Vendor Performance Management, Finding Out How Good Your Vendors Are

Vendor performance management (VPM) is the monitoring and analyzing of the reliability, quality and performance of a company’s vendors. It allows your company to improve your efficiency and profits, reduce stock levels and inventory costs and leads to more customer satisfaction.

Whilst vendor performance management may be relatively easy to define, in real life it is very difficult to maintain. It requires constant real time information about the vendor’s performance, formal procedures and a profitable two-way communication between the vendor and the purchaser.

Luckily, technology has stepped in to breach all of these gaps. The purchasers benefit as above, but the vendors also benefit from increased purchases and more loyalty from their purchasers.

Vendor performance management is usually measured by a series of agreed and contractual Key Performance Indicators (KPI’s). Most VPM systems use either dashboards or balanced scorecards to measure a vendor’s performance.

The former provide a 2-D view and balanced scorecards provide a more 3D view. The KPI’s used will usually include:

  • Delivery lead times.
  • Communication time lags.
  • Quality of the products supplied.
  • Prices.
  • Frequency of price changes.
  • Payment terms.
  • Changes made.
  • Under and over deliveries.
  • Breakages.
  • Competiveness with other vendors.
  • Financial stability of the vendor.

A dashboard approach measures each vendor against a specific number of their KPI’s and provides a visual display of their abilities and compliance. This is a very quantitative as opposed to a qualitative observation so hence it is a 2D view.

The balanced scorecard approach would look at a number of weighted metrics in four key areas:

  • Relationship
  • Cost Management
  • Delivery
  • Quality

Each company will have different ideas as to what weight to place on each of these elements. The metrics can be examined individually or as a group, which provides the 3D view of the vendor.

The supply of physical products and the supply of services can be measured in both cases.

Vendor performance management has been made considerably easier with the implementation of VPM software and the collaboration of both vendors and purchasers. Both purchasers and vendors see the benefit of vendor performance management to such an extent that it is almost the normal practice in large companies.

Indeed most large company’s terms and conditions and master purchasing agreements now consider that it is imperative and this shows in their profit levels.

 

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