How to Evaluate Supplier Performance

10 min read

A company is only as strong as its supply chain. Without reliable suppliers, things like marketing and branding mean very little. If you don’t have products to sell to customers, there’s simply no way to do business. So it would be an understatement to say that suppliers play an important role in the success of a business.

For business owners, this presents a bit of risk if you’re not careful. Suppliers are typically third-party or independent companies that do not work directly for retailers. As such, certain aspects of the supply chain are beyond a business’s control.

Beyond suppliers themselves, other external factors can derail a supply chain. Weather conditions and natural disasters, as well as economic factors, can also interfere with manufacturing and shipping.

But just because there are potential risks involved when it comes to overseeing your supply chain, it does not mean your business is powerless. Businesses can mitigate these risks by periodically conducting a thorough supplier evaluation. This guide will go over important factors to look for in a supplier evaluation, as well as strategies for conducting a supplier performance evaluation.

What to Look For In A Supplier Evaluation

The first question to answer is, “what criteria do you use to evaluate a supplier?” There are several key factors to consider during an evaluation. These factors should all be measurable and easy to understand. This makes it easier to provide feedback to your suppliers, as well as make judgments about your supply chain needs. You can use whatever internal ranking system you want (numbers, letter grades, etc.). Just be sure that your ratings are consistent and easy to understand.

With that said, here are some of the most important supplier evaluation criteria to use during your next review.

Production capacity

One of the most important questions to ask is, “Can the supplier meet the production demands of our business?” One of the fundamental reasons retailers rely on suppliers is that they are capable of handling large-scale production. A supplier who is unable to keep up with the demands of your business is not well-suited to work for you.

Risk and risk response

There is always some degree of risk for any business. Suppliers must be equipped to respond to risks and emergencies quickly and consistently. As such, you should place a strong emphasis on your supplier evaluation risk rating when conducting a review.

The risk rating should factor in not just how suppliers respond to risks, but what risks your suppliers are most vulnerable to.

For instance, a supplier in a region that occasionally experiences adverse weather conditions will be vulnerable to shipping delays. These factors may be beyond the supplier’s control, but they absolutely should be factored into your evaluation.

Of course, a supplier’s risk management and risk response plans are also key to determining the supplier evaluation risk rating.

Environmental impact

Environmental impact is a top concern for many consumers and businesses alike. Minimizing environmental damage through manufacturing and supply chain practices is one of the most effective ways to reduce your company’s environmental impact. As such, supplier evaluations should always analyze a supplier’s resource consumption and sustainability practices.

What resources does the supplier use, and how do they obtain them? Does the supplier use recycled materials? What kind of energy do they use in both manufacturing and shipment? How does the supplier handle harmful chemicals? These are all important questions to address during an evaluation.

The standard system for measuring environmental impact across industries is ISO 14001.

Product quality

Lastly, the concern of product quality is also very important during a supplier evaluation. Even if every other box is checked, poor-quality manufacturing can negate it all. You should set clear expectations about product quality before agreeing to work with any supplier. Your supplier evaluations, then, should assess whether or not those standards are being met.

For more about measuring production quality, read about ISO 9001:2000 quality management systems. This certification system is considered the industry standard for supplier performance evaluation.

How Do You Evaluate a Supplier?

Now you know what criteria to use during a supplier evaluation. But what is the first step in supplier selection and evaluation? How should you go about conducting an evaluation? Here are some basic steps to follow to ensure that your supplier performance evaluation is effective.

Clearly define criteria

The above criteria are important to have when conducting your evaluation. But it is also important to make sure your supplier understands the criteria as well. Having an understanding of the criteria allows the supplier to better understand your goals and needs. It also gives them a better chance to offer feedback about the evaluation.

Lastly, having clearly defined criteria can make the entire process run more smoothly. Because the supplier understands how they will be evaluated, they will be well-prepared when the time comes.

Consult with suppliers when setting supplier evaluation criteria

Before conducting your evaluation, you should also discuss the criteria with your suppliers. This allows them to offer feedback about how they will be assessed or provide any additional information.

Many companies provide a pre-evaluation questionnaire or survey for their suppliers. These questionnaires can be used to measure both factual and subjective aspects of the supplier’s performance. The purpose is to provide the suppliers themselves with an opportunity to evaluate their performance and expectations.

Offer feedback and listen to suppliers

Once the supplier evaluation is complete, you should share the results with your suppliers. When sharing results, it is also customary to offer feedback for areas of improvement or success.

This helps suppliers make any necessary adjustments to their supply chain or manufacturing practices. Positive feedback is also appreciated as it lets the suppliers know that their good work is recognized and appreciated.

When offering feedback, it is also critical to give the supplier a chance to respond. They may be able to provide further insight into some of the challenges that may be impacting their performance. Your supplier performance evaluation should never be closed off or one-sided.

There are two main objectives to consider when conducting a supplier review. First, identify areas of risk and vulnerability in your company’s supply chain. And second, to provide opportunities for improvement to your suppliers.

Assign the right team members to conduct the review

Lastly, the person assigned to conducting the supplier evaluation should know what they are doing. Ideally, you will have a purchasing specialist conduct the review. Why should a purchasing supplier evaluate supplier performance? There are a couple of reasons.

First, they likely already have an established relationship with the supplier. The purchasing specialist will also have an in-depth understanding of your company’s supply needs. This means they will know what to look for when assessing product quality, production capacity, and supply chain risks.

When done correctly, a supplier performance evaluation can improve results and lead to better profits. These evaluations are an advanced step to take when running a business. If you are just starting your business, there are other steps to consider before you get to your supplier performance evaluations.

To learn more about the basics of supplier relations, read Ecwid’s guide to finding suppliers for your business. Or, read about our favorite business management tools that you can use for your online business.

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Oct 22, 2022

About the author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.