Vendor Rating (Encyclopedia of Management)
Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given standing, status, or title according to their attainment of some level of performance, such as delivery, lead time, quality, price, or some combination of variables. The motivation for the establishment of such a rating system is part of the effort of manufacturers and service firms to ensure that the desired characteristics of a purchased product or service is built in and not determined later by some after-the-fact indicator. The vendor rating may take the form of a hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert in between the two. For some firms, the vendor rating may come in the form of some sort of award system or as some variation of certification. Much of this attention to vender rating is a direct result of the widespread implementation of the just-in-time concept in the United States and its focus on the critical role of the buyer-supplier relationship.
Most firms want vendors that will produce all of the products and services defect-free and deliver them just in time (or as close to this ideal as reasonably possible). Some type of vehicle is needed to determine which supplying firms are capable of coming satisfactorily close to this and thus to be retained as current suppliers. One such vehicle is the vendor rating.
In order to accomplish the rating of vendors, some sort of review process must take place. The process begins with the identification of vendors who not only can supply the needed product or service but is a strategic match for the buying firm. Then important factors to be used as criteria for vendor evaluation are determined. These are usually variables that add value to the process through increased service or decreased cost. After determining which factors are critical, a method is devised that allows the vendor to be judged or rated on each individual factor.
It could be numeric rating or a Likert-scale ranking. The individual ratings can then be weighted according to importance, and pooled to arrive at an overall vendor rating. The process can be somewhat complex in that many factors can be complementary or conflicting. The process is further complicated by fact that some factors are quantitatively measured and others subjectively.
Once established, the rating system must be introduced to the supplying firm through some sort of formal education process. Once the buying firm is assured that the vendor understands what is expected and is able and willing to participate, the evaluation process can begin. The evaluation could be an ongoing process or it could occur within a predetermined time frame, such as quarterly. Of course the rating must be conveyed to the participating vendor with some firms actually publishing overall vendor standings. If problems are exposed, the vendor should formally present an action plan designed to overcome any problems that may have surfaced. Many buying firms require the vendor to show continuing improvement in predetermined critical areas.
CRITERIA FOR EVALUATION
Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and service. Each area has a number of factors that some firms deem critical to successful vendor performance.
Pricing factors include the following:
- Competitive pricing. The prices paid should be comparable to those of vendors providing similar product and services. Quote requests should compare favorably to other vendors.
- Price stability. Prices should be reasonably stable over time.
- Price accuracy. There should be a low number of variances from purchase-order prices on invoiced received.
- Advance notice of price changes. The vendor should provide adequate advance notice of price changes.
- Sensitive to costs. The vendor should demonstrate respect for the customer firm's bottom line and show an understanding of its needs. Possible cost savings could be suggested. The vendor should also exhibit knowledge of the market and share this insight with the buying firm.
- Billing. Are vendor invoices are accurate? The average length of time to receive credit memos should be reasonable. Estimates should not vary significantly from the final invoice. Effective vendor bills are timely and easy to read and understand.
Quality factors include:
- Compliance with purchase order. The vendor should comply with terms and conditions as stated in the purchase order. Does the vendor show an understanding of the customer firm's expectations?
- Conformity to specifications. The product or service must conform to the specifications identified in the request for proposal and purchase order. Does the product perform as expected?
- Reliability. Is the rate of product failure within reasonable limits?
- Reliability of repairs. Is all repair and rework acceptable?
- Durability. Is the time until replacement is necessary reasonable?
- Support. Is quality support available from the vendor? Immediate response to and resolution of the problem is desirable.
- Warranty. The length and provisions of warranty protection offered should be reasonable. Are warranty problems resolved in a timely manner?
- State-of-the-art product/service. Does the vendor offer products and services that are consistent with the industry state-of-the-art? The vendor should consistently refresh product life by adding enhancements. It should also work with the buying firm in new product development.
Delivery factors include the following:
- Time. Does the vendor deliver products and services on time; is the actual receipt date on or close to the promised date? Does the promised date correspond to the vendor's published lead times? Also, are requests for information, proposals, and quotes swiftly answered?
- Quantity. Does the vendor deliver the correct items or services in the contracted quantity?
- Lead time. Is the average time for delivery comparable to that of other vendors for similar products and services?
- Packaging. Packaging should be sturdy, suitable, properly marked, and undamaged. Pallets should be the proper size with no overhang.
- Documentation. Does the vendor furnish proper documents (packing slips, invoices, technical manual, etc.) with correct material codes and proper purchase order numbers?
- Emergency delivery. Does the vendor demonstrate extra effort to meet requirements when an emergency delivery is requested?
Finally, these are service factors to consider:
- Good vendor representatives have sincere desire to serve. Vendor reps display courteous and professional approach, and handle complaints effectively. The vendor should also provide up-to-date catalogs, price information, and technical information. Does the vendor act as the buying firm's advocate within the supplying firm?
- Inside sales. Inside sales should display knowledge of buying firms needs. It should also be helpful with customer inquiries involving order confirmation, shipping schedules, shipping discrepancies, and invoice errors.
- Technical support. Does the vendor provide technical support for maintenance, repair, and installation situations? Does it provide technical instructions, documentation, general information? Are support personnel courteous, professional, and knowledgeable? The vendor should provide training on the effective use of its products or services.
- Emergency support. Does the vendor provide emergency support for repair or replacement of a failed product.
- Problem resolution. The vendor should respond in a timely manner to resolve problems. An excellent vendor provides follow-up on status of problem correction.
A 2001 article in Supply Management notes that while pricing, quality, delivery, and service are suitable for supplies that are not essential to the continued success of the buying firm, a more comprehensive approach is needed for suppliers that are critical to the success of the firm's strategy or competitive advantage. For firms that fall into the latter category performance may need to be measured by the following 7 C's.
- Competencyanagerial, technical, administrative, and professional competence of the supplying firm.
- Capacityupplier's ability to meet physical, intellectual and financial requirements.
- Commitmentupplier's willingness to commit physical, intellectual and financial resources.
- Controlffective management control and information systems.
- Cash resourcesinancial resources and stability of the supplier. Profit, ROI, ROE, asset-turnover ratio.
- Costotal acquisition cost, not just price.
- Consistencyupplier's ability to exhibit quality and reliability over time.
If two or more firms supply the same or similar products or services, a standard set of criteria can apply to the vendor's performance evaluation. However, for different types of firms or firms supplying different products or services, standardized evaluation criteria may not be valid. In this case, the buying firm will have to adjust its criteria for the individual vendor. For example, Honda of America adjusts its performance criteria to account for the impact of supplier problems on consumer satisfaction or safety. A supplier of brakes would be held to a stricter standard than a supplier of radio knobs.
AWARDS AND CERTIFICATION
Many buying firms utilize awards and certification programs to rate vendors. Attainment of certification status or an award serves as an indicator of supplier excellence. Certification and awards-program recognition represents a final step in an intense journey that involves rigorous data collection under the total-quality-management-rubric as well as multitudes of meetings with suppliers and purchasing internal customers. Serious buying firms view these programs as an integral part of their overall efforts to improve the total value of the company.
The attainment of a supplier award usually serves as an indication that the vendor has been rated as excellent. Intel awards their best suppliers the Supplier Continuous Quality Improvement Award (SCQI). Other firms may utilize a hierarchy of awards to indicate varying degrees of performance from satisfactory to excellent. DaimlerChrysler awards its best suppliers the Gold Pentastar Award. Several hundred vending firms receive this award per year. However, only a handful (less than a dozen) of DaimlerChrysler's vendors are good enough to garner the Platinum Pentastar Award.
For other firms, supplier certification is desirable. Supplier certification can be defined as a process for ensuring that suppliers maintain specific levels of performance in the areas of price, quality, delivery, and service. Certification implies that participating firms have reached a level of excellence that other firms were unable or unwilling to achieve. For example a quality certified firm maintains a level of quality such that customer-receiving inspection may be utilized with decreasing frequency up to the point where it is eliminated altogether. Theoretically, this will ensure that all of the supplier's products meet the customer's product specifications. In this case, the goal of supplier certification is quality at the source.
While it is uncertain whether individual firms are consistent in the manner in which they certify vendors, a quality certification would likely require that the vending firm be part of a formal education program, utilize statistical process control (SPC), and have a quality assurance plan (set written procedures).
Benefits of vendor rating systems include:
- Helping minimize subjectivity in judgment and make it possible to consider all relevant criteria in assessing suppliers.
- Providing feedback from all areas in one package.
- Facilitating better communication with vendors.
- Providing overall control of the vendor base.
- Requiring specific action to correct identified performance weaknesses.
- Establishing continuous review standards for vendors, thus ensuring continuous improvement of vendor performance.
- Building vendor partnerships, especially with suppliers having strategic links.
- Developing a performance-based culture.
Vendor ratings systems provide a process for measuring those factors that add value to the buying firm through value addition or decreased cost. The process will continually evolve and the criteria will change to meet current issues and concerns.
For example, some feel that supplier evaluation must now reflect the strategic direction of the buying company's environmental initiatives. As a result, some firms have recently developed supplier evaluation systems that place significant weight on environmental criteria. It would seem that the concept will remain valid for some time.
"Measure for Measure." Supply Management, 1 February 2001, 39.
Muralidharan, C., N. Anantharaman, and S.G. Deshmukh. "Vendor Rating in Purchasing Scenario: A Confidence Interval Approach." International Journal of Operations and Production Management 21, no. 9/10 (2001): 1305325.
Trent, Robert J., and Robert M. Monczka. "Purchasing and Supply Management: Trends and Changes Throughout the 1990s." International Journal of Purchasing and Materials Management, Fall 1998, 21.
Walton, Steve V., Robert B. Handfield, and Steven A. Melnyk. "The Green Supply: Integrating Suppliers Into Environmental Management Processes." International Journal of Purchasing and Materials Management, Spring 1998, 21.