A supplier scorecard is an essential tool that measures a supplier’s performance against specific metrics. It is used by both small and large businesses to manage and keep track of their supplier performance.
Most businesses are looking for ways to improve their bottom line by finding ways to reduce costs, while maintaining or improving quality.
To accomplish this, finance teams need to have visibility in their vendor or supplier catalogue, allowing them to identify areas of opportunity and track progress over time. An excellent way to achieve this is through a streamlined supplier performance management (SPM) process that includes the use of supplier scorecards.
Let’s take a look at what a supplier scorecard is, the benefits of having one, how to create one for your organization, and the best practices in vendor management.
What Is a Supplier Scorecard?
A supplier scorecard, also called a vendor scorecard, is a document used by businesses to rate the performance of their vendors or suppliers.
In supply chain management, supplier scorecards can be used to compare the performance of different suppliers to help businesses decide which supplier to use for a particular good or service.
This information can also be used to make informed decisions about how much business to give each supplier and what prices to pay for their goods or services.
What to Include in a Supplier or Vendor Scorecard
Since a supplier scorecard is a performance measurement tool that can be used to assess and measure supplier performance, it should include KPIs (key performance indicators) that are specific and measurable. This data can be captured manually or electronically and is typically tracked over time to identify trends.
Here are the most essential elements to include in a basic supplier scorecard:
- contact information
- delivery times
- quality of goods or services
- order accuracy
- customer service
- invoice payment history
When deciding about what to include in your supplier scorecard, it’s important to consider what type of data will be most helpful in assessing your vendor’s performance.
For example, if you’re a manufacturing company that buys raw materials from a textile supplier, delivery times and quality of goods or services may be more important than customer service.
Who Uses Supplier Scorecards?
However, other departments may also find scorecards useful, such as accounting and finance (for auditing purposes), operations (to measure performance against internal SLAs), and even marketing (if customer satisfaction is a key metric).
When and How to Use Supplier Scorecards
Supplier scorecards are used to track, manage, and measure vendor performance. This includes measuring performance against specific metrics, setting targets, and increasing supplier performance over time.
There are many ways that a scorecard can be used. Some examples are:
- Negotiating with a current supplier: You can use a scorecard to show areas of improvement that a supplier needs to make in order for you to continue doing business with them. Whether it’s for direct or indirect procurement, it can help you get a better price or more favorable terms.
- Approving a new vendor: In the approval process of considering doing business with a new vendor, you can use a scorecard to compare their performance against your current suppliers. This will help you streamline your vendor approval process to make an informed decision about whether to proceed with working with the new supplier or not.
- Identify potential risks: A vendor scorecard can help identify potential risks associated with working with a particular supplier. This includes things like financial stability, supply chain risks, quality of products or services, and delivery times.
One of the most common applications of vendor scorecards is to track your suppliers’ performance over time. This information can be used to identify areas of improvement and develop action plans for increasing performance.
For example, if you notice that one of your suppliers has consistently late deliveries, you may want to consider finding a new supplier.
Benefits of Using a Supplier Scorecard
Most businesses consider scorecards to be a valuable tool for managing vendor performance. Here are some benefits that you can expect to see by using a scorecard:
- Improved communication: By using a scorecard, you can provide feedback to your suppliers in a clear and concise way. This will help them understand your expectations and what you need from them.
It provides a common language that you can use to discuss areas of improvement and enhance your supplier relationship management process.
- Higher supplier performance: When suppliers know that their performance is being tracked and evaluated, they’re more likely to perform at a higher level. This can lead to improved quality of products or services, better delivery times, and more favorable terms.
- Cost savings: By tracking vendor performance, you can identify areas where you can potentially save money. For example, suppose one of your suppliers consistently has late deliveries. In that case, you may be able to negotiate a discount or find a new supplier that can provide the same products or services at a lower cost.
- Better decision-making: When you have accurate and up-to-date information about your suppliers, you can make better decisions about whom to do business with. You can also more easily identify areas of improvement and develop action plans for addressing them.
- Increased transparency: A scorecard can help to increase transparency within your organization by providing visibility to your supply chain and vendor management systems.
This includes providing visibility into vendor evaluations and performance for all stakeholders, including senior management, procurement, and finance, allowing you to identify issues early and take corrective action before they become bigger problems.
How to Create a Supplier Scorecard
A supplier scorecard is effective only if it’s tailored to your organization’s specific needs. When creating one, it is helpful to consider how it can be used specifically in your vendor management system.
1. Identify your key performance indicators (KPIs)
The first step is identifying which KPIs are most important for measuring performance. This will be different for every organization, but some most common KPIs used by many industries include on-time delivery, responsiveness, quality of goods or services, and pricing.
For starters, sit down with your team and brainstorm which KPIs would be most important to track to improve the vendor’s performance. Consider your business objectives and goals, key suppliers, and areas in which you would like to see improvement.
Once you’ve identified the KPIs that are most important to your organization, you need to set thresholds or targets for each one. For example, you can set a target of 90% for on-time delivery and 95% for quality of goods or services.
To have a well-rounded view of your suppliers’ performance, you need to assign a timeframe to measure each KPI, which could be monthly, quarterly, or yearly. It’s important to regularly review your KPIs to ensure that they are still relevant and that your suppliers meet or exceed your targets.
2. Gather your data
Once you’ve identified the most relevant KPIs and set targets for each one, it’s time to gather data. This data can come from various sources, including your internal departments, such as customer service or accounting, or external sources, such as surveys or third-party reports.
If you don’t have any data on hand, you can always reach out to your suppliers and ask for their help to gather it. Most suppliers are happy to provide data if it means they can improve their performance, maintain a good relationship, and grow their business with you.
Since tracking data manually can be time-consuming and error-prone, supplier management software can automate data collection and make it easier to track KPIs.
3. Maintain open communication with suppliers
Scorecarding is not a one-time activity. In order for it to be effective, it needs to be an ongoing process that is regularly reviewed and updated.
As part of this process, it’s important to maintain open communication with your suppliers. They should know the KPIs you’re tracking and how they can improve their performance.
Additionally, you should provide feedback to suppliers on their performance, both good and bad. This feedback should be specific and actionable so that they can make the necessary changes to improve their score.
For convenience, supplier management software can make communication easier and accessible for both sides to exchange feedback and give suggestions 24/7.
Supplier Scorecard Best Practices
Start small and simple
If you’re just getting started with supplier scorecards, it’s best to start small and gradually add more complexity as you become more comfortable with the process. You can start by tracking only a few KPIs for a handful of suppliers. Once you get the hang of it, you can add more KPIs and suppliers to your scorecard.
Make sure the KPIs are specific and measurable
This may seem like a no-brainer, but it’s important to make sure that the KPIs you’re tracking are specific and can be easily measured. For example, if you’re tracking the quality of goods or services, you’ll want to make sure that you have a way to measure this (e.g. customer satisfaction surveys, defect rates, etc.).
Use supplier scorecards as a starting point for further analysis
Supplier scorecards should not be used in isolation but rather as a starting point for further analysis. For example, if you notice that one of your suppliers is consistently underperforming, you can use the scorecard data to drill down and figure out why that’s the case.
Is it because of late deliveries? Poor quality? Unsatisfactory customer service? Once you identify the root cause, you can communicate and work with the supplier to address the issue.
Consider using supplier scorecard software
If you’re looking for a more efficient way to track supplier performance, you may want to consider using supplier scorecard software.
Instead of using email and spreadsheets, software typically includes features such as real-time communication, detailed dashboards, customized reporting, and powerful integrations that can make it easier to track and assess your suppliers’ performance on a weekly or monthly basis.
This is especially useful if you have many suppliers or need to track many KPIs at once. For most businesses, supplier scorecard software is a way better option than manually tracking everything.
Automate Your Supplier Performance Management Process
Supplier scorecards can help you track the performance of your suppliers against specific metrics, identify trends, and make informed decisions about how much business to give each supplier. Building your supplier scorecard with the software makes the process easier and more efficient for both you and your team.