The Importance of Tracking Vendor Performance

How well your vendors perform will have a profound effect on the success of your company. In fact, it’s possible to use vendor performance as a benchmark to assess your entire procurement process.

Some vendors perform well, regardless of how well your vendor management systems are set up, or how well you structure your purchasing contracts. On the other hand, a perfect contract and vendor management strategy will not suddenly cause a lacklustre vendor to always fulfil or even exceed your expectations.

Which is why it's always important to track vendor performance and make adjustments before the vendor relationship goes off the rails.

In this article we will look at why it's important to track vendor performance, specific methodology for doing so, as well as ways to make corrections if a vendor underperforms.

Why is vendor tracking important?

It might seem as if the most important part of vendor management is choosing and onboarding the right suppliers for your needs. But this is far from the truth.

Vendor management is an ongoing process. You have to track the performance of your vendors from the moment you approach them with a potential contract, until the day that contract is terminated.

If you allow vendor relationships to carry on unsupervised, you might expose your business to unnecessary operational risk. When you make periodic evaluations an integral part of your vendor management strategy, you will get instant feedback of any adjustments you need to make in your overall strategy.

A continuous flow of data with regards to vendor performance will also show the way to improving your business performance, as well as clues to the optimization of your supply chain.

This is why it's important to track vendor performance on a continuous basis. It will ensure that all expectations and contractual obligations have a good chance of being met.  

If a vendor meets and exceeds their contractual obligations, you will be able give them more contracts with confidence. But if a vendor lets you down, you will have hard evidence to prove that it’s not worth renewing their contract.

Simple performance indicators

Tracking a vendor's performance isn't always complicated. There is part of a vendor's performance that is easy to evaluate, for example whether they delivered the right product to your warehouse, or if they made the delivery within the stipulated time frame.

When a vendor signs a contract to deliver specific products and services within a specific timeframe, there are usually certain performance targets they have to meet:  

• That the goods have to be delivered by a specific date and time
• That the goods need to be delivered to a specified location or locations.
• That the goods have to be delivered at a predetermined price point.
• That the goods have to comply with a set of predetermined standards and specifications.
• That they have to deliver a specific number of items.
• That the goods have to be of a certain quality.
• That the vendor has to comply with the relevant regulations.
• That the buyer can rely on achieving a certain level of end-user satisfaction from the vendor's goods and services.

These delivery targets with regards to cost, quality, and time are easy to measure and to assess. They don't rely on someone's opinion to determine whether the vendor kept their side of the agreement.

Regular tracking as an early warning system

There is a certain time investment required for effective vendor management. It will be necessary to correct mistakes or performance deficiencies from time to time. Which means it's necessary to clearly outline everything you require from your vendors from the outset. You also need to set the appropriate boundaries for your relationship—similar to any type of relationship.

When a vendor fails tokeep their side of the bargain—if they violate a boundary or fail to meet the requirements of their contract—you will have to meet with them and discuss this unsatisfactory situation.

These uncomfortable discussions need to be based on hard facts and real-world metrics not objective reasoning or emotions. When you have solid data to back you up, it will be much easier to demand corrective action from your vendor. If you decide to modify or cancel your contract with them, these types of decisions need to be based on facts not feelings.

Tracking vendor performance on a continuous basis will act as an early warning system for when corrective measures need to be implemented. That is why you have to agree on service delivery targets at the start of the contract. These targets need to be set for a particular order as well as what you expect from every order going forward.

Furthermore, the members of your team tasked with receiving the delivered goods, need to be thoroughly briefed on what to expect from the vendor. They need to know the exact date or lead times when to expect the order, what is going to be delivered, in what quantity, and of which quality.

If the vendor didn't make arrangements with regards to any delays to the delivery schedule, your team is then able to inform management that the vendor didn't meet the relevant performance targets.

Tracking performance through KPIs

A large part of vendor performance can only be tracked by evaluating data points  collected  and reported over extensive periods of time.

The expectations with regards to the goods and services that the vendor has to provide, have to be clear to all the stakeholders. For example, the contract must spell out all delivery expectations.

Other performance criteria have to be described, as well as the ways the requisite metrics are to be calculated. These data points have to be verified on a regular basis, to ensure that all the vendor tracking data are up-to-date and accurate.

When all these benchmarks are in place, it becomes a simple matter to track vendor performance over a period of time.

A great tool that will help you set the proper boundaries and expectations for each vendor, is to specify Key Performance Indicators (KPIs) for each contract. When KPIs form a strategic part in the way you regularly deal with vendors, it becomes an invaluable tool for measuring the success of the vendor relationship.

KPIs must be defined in the contract

For KPIs to be effective, they have to be determined when you're still negotiating the vendor contract. Both parties have to agree on the set of KPIs that the vendor has to meet.

It's important that the KPIs should favour both parties to the agreement. If the KPIs are unrealistically aligned in your favour, the vendor might be unable or unwilling to meet these goals. Which means you've doomed the vendor relationship from the start.

When there is buy-in from both parties in reaching the KPIs, both will be invested in reaching these goals.

Both parties must clearly understand the KPIs, what is expected from both parties, and what are each party's obligations. Otherwise, the KPIs will have zero impact—they become unreachable and unenforceable, and nothing but a waste of everyone's time.

Examples of effective KPIs

There are a number of KPIs that have successfully been used by procurement managers around the world in tracking vendor performance. Here are examples of KPIs that are specifically geared towards meeting general business goals:

• Ensuring that the vendor is compliant with local laws and regulations as well as industry standards.
• Delivering goods on the specified date and at the right location.
• Ensuring that the right goods are delivered.
• Ensuring that goods and services delivered meet predetermined levels of quality.
• Allowances for product variance or defects are specified.
• How often the vendor is obligated to deliver a specified good or service, and what are the consequences if these fulfilment rates aren't met.
• Contingency planning for when there is an operational disruption or something else goes wrong.
• How will the vendor make themselves available to assist in resolving any unexpected delays or glitches?
• There can also be KPIs with regards to pricing—to ensure that the vendor always provides their goods at competitive prices.
• Will the vendor adjust their pricing to ensure that you always get the best market prices?

There are also other more subjective criteria that can be instituted to measure vendor performance. They focus on indirect means to track performance criteria that are more general in nature:

• Is there a downward trend in cost?
• Is there an upward trend of speed of execution and product and service quality?
• Does the vendor respond to requests and inquiries in a reasonable turnaround time?
• Are you able to forge a working relationship with the vendor that is effective?
• Is the vendor improving their level of service and goods on a continuous basis?
• Does the vendor strive for innovation?
• How well does the vendor adapt to changes in operational circumstances or requirements of the organisation?
• Is the vendor able to communicate well when they experience challenges to their operational efficiency—especially when your organisation is the bottleneck?

For most of these KPIs, there is usually some type of ramp-up time—where the vendor is expected to work themselves up to the final performance level through a staged roll-out. Even in these types of circumstances, the vendor will still be expected to meet a set of minimum requirements at the start of their contract.

Automatic, regular performance reviews

KPIs don't have much weight if they're simply a list of requirements on a piece of paper that is never executed. If no one takes them seriously, the whole process of coming up with KPIs is just a giant waste of time.

It is in your best interest as a business to track the performance of all your vendors through a regular reviewing process. The result will be improved outcomes and you will get the most benefit out of your vendor contracts.

When choosing KPIs, make sure that there aren't any hidden performance indicators that you overlook. Devise KPIs that are easy to measure and track, so that any lag in performance can be addressed quickly and before it becomes a major setback.

The KPIs must hold vendors accountable. It's these types of performance metrics that will build strong and long-lasting vendor relationships that will prove beneficial to both parties. Remember, KPIs will only work if you subject all your vendors to regular performance reviews, conducted at regular, predetermined intervals.  

To prevent these regular reviews from adding an unnecessary administrative burden to your team, consider automating these business functions. You can set up technology tools to manage the regular performance reviews of your vendors and track their progress along the lifetime of their contract. The system can, for example, send automated surveys to the appropriate stakeholders to get regular feedback on how your vendors are shaping up.

Here are some ways that technology can help you track vendors on a continuous basis:

• You are able to set key dates that will automatically trigger review notifications.
• Because you are able to automate workflows, you take charge of the scheduling of your vendor contracts so that you can proactively set aside time for review functions.
• The system can send out automated surveys to the relevant stakeholders. In this way the information necessary to track KPIs are automatically gathered at the appropriate time and analysed to track vendor performance.
• Vendor tracking data can be represented in graph format—which makes comparing vendors a simple matter
• Vendor performance data can be tracked on automated dashboards that give in-depth performance data that will form a clear picture of performance patterns.

Tracking vendor performance need not pose an undue burden on your team. Vendor management system (VMS) software will be able to simplify and streamline the whole performance tracking workflow. The system will automatically coordinate the gathering of the required information to make vendor performance tracking information instantly available.

In this way, the supplier performance management software can play a valuable role in ensuring that vendors fulfil all their obligations. The result is that you will receive the goods and services you need at the right time to make your business a success.

The system will also be able to show you how well the vendor fulfilled their obligations, which will help you make solid, fact-based decisions with regards to the vendor relationships going forward.

Conclusion

If there's one truism surrounding vendor relationships, it is that you can't just let them run unsupervised in the background. You have to be proactive in your vendor engagements and form strong connections. This is especially true when it comes to those vendors with higher strategic importance.

No vendor relationship will be worth your while if the vendor doesn't comply with their contractual obligations. And you won’t know if a vendor keeps their side of the bargain if you don't track their performance.

This is where KPIs are invaluable. You can devise specific KPIs that measure the delivery times, quality levels and speed of execution of your vendors.

This is also an important way of mitigating vendor risk. Drops in service and product quality tend to happen when one looks the other way. A drop in vendor performance can occur slowly over a long period of time, or things can suddenly go wrong. A problem usually only becomes apparent once it’s grown considerably in size and scope—when it can already pose a significant threat to your operations.

The effects on the running of your business can range from easily remedied, to catastrophic—or even terminal. You need to nip any lag in vendor performance in the bud before things get out of hand.

This is why automated systems are invaluable in keeping your vendors in line. Software can automatically send out reminders to team members to perform the necessary performance reviews or other actions.

The software is also able to adapt the surveys it sends out to different stakeholders, to ensure that the correct information is collected at the correct time. In this way, you can be assured that the performance of all your vendors will be measured to give you warning when things go wrong—making it possible to take corrective action in good time.

The software will also give you a centralised overview of all your vendors with their level of compliance, making it possible to track their performance against predetermined targets on an ongoing basis.