12 Vendor Management KPIs You Need to Track
Your supply chain vendors are critical assets that you need to grow your business. But you can’t trust every vendor to do their job independently. You need to evaluate their performance over time and ensure they’re living up to their contracts. Vendor management KPIs provide the guardrails you need to make that happen.
Without the data, you’re firing from the hip.
The larger your organization is, the harder it is to track vendor performance without a system in place. On the other hand, you want to make sure you’re tracking the right vendor KPIs. Otherwise, you’ll miss out on opportunities.
This guide will help you better understand vendor management key performance indicators (KPIs), empowering you to reduce risk, lower cost, and gain a strategic advantage for your business.
Why It’s Important to Collect Vendor Metrics
Establishing a baseline with your vendors and monitoring their performance is critical to ensuring your suppliers provide the highest value at the lowest risk for your organization. And the only way to ensure that is through accurate data and reporting.
Once you establish baseline parameters for your vendors, you can hold them accountable for their performance. You can also work with them to ensure they meet or exceed expectations.
The end goal is to ensure your business needs are met while positioning both the vendor and your organization on the path to a long-lasting, mutually beneficial relationship. Vendor KPIs give you the clarity needed to find gaps and provide support, you can reach that goal.
Without clear metrics, everything falls apart.
Instead of working with your vendors using data that pinpoints problems, you’re left with fuzzy notions of performance. This can lead to complaints, frustration (from all parties), poor performance, decreased profitability, and increased customer.
In the end, everyone’s unhappy.
So, while it’s important to get what you pay for, it’s equally important to ensure the long-term profitability of your business. Measuring vendor KPIs makes that possible.
12 Vendor Management KPIs You Need to Monitor
This is not a comprehensive list of all the vendor KPIs you need to monitor. However, it does provide a strong foundation for effective vendor relationship management. Ultimately, the KPIs you track will depend on your organization’s exact needs and goals.
- Supplier Lead Time: This is the time it takes for a vendor to ship an order after receiving an order, usually measured in days. Once they confirm availability, you track the time until you receive the goods.
- Vendor Availability: Measure your vendor’s ability to respond to emergencies by calculating the items shipped vs. items requested OR services performed vs. services requested.
- Compliance Rate: Track how often your vendors meet their contract requirements. These metrics can vary from pricing to delivery times to the quality of goods and services.
- Pricing and Competitiveness: Evaluate how much your vendor charges for a product or service against competitors. You should be paying a price that’s fair market value for the quality of product and level of service you’re receiving.
- Vendor Discounts: Calculate how many discounts your organization has received from early payments, bulk orders, group orders, and goodwill gestures (after vendor errors.)
- Product/Service Defect Rate: Evaluate the quality of your supply by tracking how many failed products or services you receive against the total amount (typically per million). Categorizing by the type of defects can help drive improvements.
- Order Accuracy: Inaccurate orders drive up costs and cause slowdowns. Evaluate vendors based on the number of complete, accurate orders against total orders.
- Order Capacity: Rate the number of times your vendor met demand against the total number of orders to see if they have the capacity to meet your growing needs.
- Return on Investment (ROI): There are many ways to review vendor ROI: cost savings vs. budget, increases in customers, customer satisfaction, efficiencies, compliance goals, and risk mitigation.
- Customer Service: Track and score how well your suppliers manage any complaints or issues your team has with their products or services. You should also evaluate your team's attitude toward your vendor to see if you're a bad customer.
- Innovation: Analyze the additional value working with a particular vendor provides in addition to the standard service or products they provide. You can also use this metric to inspire vendors to find affordable solutions to keep costs low and meet business goals.
- Risk Assessment: Your suppliers should provide credentials and other evidence proving they are financially stable, diverse, and practice both ethical and sustainable sourcing. Plus, they should have the infrastructure needed (if required) to keep any sensitive customer data secure.
Exceptions to Vendor KPIs You Should Consider
Nothing is black and white. Throughout the course of your vendor relationship, situations will arise that impact your vendor’s ability to perform within established parameters. You need to account for and track these circumstances to avoid damaging a potentially healthy vendor relationship.
Delays are either justifiable, non-justifiable, or a result of your organization.
- Justifiable delays: Natural disasters, political unrest, and unforeseen circumstances that interfered with the vendor’s ability to deliver within their established contract guidelines.
- Organizational delays: Scope creeps, changing parameters of your business, or a shift in customer demand/needs could cause slowdowns that wouldn’t be your vendor’s fault.
- Non-Justifiable: Procrastination, miscalculating scope, inability to meet expectations due to a lack of facilities or skill sets would be the fault of your vendor.
To accurately measure your vendor’s KPIs, you need to adjust your scoring to account for instances where your vendor was not at fault.
How to Track and Rate Your Vendors
You need visibility into your vendor relationships. Without it, you’re left “trusting” your vendor to follow through on your contract. And that’s too risky for any business.
However, you don’t want to measure the wrong data points. And you don’t want to measure too many data points, either. The key is knowing how to weigh your KPIs and score them in a way that accurately reflects how effective your suppliers are.
The key to making this happen is to focus and review your contracts. This is where you’ll find the parameters that outline your vendor relationships. You want to take those guardrails and compare them against your business goals and needs.
For older vendor relationships, this can help you find gaps you can revisit during your renewal or next contract negotiation. For prospective vendors, you should use these frameworks to create a contract that supports your organizations’ exact needs.
Once you know what metrics you both can and should be tracking, you need to collect vendor data in a system that allows you to quickly evaluate supplier performance. For organizations without a vendor management system, this tends to be a spreadsheet. But those can be very problematic and dangerous for your organization.
The simple alternative is to automate the process with a vendor management system.
Reviewing Vendor KPIs with Automation
It’s important to evaluate your vendor performance regularly. It ensures that you’re getting what you pay for and reduces risk to your organization. Plus, you can leverage strong vendor relationships to make your business more competitive.
The problem is that it isn’t always easy to find the time to do that…
If you don’t use a vendor management system or you’re tracking vendor performance through spreadsheets and a paper-based review system, the process can be excruciatingly time-consuming. The solution is to streamline your vendor review process with automation.
And you can do this fast and affordable using low code. With low code, you can rapidly build the custom applications you need to manage your vendors with ease.
Using low code, you can build a self-service vendor portal and vendor management system that allows you to effortlessly track vendor performance. Vendors can keep their details up-to-date, submit invoices, and leave feedback or communication in the vendor portal. And you can track that data along with your vendor KPIs in a vendor management system.
In the end, you’ll have real-time data on your suppliers that you can use to make your procurement process more efficient and strategic. And while you’ll certainly reduce costs, you’ll also get the insights you need to keep your business agile while reducing risk.
Check out how we’ve helped our clients build similar tools by reviewing our case studies below.