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A 3-Step Guide: Identifying Underperforming Suppliers

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Properly tracking and evaluating supplier performance helps ensure smooth operations and profitability. This becomes extra important as you prepare to order stock in the lead up to the holiday season.

If a supplier seems to always have an excuse, you’re not wrong in being sceptical if it’s a common occurrence and affects your business schedule. Perhaps it might be that a supplier is never wrong, and you notice their frequent attempts to sidestep responsibility and put the blame on someone else. These are some common signs that you may be working with a bad supplier. However, it’s important to have a robust approach to tracking and evaluating suppliers, so here’s our simple three-step guide to help identify underperforming suppliers better.

1. Establish KPIs

The first step to identify underperforming suppliers is to determine what characteristics a supplier needs to continue doing business with your business. This should be determined right at the beginning of your relationship. Creating specific performance criteria for tracking and evaluating your suppliers and vendors will make it easier for your business to identify those who are performing less than ideal.

While your own processes and needs will dictate the criteria you apply, a basic consideration for every business owner should be whether the supplier has a quality management system in place. If the supplier has a certain set of procedures in place that their employees are expected to follow, then this provides for some reassurance and consistency. This is because the quality of your inventory stock needs to be consistent — your customers associate poor quality with you, not your suppliers.

You’ll also need your suppliers to deliver on time or to be honest and give you plenty of warning if they can’t. When a supplier’s reliability is questionable and they keep letting you down, then they’re letting your customers down. It’s also important to remember that the lowest price is not always the best indication of value for money. If you want reliability and quality from your suppliers, you’ll have to decide how much you’re willing to pay for your inventory stock balancing this between cost, reliability, quality and service. These factors will need to come into consideration when choosing what criteria to apply and how.

2. Classify multiple suppliers and vendors

If you work a lot of suppliers, it is better to separate them into categories such as critical and non-critical or a sliding scale (1, 2, and 3) based on how critical they are. Decide the classification that is best for your business and evaluate suppliers according to the effect they have on your product or service in order of importance. By splitting up suppliers this way you can devote more time to measuring the performance of your most important suppliers. For example, you may have a more in-depth evaluative approach for your most critical suppliers, compared to your least critical ones.

3. Formulate an evaluation method for underperforming suppliers

There are common techniques for rating a supplier’s performance including evaluation forms, surveys, system metrics and software applications. These are designed to help better identify underperforming suppliers.

For example, you can craft a survey where you ask your own employees to answer questions and to rate suppliers and vendors. You can review how many corrective actions you had to issue a supplier or vendor, how many products you had to scrap or return because the supplier or vendor failed to meet specifications, or how many customer complaints you received due to bad inventory stock or service on their part. You also can monitor suppliers by doing an audit periodically. The bottom line is that you need to generate measurable reports at the start as well as throughout the course of the supplier and vendor relationship.

After time, this data will start to give you a clear picture of any suppliers who are underperforming. What follows will be red flags and to issue warnings, then more serious approaches to terminating agreements. However, this process is not just about reviewing your suppliers but helping them to improve their performance. After all, the relationship with your supplier is a business partnership, and if both parties are working to make sure that the partnership is a success it will be a success. In the long run, having a win-win supplier and vendor relationship will be a competitive advantage.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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