Supplier evaluation: What is it, and how’s it done?

Your suppliers play an integral part in the success of your business. That makes it vital to be working with the right ones – and that’s exactly what supplier evaluation will help you achieve.

Supplier evaluation is about determining if your current or potential suppliers are the right fit for your business. It’s about ensuring that your supply chain is reliable, cost-effective and meets your expectations – all crucial aspects of running a successful business.

In this article, we’ll cover what supplier evaluation is, why it’s important and 6 steps to carry out an effective supplier evaluation.

What is supplier evaluation?

Supplier evaluation is an element of Supplier Performance Management. Essentially, it’s the process of evaluating and approving suppliers – both potential and existing – on elements such as quality, delivery, costs, services and innovation potential.

Businesses employ a variety of different supplier evaluation methods, including:

• Questionnaires
• Scorecards
• Site visits
• Trial orders

The goal of supplier evaluation is to assess whether a current or potential supplier is a good match for your business. It allows you to create a best-in-class, low-risk portfolio of available suppliers.

In short, supplier evaluation helps you build lasting professional relationships with suppliers that you know you can rely on – a crucial aspect of running a successful business.

Why is supplier evaluation important?

It probably goes without saying that it’s important to know that you’re working with reliable suppliers. Still, there are many reasons why supplier evaluation is so integral to your success.

Let’s take a look at some of them:

• Quality assurance: If your products aren’t up to scratch, it can cost you dearly. Supplier evaluation helps you ensure that your suppliers consistently provide quality products. It minimises unnecessary costs, and it keeps your customers happy.
• Cost efficiency: Who doesn’t love saving money? Supplier evaluation helps you balance cost with quality and service, helping you find those hidden gems that offer the best value for money.
• Reliability: Imagine a world without supply hiccups. Evaluating suppliers enables you to minimise disruptions and ensure your operations run smoothly – what’s not to like?
• Risk management: No one likes a nasty surprise, and with supplier evaluation you can avoid them. Supplier evaluation helps you spot potential risks before they become big headaches, saving you valuable time and resources in the long run.
• Compliance: Evaluating suppliers allows you to keep things above board. It ensures your suppliers play by the rules, follow the law and keep things ethical. In other words, it lets you sleep easy – and the less stress, the better.
• Performance improvement: With clear benchmarks for supplier performance, you encourage your suppliers to constantly level up their game, inspiring excellence and innovation.
• Strategic relationships: Strong supplier relationships are a vital asset in the business world. Effective supplier evaluation can help you build rock solid professional relationships and boost your long-term success.

6 essential steps for effective supplier evaluation

Now that we’ve covered why supplier evaluation is so important, it’s time to get a better idea of what the process involves.

For that purpose, we’ve compiled a list of six key steps to carry out supplier evaluation effectively. Let’s get started.

1. Define your evaluation criteria

It probably goes without saying that to effectively evaluate your suppliers, you need to know what criteria you’re basing your evaluation on.

To help you define your evaluation criteria, here’s a list of important criteria to consider:

• Quality: What’s the supplier’s defect rate? Does the supplier comply with specifications and quality control processes? Assess their product quality to ensure it fits your standards.
• Cost: Does the supplier’s pricing structure work for you? Evaluate hidden costs, discounts and overall cost-effectiveness.
• Delivery: Make sure the supplier can meet your delivery requirements and that they’re reliable and fulfil orders on time.
• Financial stability: Check the supplier’s financial health – it’s important to ensure their operation is sustainable and supports your business as it grows.
• Service and support: If an issue pops up, you want suppliers who offer great customer service and technical support. Check how fast and how well they respond to problems.
• Compliance: The quality and cost effectiveness may be on point, but if the supplier doesn’t play by the rules, they’re no good. Make sure they comply with industry standards.
• Innovation: You want to build lasting relationships. Assess the supplier’s ability to innovate and improve – these qualities are vital for a long-lasting collaboration.

2. Develop a scoring system

Next, it’s time to create a scoring system based on the evaluation criteria you’ve defined. This’ll enable you to quantitatively evaluate each potential supplier, giving you a better idea of how they compare.

Assign scores to each criterion for the individual suppliers. Once that’s done, you can calculate the total score to rank each supplier. This way, you can quickly get an overview of what each supplier excels at and which areas they could stand to improve.

3. Assess risks

Risk assessment is an important element of supplier evaluation. You need to know what could potentially compromise your operation – and how to respond if something goes wrong.

Conduct a risk assessment to identify potential risks associated with each supplier. For example, these could be geopolitical risks, natural disasters or financial instability.

Once you’ve identified potential risks, you should develop strategies for how to mitigate them. Not only will this ensure you’re prepared in the event of a disruption – it’ll also quickly show you which suppliers might be more trouble than they’re worth.

Want to learn more about risk assessment? Check out our article: ‘What is Supplier Risk Management – and how do you benefit?’

4. Conduct audits and trials

When evaluating suppliers, it’s important to get a proper understanding of how they perform on the daily. There are a few different ways to do this – such as supplier audits and trial orders.

Perform regular audits – both scheduled and surprise audits – to assess supplier performance over time. Pay attention to quality control processes, production capacity and how well the suppliers adhere to delivery schedules.

You can also place trial orders to evaluate how well the suppliers are able to meet your expectations under real-world conditions. This’ll give you a good idea of what an ongoing working relationship with them might look like.

5. Negotiate terms

Your evaluation should set you up for ensuring the most beneficial collaboration. Use your findings to negotiate terms and conditions that’ll protect your interests and help you build solid relationships with your chosen suppliers.

For your terms, make sure to include the nitty-gritty like quality benchmarks, delivery schedules, pricing and penalties for any slip-ups.

6. Review and update

Finally, it’s important to continually review your supplier evaluation process. After all, as your business grows, your needs will change – and so will the market conditions and industry rules and regulations.

Stay up to date with the latest developments, and adjust your evaluation criteria accordingly to make sure they stay relevant and cover all bases.

Conclusion

Supplier evaluation helps you build lasting professional relationships with suppliers that you know you can rely on.

With a good understanding of what supplier evaluation is, why it’s important and how it’s done, you’ll have a solid foundation for getting the most out of your supplier evaluation efforts and ensuring your business relationships last.