Having reliable suppliers is critical for running a successful business. Learn what constitutes a healthy, profitable relationship with your suppliers and how to evaluate them.

Maintaining strong and mutually beneficial relationships with suppliers should be a key part of a company’s strategic plan, regardless of whether the business is product- or service-based. But even the best supplier partnerships can deteriorate. Implementing a formalized system to track and evaluate supplier performance, as well as judging whether a particular supplier is a good match for your company’s needs, is essential to the operation and ultimate success of your business.

“Daunting as it may seem, managing today’s complex supply chains can be improved dramatically,” Forbes.com explains. “By combining access to accurate data on suppliers and the ability to efficiently manage the supply base, organizations can deliver dramatic efficiencies and bottom-line results very quickly.”

The first step in evaluating the quality of a supplier is to identify the specific ways suppliers can affect your business’s day-to-day operations and its long-term success. Obviously, the quality of a supplier’s products plays a crucial role in customer satisfaction, as do the timeliness and reliability of its shipments. But it’s important to consider other competitive features, such as the potential for additional financing from suppliers should your business experience growth or contraction, as well as the potential for innovation that comes from a good supplier.

“Suppliers can make major contributions to your new product development. Remember, they live their product more than you do; they’re working to be on the cutting edge of innovation for their product,” Entrepreneur.com notes. “The good ones will understand your company, its industry and needs, and can help you tweak your new idea.”

Of course, this depends on having a supplier that is particularly well-suited to your business requirements. Determining which suppliers meet your standards, as well as those that exceed them, requires an evaluation process. This can be difficult when dealing with numerous suppliers, especially because it is not always practical to apply the same expectations to every one. A segmented approach can help make these analyses more manageable.

“If you have a multitude of suppliers and you implement a survey to evaluate them, it will be very cumbersome to apply the same survey to 500 suppliers,” Quality Digest advises. “If you segregate suppliers in levels (Level 1, Level 2, Level 3, etc.) based on how critical they are for your company, you may be able to apply different controls to each supplier level and therefore evaluate each category differently.”

For example, a company may choose to have its suppliers categorized by raw materials providers, transport carriers, warehouses and contractors, and then judge them based on their effect on products or services within those areas.

“The idea is that your company should benefit from implementing supplier re-evaluation so that your organization can monitor supplier performance and decide when to praise them and when to issue a red flag,” Quality Digest adds. “In the end, a bad supplier will provide you with mediocre products and services, and ultimately will cause a problem with your own customers.”

While the specific criteria for a good supplier relationship will vary from business to business, there are some basic guidelines for establishing an evaluation process. Inc.com offers the following recommendations for rating your suppliers:

• Set performance criteria. Determine which factors are most important in tracking and evaluating suppliers on a monthly, quarterly or yearly basis. Key considerations include a supplier’s size, number of certifications, quality management systems, complaint record and financial stability. Establish specific metrics, such as percentage of on-time deliveries or vendor response time for quote requests.
• Develop a method. An evaluation can be conducted in a variety of ways, including surveys in which employees rate suppliers or reviews of error rates, mistimed shipments and customer complaints that a supplier generated. Regardless of method, measurements and periodic monitoring should start from the first purchase and continue throughout the supplier-client relationship.
• Assign responsibilities. The next step is to designate who in your company will be responsible for reviewing the evaluation data and monitoring supplier performance. It may be helpful to assign responsible parties based on the importance of the supplier.
• Maintain a strong relationship. Suppliers should be viewed as part of the team. Maintain regular and open communication with them, and remember the value of personal connections. Try to avoid potential problems by paying on time while also being upfront and honest about your business’s needs and expectations.
• Notice any red flags. When evaluating suppliers, you must set standards for when to praise them for a good job and when to issue a red flag for poor performance. Use the data collected for your metrics to define supplier performance, and act accordingly.
• Know when to cut them loose. Your company should not tolerate a prolonged pattern of bad service, even if it has had a long relationship with a supplier. Note any serious problems in service and try to give the supplier a chance to correct them. If it does not or cannot, it may be time to cut the supplier loose.

“Instead of getting stuck on price, focus on quality of service. A vendor can have the lowest price and the lowest quality of work, too,” Inc.com explains. “Your goal is [to] understand what value-add a given vendor [is] bringing to your company. Your business should have a system in place for evaluating, selecting and then reevaluating the suppliers and vendors it works with.”

Related

Downturn Highlights Supply Chain’s Importance

Spotting a Troubled Supplier

Resources

Connecting the Dots on Supplier Management
by Jon Bovit
Forbes.com, July 21, 2010

Build a Good Relationship with Suppliers
by Bob Reiss
Entrepreneur.com, May 11, 2010

Evaluation and Reevaluation of Suppliers
by Miriam Boudreaux
Quality Digest, Sept. 10, 2009

7 Tips for Rating and Evaluating Your Suppliers and Vendors
by Carolyn M. Brown
Inc.com, Dec. 30, 2010