Ways to Measure Supplier Performance

February 19, 2020

Boca Raton, FL, 02.19.2020 – When you run a business, it’s inevitable that you’ll need suppliers at some point. After all, the goal is to grow your business big enough that you can’t do it all on your own, right?

However, with suppliers come complications. So, how do you know if your suppliers are performing to the top of their ability and giving you the best results?

Here are a few ways you can measure supplier performance:


1. Use price-based metrics

One of the most obvious ways you can decide if your supplier is cutting it is by looking at their price. Is this price in line with the industry standard? Having a supplier that offers a fair price likely tells more about them as a business person than you would think. Any supplier that is willing to price-gouge you likely doesn’t care about your business. In this case, it’s best to look for suppliers elsewhere.

If your supplier’s prices are in line with the industry, do an analysis to see what they quoted you to begin with and what you are paying now. For instance, if in the beginning of 2019 you were quoted $100 and in the beginning of 2020 you began paying $108 for the service, you are now paying +8% more than originally quoted.

Take this into account when deciding how well they’re doing and if you want to continue your relationship with them. Are they offering you a better service that you’re willing to pay 8% more for, or did they simply up the price on you?


1. Use cost-based metrics

Another way to measure if suppliers are performing is up to standard is using cost-based metrics. You should analyze the health of your supplier relationship by measuring how much money is out-flowing from your business.

Reducing the cost of your supplier can immediately impact your business in a positive way. Simply looking at the historic cost baseline and comparing it to the current cost impact is a good way to see the current impact of the cost on your business. The percent variance yields the savings. If the baseline cost is $100 and the new cost is $95, the $5 saved equates to 5% cost increase.

Therefore, by paying $100 for this good or service, you’re paying 5% too much. You can cut this cost by kindly relaying the data you found to your supplier and asking them for a 5% discount bringing your cost down to market value, or $95.

Use this calculation when deciding whether to continue the relationship with your supplier. If your supplier is charging you more than market value and refuses to give you a discount based on loyalty, this could be a red flag.


1. Use quality-based metrics

When evaluating your supplier, use quality as a metric to decide the value of your supplier’s good or service. Simply refer back to your contract to see if they are meeting the quality in which you both agreed to. Are they performing as they said they would in the contract? Have they missed deadlines? Has quality slipped since first signing on with them?

Make a list of ways they have exceeded and/or fell flat in terms of their service. If your list becomes longer in terms of ways they have under-delivered their service to you than ways they have exceeded your expectations, it may be time to consider a new supplier.


Summary


Make a decision with your newfound information

Now that you know three highly valuable ways to measure your supplier’s performance, it’s up to you to decide what to do. Asking to meet with your supplier to discuss your findings could be a good first step in mending the relationship. See if you can work out an agreement that suits your company a bit better. If nothing can be agreed upon it may be time to look for a new supplier.

Keep this list handy next time you need to evaluate a supplier!

– Written by Samantha Rupp


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