In procurement, a transparent buyer-supplier relationship is vital for a supply chain to run smoothly. A lack of communication and transparency among the two groups can cause orders to run late or be missed altogether. This is where a strong supplier scorecard comes in. A supplier scorecard, also called a vendor scorecard, is a tool that allows buyers and suppliers to monitor their relationship.
Scorecards have metrics or categories that buyers will use to grade their suppliers. These can differ from company to company, but most scorecards will measure quality, on-time delivery, and responsiveness. All in all, a scorecard system can help you measure vendor performance, push for improvements, foster better vendor relationships, decide which suppliers to keep in your supplier base, and reward particular suppliers based on cold, hard data.
Surprisingly, many companies don’t have a straightforward supplier scorecarding process, the biggest hurdle being that scorecarding is frequently a manual process that’s prone to mistakes and confusion. If you find yourself in that camp, don’t put off implementing supplier scorecards any longer. If 2020 has taught businesses anything, it’s the importance of predictable supplier behavior. Supplier scorecards are an important step in minimizing your supply chain risk, and—thankfully—they don’t have to be that manual anymore.
Building Your Supplier Scorecard
In order for a supplier scorecard to be effective, you need to measure what matters most to your business. While there are some best practices for supplier scorecards, each company’s weighting will be slightly different. Here are the steps to follow to set up a scorecard that works for your specific needs.
Step 1: Identify Your Key Performance Indicators (KPI’s)
Don’t over complicate this.
One of the most common points of frustration is that buyers will try to grade suppliers on too many KPIs at once, so make sure you are starting with a reasonable amount. Measuring 2-3 key metrics will be enough to give you a well-rounded view of your suppliers’ performance.
While there are dozens of ways to measure supplier performance, we recommend starting with the basics: quality, responsiveness, on-time delivery, and price-variance.
You’ll need to plan to review your KPIs every month within the first 3-4 months of your vendor scorecard implementation. Don’t be afraid to cut out supplier metrics that aren’t useful. It’s also important to understand that some suppliers need to be graded differently than others. This will allow your team greater visibility into each supplier relationship.
Step 2: Integrate Your Data
This part can be daunting. You need to make sure that you are pulling data from all the related applications. While data collection can seem time-consuming, you need the data for scorecarding to be effective.
A balanced scorecard is a healthy mix of quantitative and qualitative data. While many companies have no shortage of qualitative, or anecdotal, data, it’s often much harder to gather up quantitative data. And yet, quantitative data is much more important.
Quantitative data allows you to see the big picture, including how well a supplier is performing right now versus in the past. Because it’s grounded in numbers, it’s also more objective and useful in monitoring and rewarding improvement. Over the course of years, it can also be valuable in spotting trends concerning your suppliers. However, regardless of how well-developed your scorecard is, it will be nearly impossible to measure these KPIs if you are relying solely on email to communicate with suppliers. Emails lack transparency and can get discarded or lost in the jumble. Tracking these metrics reliably requires that communication run through a modern software solution that tracks order updates.
Learn about the 4 biggest risks in your supply chain.
Step 3: Transparent Communication
Scorecarding is not a top-down process. For it to be truly effective, it should never be one-sided with the buyer solely critiquing or grading the supplier. Effective communication brings suppliers together, giving them the opportunity to give their own feedback about the process.
Monthly or quarterly check-ins are a must, at least for top-tier suppliers. They give buyers and suppliers a chance to review the relationship and look for areas of improvement.
While it’s best practice to meet with suppliers and discuss performance on a regular basis, the best supplier scorecards will be available to both parties 24/7 so that any performance dips can be addressed right away, instead of weeks after the fact when a meeting finally takes place.
While every company’s scorecard should be tailored to their needs and reflect the performance of their specific set of suppliers, there are some industry benchmarks that can help lead you on the right path.
A recent study by the Hackett Group found that 90% of orders should be “perfect orders” in order to maintain customer happiness. A perfect order is defined as one that arrives on time, in full, and with no issues or damages. If fewer than 90% of orders are perfect, customer trust begins to erode.
This is a helpful standard to keep in mind for your own business, but it’s also one to consider when grading suppliers.
As you perform quality checks, it’s fair to say that the majority of orders should not have any issues. If you do notice consistent issues in quality, use the supplier scorecard to start a discussion and let them know your customer loyalty is at risk if it continues. Don’t forget: you’re also held to perfect order standards by your customers, which you put at risk with imperfect materials.
On-Time Delivery Standards
On-time delivery is one component of a perfect order, so you should maintain high standards for it. The question here becomes, how exactly do you define “on-time”?
In some businesses, on-time delivery means suppliers hit the date requested on the original purchase order. In others, the date may shift a few times but, as long as it’s communicated and agreed to by both parties, it’s deemed on-time. And in some, each vendor may have its own unique window of time in which an order is considered on time.
When buyers and suppliers discuss on-time delivery, the conversation is often accompanied by several anecdotes. There are special cases for certain items or circumstances. And it becomes an extremely difficult metric to trust on a scorecard given the fact that most systems can’t show a full audit trail of every change on every order.
These special cases will always exist. The only way to accurately define on-time delivery is to use a platform that allows you to see an entire order history and set rules for your suppliers based on how you work together.
Responsiveness is broadly defined as how quickly suppliers get back to you. This can include how quickly they acknowledge new orders, accept or reject order changes, or simply answer questions.
Industry standards may vary depending on where the bulk of your suppliers are located. Some SourceDay customers require a 24-hour response time of suppliers, but the majority allow 48 hours to respond.
In email, responsiveness is impossible to measure objectively, since there’s no way to extract this information and present it to a supplier without going through emails one-by-one. Yet, it’s too important to ignore.
In recent surveys, SourceDay has found that the majority of businesses surveyed had no idea how many of their POs went unacknowledged. In modern supply chains, simply acknowledging POs within a set time period should be a basic requirement. Modern supplier scorecards are the first step to holding suppliers to these new standards.
Price Variance Standards
Tolerances for price variances vary widely from industry to industry. Your business might judge this on a per-part basis, line item basis, or total invoice amount basis. If the price difference is within a certain threshold by your standards, the accounts payable team knows to voucher the invoice without investigating the price deviation in closer detail.
Finding a Supplier Scorecard Software
In order to truly measure supplier performance, you have to commit to ditching email and spreadsheets. Communicating through these messy channels make it nearly impossible to cut through the “we said, they said” confusion and to quantify performance. There will always be an asterisk next to scorecard numbers otherwise.
The good news is that once you make the switch, quantifying performance becomes more or less automatic. Since communication is taken out of email, both you and your suppliers can track KPIs in real-time, which is crucial if the goal of the scorecard is to improve performance. (And it really should be.)
Scorecarding as a Collaborative Experience
SourceDay believes that improving supplier performance is a collaborative experience and that scorecards should always be up-to-date and visible to you and your suppliers. With all the data in one place, it’s simple to look back as far as you need to see the full picture, and you don’t have to wait until your next quarterly or semi-annual check-in to identify problems and create action plans.
Keeping performance data visible to both parties 24/7 might even empower suppliers to take corrective actions without a conversation.
Tailor KPI’s by Vendor
It’s rare that all suppliers are treated equally. You may have different agreements in place about what counts as an “on-time” delivery or have different rules for domestic suppliers than those overseas. It’s important that your scorecard be dynamic enough to handle these differences so that you don’t have to keep track of exceptions manually.
You shouldn’t change your expectations of suppliers to fit a scorecard. The scorecard should be customized to reflect your expectations and preferred method of grading.
Look at Aggregate Supplier Metrics
Reviewing supplier performance one by one is a useful exercise, especially in advance of performance conversations. But if one of your team’s business objectives is to drive continuous improvement in supplier performance overall, look for a solution that can aggregate all your data and show you big-picture results.
Manage Supplier Scorecards with SourceDay
SourceDay is the go-to solution for companies looking to improve supply chain performance, and supplier performance is a key element of that.
Our suite of collaborative products make it easy to track orders from the moment the PO is issued until the invoice is paid, taking order management out of email once and for all. Because all that data is stored in one place, scorecarding is simpler with SourceDay. Every purchase order change is tracked, allowing for full visibility into changes in lead-times, pricing, response times, quantities, and delivery dates. Best of all, it’s cloud-based and works with any ERP (even the on-premise systems).
SourceDay makes every part of your supply chain process simpler, including scorecarding. Learn more about how SourceDay can automate and simplify procurement processes.
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