and third party experts to give their perspective on the situation. They might be able to give an assessment on the reasons for the underperformance, as well as make recommendations to mitigate the problem.  

Preventing failure with a good contract

One of the main purposes of negotiating and drawing up a vendor agreement, is to stipulate all of the performance targets that the vendor has to meet.

It should, theoretically, be possible to write the contract in such a way that vendor underperformance can be avoided.

When both parties agree to these terms at the start of the vendor relationship, the vendor won't have any excuse if they fail to keep the terms and things go wrong.

Performance criteria are crucial for later measuring and assessing whether the vendor agreement has been honoured and if the contract could be considered to be successful.

Anything less than hitting all of the performance benchmarks should be considered unacceptable. Nevertheless, you have to be realistic in what you expect. There will always be areas where a vendor will underperform.

That is why a contract should provide some leeway to allow for a certain level of vendor underperformance. It would be foolhardy not to do so.

Which means that the performance criteria stipulated in the contract should include a range of performance outcomes ranging from perfect compliance to completely unacceptable on the other end.

Each performance level should also specify both penalties and rewards for achieving each stage. This is important for vendor management practice.

Part of this approach means that you have to clearly describe poor vendor performance in the contract. Everyone must know what it means if a vendor underperforms. When a vendor fails to keep their contractual obligations, they shouldn't be able to claim ignorance.

Furthermore, the consequences for underperformance should also be spelled out in the contract, taking intentionality into account.

When underperformance and the consequences for not reaching performance targets are set out in the contract, it instils a culture of accountability. It creates a  definite link between effort and outcome.

In this way, there will be strong incentives for vendors to comply with their agreements and deliver the products and services they promised. It will also bring home the message that your organisation trusts the vendor to keep their commitments.

As the contract runs its course, there will always be room to make changes to the vendor agreement. When the performance criteria or benchmarks change, these can be amended in the contract.

Mitigating the risk of underperformance

When it comes to managing vendor risk, you have to assess the risk level of each vendor from the start. This makes it possible to predict poor vendor performance. This will allow you to build risk mitigation measures into the vendor agreement.

During the contract negotiation phase, you should build mechanisms into the contract that will improve performance targets and service delivery as specified junctions of the contract's fulfilment. These risk mitigation measures should also apply to the contract's definition of vendor underperformance.

What types of risk mitigation steps could be included in a contract? Here are a couple of examples:

• The vendor could be obligated to commit to a system of continuous improvement.
• Obligatory innovation could be spelled out in the contract.
• The vendor could make a commitment to improve their processes over the duration of the contract.
• The vendor could commit to improving their product and service delivery in measurable ways over a specified period of time.
  

Good vendor relationship management

When working with vendors, the goal should be to give your vendors the best possible chance to meet your expectations while maintaining a good working relationship with them.

A good working relationship should include the following components:

• A culture of mutual trust and respect.
• Making an effort to make the relationship work, no matter what.
• Communicate clearly and often.
• Making sure that both parties agree on shared priorities and goals.
• Establishing clear performance targets.
• Sharing the commercial risks of your relationships to such a degree that both are responsible for implementing mitigation measures should anything go wrong.
• Maintaining a good balance between handing out rewards and issuing warnings.

When you struggle to get along, every interaction becomes difficult and performance will suffer.

When you maintain strong working relationships with your vendors, it becomes much easier to deal with  any underperformance issues.

Take responsibility for your own involvement

Usually the vendor can be blamed for their own underperformance. Since it's their responsibility to provide the goods and services they have been contracted to deliver, they have to take the lion share of the blame for under deliverance

But that isn't always the case. Sometimes through the action or inaction of your own organisation, you made it increasingly difficult for the vendor to perform.

In these instances, your organisation is at least partly to blame for the vendor's underperformance.

Here are a couple of examples. If your team continually places orders after the agreed cut-off times and yet  expects the normal delivery schedules to the honoured, you are setting up the vendor to fail.

There are other ways that you could cause delivery dates to slip, for example by giving incorrect order and shipping information. This will require the order to be repossessed or even reshiped, causing the vendor to make delivery after the cut-off times. Under these circumstances they are hardly to blame for these delays.

It would be foolish to automatically blame the vendor for their underperformance issues without first doing at least perfunctory investigations into what actually happened. It's always embarrassing to admit fault after the fact.

Realise that your team's actions have real consequences when it comes to vendor performance. There is always room to improve your vendor management strategy.

Analyse your systems and processes and identify areas where your team could negatively impact vendor performance.

These factors need to be monitored as closely as you track your vendor performance data, to ensure that you give vendors the best possible chance of meeting their obligations.

Don't ignore the signs that your organisation contributed to a vendor's poor performance. If you do,  these types of problems will reoccur in all your vendor interactions and you will get a bad reputation in the market.

Conclusion

A vendor's underperformance could be the result of several factors working in concert, or it could be the result of the particular vendor and buyer's interactions, or the result of some external force that is causing performance to plummet.

Which is why it would be unrealistic to expect all your vendors to perform to the highest standards all of the time. It's impossible to prevent all causes of vendor underperformance.

There are, however, steps that you can take to improve the chance of your vendors meeting their performance targets.

There are also measures that you can implement in your supply chain to minimise the likelihood of delivery failure and mitigate the results of a vendor letting you down.

At the same time, you need to ensure that nothing you or any member of your organisation does cause a vendor to underperform.