In the business world, the significance of vendor management cannot be overstated. However, the unfortunate reality is that many businesses become complacent post-contract, neglecting the crucial task of monitoring vendor performance. This laxity leaves them vulnerable to an array of risks, including regulatory non-compliance, financial losses, and potential harm to their reputation. So, let’s delve into the realm of vendor performance tracking and its role in mitigating these risks, particularly in critical and high-risk vendor relationships.
Why Vendor Performance Tracking Matters
Vendor performance tracking is not just a preventive measure against risks; it’s a strategic approach that allows businesses to derive value from vendor relationships. Here’s why it’s vital:
1. Detecting Emerging Risks
Vendor risk is a dynamic entity, shifting with changes in the vendor’s internal and external environments. A vendor’s performance can reveal underlying issues, such as management changes, declining quality, or ineffective security controls. Active performance management enables businesses to identify and address these challenges before they escalate into significant problems.
2. Ensuring Contractual Compliance
Performance management, when aligned with the terms of the contract, ensures vendors fulfill their obligations and deliver value. It verifies that the vendor’s performance is within the agreed thresholds and that they’re providing the anticipated benefits. It also provides tangible data to help decide whether to renew, renegotiate, or terminate a vendor’s contract.
3. Enhancing Vendor Comparison Data
Each vendor is unique, even if they offer identical products or services. Vendor performance data can be useful for businesses looking to consolidate their vendor lists or drive more volume to a single vendor to negotiate better pricing. When deciding between two vendors offering similar products or services at comparable prices, the better-performing vendor will always offer more value.
Implementing Vendor Performance Management
Vendor performance management is a blend of science and pragmatism. The more tangible your expectations, the easier it is to determine if they’re being met. This process involves clearly defining expectations, conducting regular reviews, and maintaining open lines of communication. Here are some key aspects to consider:
1. Service Level Agreements (SLAs)
These define the expected level of service and are formalized in the contract. Examples include regulatory compliance, breach notifications, or system uptime.
2. Key Performance Indicators (KPIs)
These metrics measure how well the vendor is meeting expectations, covering aspects like customer satisfaction, quality, errors, efficiency, etc.
3. Risk Management
The higher the risk of the relationship, the more frequently you should review performance. For critical and high-risk vendors, performance reviews should be conducted quarterly at a minimum.
Choosing the Right Vendor Management System
Selecting the right vendor management system is crucial for effective vendor performance tracking. One such system is SAP Fieldglass. Known for its robust features, integrations, and advanced automation capabilities, SAP Fieldglass allows businesses to manage every aspect of their vendor network, from contract management to compliance and performance tracking.
However, it’s important to note that the system might not be suited for all businesses, particularly those that find its comprehensive features overwhelming or its subscription costs prohibitive.
Understanding Vendor Performance Evaluation
Evaluating vendor performance is a crucial part of procurement and strategic sourcing. It involves using a scorecard-style document and process to measure the success of existing supplier relationships. The primary purpose of this process is to ensure that the best possible value is derived from these relationships.
Benefits of Regular Vendor Evaluations
Conducting regular vendor evaluations has numerous benefits, including:
1. Establishing Benchmarks and Goals
Vendor performance management is an essential part of strategic sourcing. It allows you to track progress and measure success at preset intervals, ensuring that you’re getting the most out of your investment.
2. Building Stronger Partnerships
Vendor evaluations can lay the groundwork for stronger partnerships. By identifying areas of improvement and acknowledging areas where the vendor excels, you can work together to create a more beneficial relationship.
3. Supporting Cost Avoidance and Cost Reduction Efforts
Regular vendor performance evaluations can help identify partnerships that have become obsolete, allowing you to avoid unnecessary costs. They can also highlight opportunities to work with a proven partner to reduce procurement and onboarding costs.
Creating a Vendor Review Program
Creating an effective vendor review program involves establishing key performance indicators (KPIs), formulating pertinent questions for vendor reviews, and developing a supplier performance scorecard. It’s also crucial to choose a vendor performance management system that is secure, streamlined, and organized.
Sample Vendor Review Templates
Creating a vendor review template from scratch can seem daunting. Here are three real-life examples to help speed up the process:
Concluding the Vendor Performance Evaluation Process
After completing your evaluations, it’s time to decide on the next steps. This could mean renewing a contract, providing feedback for improvements, or even ending a relationship. Regardless of the decision, what matters is that you’ve collected the data necessary to make informed choices that best serve your organization’s needs.