How vendor scorecards can prove critical for supplier performance analysis

Whether it's the supply of raw materials or providing SaaS platforms, vendors play an outsized role in your company's growth. Growing businesses can find it challenging to monitor supplier performance, creating issues like duplicate purchases and shadow IT that hamper growth.

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Vendor scorecards simplify vendor management and are a critical part of monitoring supplier performance. In this handy guide to vendor scorecards, we'll cover everything you need to know, from how to create one to benefits and more.

What is a vendor scorecard?

A vendor scorecard is a document that businesses use to track a vendor’s performance over time using relevant metrics. Vendor scorecards help you spot performance gaps and areas where your suppliers can improve performance, as well as determine ROI for your supplier spend and eliminate kinks in the supply chain.

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Most businesses don’t think to create a vendor scorecard given the many other priorities they’re managing on a day-to-day basis, but the result is an engaged and efficient vendor base that is aligned with your business objectives. Done right, these scorecards can be a huge benefit for businesses trying to stay on top of vendor performance and puts them in a position to take corrective action should anything go awry.

5 benefits of using a vendor scorecard

Vendor scorecards have many benefits. Here are five of the biggest advantages your business will realize by using them.

Minimize subjectivity

Subjectivity is often tough to establish when tracking vendor performance. Data-driven vendor scorecards remove biases by using KPIs such as vendor price competitiveness, price stability, on-time deliveries, etc., to derive performance scores. We’ll dive deeper into KPIs later in this article.

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As a result, every vendor management decision is backed by data, improving decision-making transparency throughout the vendor lifecycle. Biases cannot lead you down the wrong path in this scenario, improving the ROI you realize from your vendors.

Map and mitigate supplier risk

Balanced scorecards are a valuable tool for vendor risk management. You can track many KPIs related to vendor performance on a scorecard, helping you understand how efficient their company is and the risk you are exposed to, thanks to their actions. For instance, companies are increasingly relying on a range of SaaS software vendors these days.

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A declining trend in update quality and product fixes point to less-than-efficient coding practices. As a result, cybersecurity risks increase. For example, financial institutions are increasingly facing scrutiny due to shortcomings in their vendors' data security.

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Vendor scorecards will help you map this risk ahead of time and mitigate them before they turn into a crisis.

Greater ROI from vendor relationships

Business costs can multiply if left unchecked, and vendor management plays a critical role in ensuring this situation doesn't come to pass. Vendor scorecards make it simple to identify top-performers, allowing you to devote more resources in that direction. 

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As a result, procurement efficiency increases, leading to more ROI on your investment.

Better negotiations

Strong relationships with your vendors will bring your business multiple benefits. Testy contract negotiations can potentially derail these relationships since both parties must justify their claims and disprove others.

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A data-driven vendor scorecard will help you easily frame the conversation and help the vendor understand your point of view. You can negotiate win-win situations by removing any emotional biases from negotiations.

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The result is greater transparency and a strong vendor relationship, no matter how complicated negotiations become.

Track compliance obligations

Vendor compliance tracking is a critical part of supplier management. Scorecards are a summation of audit trails since they record compliance-related data. 

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For instance, if a vendor routinely delivers products that do not meet safety standards, a scorecard will help you understand how long this issue has persisted. Identifying compliant suppliers will also be simple, reducing the regulatory risk your business faces.

5 must-haves for your vendor scorecard

No matter how complex a vendor scorecard program you design, make sure you track these five performance areas and their metrics.

Pricing performance

Pricing is a critical evaluation point when choosing a vendor. Here are some critical price-related metrics you must track:

• Price competitiveness - How does the vendor compare to its competitors?
• Price stability - How stable are the vendor's prices?
• Invoice to purchase order accuracy
• Length of billing processes

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Tracking these metrics will help you identify the most efficient vendors. 

Delivery or implementation performance

What condition do your vendors' goods arrive in, and are they fully compliant with industry standards? Are your SaaS platforms implemented in a timely fashion? Your vendor scorecard's delivery performance section must track these metrics. For instance, you can assign a numeric score to track product delivery conditions, time to implementation, and compliance adherence and observe trends over time.

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Other delivery performance-related metrics include:

• Contract terms fulfillment rates
• Number of on-time deliveries
• The smoothness of the vendor's delivery process
  

Service efficiency

No one likes to be left hanging on a customer service call. How well does your vendor address your issues and complaints? Here are a few metrics that help you measure service efficiency:

• Average time to respond to complaints
• Dispute resolution rate
• Communication quality
• Willingness to incorporate feedback
• Number of customer complaint channels
• The complexity of dispute processes

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These data points help you understand the degree of empathy the vendor has for your business.

Product quality

While prices are important, a vendor's product quality deserves equal attention. For instance, how well does a SaaS vendor's paid service contrast with their free trial? How innovative are their products, and are they in touch with your industry's needs?

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The pace of innovation in a vendor's products gives several insights into a vendor's performance. A high degree of product enhancements that address industry issues comes from seeking customer feedback and communicating transparently with clients. 

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Vendors like these are open to market feedback and typically fix issues quickly. Most importantly, they'll remain in touch with your compliance needs, reducing the risk you'll have to bear when doing business with them.

Compliance

The compliance metrics you track will depend on your industry. However, here are a few common ones:

• Documentation standards and quality
• Product security
• Adherence to customs regulations
• Sustainability documentation 

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These metrics will also help you mitigate budding risks and avoid confrontations with your regulators, both of which can damage your reputation in the industry.

How to create a vendor scorecard

Creating a new vendor scorecard from scratch might seem intimidating. However, following these five steps will help you quickly build a data-driven vendor tracking system.

Establish focus areas

Define your broad expectations of your vendor partnerships. For instance, you would expect your SaaS vendors to deliver innovative solutions quickly. Thus, product quality, vendor response times, and delivery times are critical focus areas for you.

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Your focus areas might not be equally important. From the previous example, your business needs might lead you to prioritize product quality over fast deliveries. Grade the importance of your focus areas before moving to the next step.

Define KPIs

Which metrics will help you objectively measure vendor performance in your focus areas? Define them and take care to stay away from vanity metrics. For instance, measuring on-time deliveries doesn't provide a complete performance-related picture. The ratio of product issues per delivery to on-time deliveries offers insight into the true costs you're facing.

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To establish a data-driven culture, you must prioritize decision-making using KPIs. Practice justifying every vendor-related decision using data, and you'll automatically create valuable vendor scorecards.

Set grades

Define the thresholds of acceptable vendor performance in each focus area. While you'd love your vendors to offer perfect services all the time, this view isn't realistic. For instance, you can grade vendors on a five star system, with five stars indicating great performance. Vendors that achieve KPIs above industry benchmarks or above the 95th percentile of comparable vendor scores can receive five stars.

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In contrast, vendors that fall below your minimum performance thresholds can receive one star, with intermediate star levels tied to percentile or benchmark outperformance. Create processes to help vendors increase their scores if they fall below acceptable levels. Offering vendors a chance to improve their performance enforces transparency and creates better relationships.

Track performance data

Ensure your team updates vendor scorecards quickly and backs up each score using documentary evidence. For instance, if your latest vendor evaluation grades a delivery as poor, collect evidence of why this was the case using product pictures or other delivery documents.

Review your scorecard regularly

In a rush to record data and draw conclusions, you might forget that your business will evolve. Focus areas that were once important might not require similar attention in the future. Reviewing your focus areas and tracking KPI effectiveness is critical to a robust vendor scorecard system.

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Seek feedback from your vendors and incorporate it as necessary. This will help you design KPIs that are realistic and fair to all parties.

4 best practices for creating vendor scorecards

Vendor management offers you a great way of streamlining your expenses and maintaining robust supplier relationships. Aligning your scorecard with vendor management best practices is essential. Here are four best practices for creating vendor scorecards that make an impact on your business.

Digitize and automate

As your company grows, manually tracking vendor-related data is tough. A digital solution will simplify workflows and free your time to conduct value-added tasks. For instance, Ramp's vendor management feature gathers all your vendor spending on a single dashboard.

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You can view trends in spending and upcoming vendor expenses to streamline procurement. In addition, you'll also uncover duplicate expenses and shadow IT that increase business risk.

Collaborate

While your business comes first, you can't be successful without vendor support. Collaborating with your vendors before defining new standards and communicating your expectations will help you understand their issues and challenges. In turn, your vendors will also empathize with your needs. The result is realistic criteria that increase cooperation levels with your vendors.

Compare to industry benchmarks

Compare your vendors' KPIs and your spending to industry benchmarks to figure out whether there's any room for improvement. For instance, one of your vendors might be responding to your issues on time but below industry-standard response times. 

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You must upgrade your KPI thresholds, in this case, to bring them in line with benchmarks. Your vendor scorecard and vendor management system will thus help you remain competitive in your industry. Ramp makes it easy for you to review your vendor spends and eliminate duplicate SaaS subscriptions that increase expenses.

Link incentives and penalties to KPIs

Your vendor scorecard will help you make objective decisions only if you link KPIs to incentives and penalties. Incentives are a great way of aligning your suppliers with your business goals. For instance, you can reward great vendors by adding them to your preferred supplier list and paying their invoices faster than normal.

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Penalties might seem harsh on the surface but as long as you tie them to KPIs, most vendors will strive to improve performance. Reducing future orders and dropping suppliers from preferred lists are examples of effective penalties. 

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Making these vendor-related decisions by "feel" or intuition" reduces the transparency in your vendor performance processes and leads to supplier dissatisfaction. Instead, back every decision with KPIs and share them with your vendors. They'll understand your thought process and expectations better.

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Start using Ramp today to track your spending, save money, and manage your vendors