Introducing a third-party exposes a business to potential risks that can impact the supply chain. By evaluating the vendor before drafting a contract and intermittently throughout the partnership, companies can actively perform third-party risk management to mitigate emerging threats.
Therefore, organizations should evaluate potential vendors' operations, reputation, and qualifications to reduce risk and promote productivity.
What is a Vendor Assessment?
A vendor assessment is an evaluation and final approval process to determine which potential suppliers meet a company's standards and specifications. An evaluation can minimize third-party risk by thoroughly vetting all candidates before securing a contract with the ideal vendor.
Although performing an assessment can require extensive time and research, if done correctly, businesses will find financially reliable suppliers that offer high-quality products with low risk. Additionally, through complete transparency on company standards, organizations can build strong partnerships based on open communication and shared responsibility.
A vendor assessment process provides additional benefits, such as-
- Lower Regulation Risk - By evaluating vendors, businesses can confirm that all parties are abiding by the appropriate laws, regulations, and company standards. However, if the vendor is located in another country, the organization is responsible for understanding the foreign legal restrictions as well.
- Contract Compliance - Before final approval, both organizations perform a legal review of contract terms to clarify any nondisclosure agreements (NDAs), each party's responsibilities, and additional clauses. This ensures that each company understands what is expected of them, avoiding any confusion and risk of breaching the contract.
- Reduced Cyber-Security Risk - A thorough investigation will cover how the vendor plans to store the client's data, whether in the cloud or on a hard drive. The vendor must also disclose who would be granted access to view sensitive information and how they plan to verify users. Establishing a secure medium mitigates the risk of data being leaked, hacked, or manipulated.
7 Tips for an Effective Vendor Assessment
Vendor assessments are meant to analyze the supplier performance, product quality, and potential risks so companies can accurately determine their overall value.
Many businesses make the mistake of focusing on low prices as the deciding factor, which often leads to low-quality goods. Instead, companies can monitor and evaluate vendor performance by following the best practices-
1. Establishing Benchmarks
Companies need to clearly define benchmarks and key performance indicators (KPIs) to accurately judge the vendor's output. By developing a criterion that states the quality, quantity, and operation specificities, businesses can efficiently monitor performance. Benchmarks can be established monthly, quarterly, and annually to ensure product output meets the demand.
However, companies should consider all variables, such as the vendor's size, qualifications, reputation, financial stability, management systems, and staffing before implementing KPIs. Therefore, a smaller vendor specializing in unique components should not be given the same quota as a large vendor that mass-produces raw material.
2. Ranking Suppliers
Businesses that occupy a third-party vendor should have an idea of their top performers and average output. However, companies cannot use the same survey on all vendors as they each provide a separate service.
Therefore, organizations should rank suppliers by grouping them into levels according to their value. The levels can reflect whatever element is most important to the company, such as product quantity, customer service, or production time. By ranking vendors, a company can gain a better idea of who is essential to their operations.
3. Creating an Evaluation Method
Every company has their own technique of evaluating vendors, from surveys to software-generated analyses. However, management must customize their evaluation method to their company and vendors to ensure accurate results.
For example, if a business wants to use surveys, they need to craft questions that directly reflect the respective vendor's role. Businesses can also review the supplier's corrective actions to see how many products were wasted or returned due to poor operational management. Alternatively, companies can survey their own employees that work directly with the suppliers to gain insight into their customer service.
Regardless of how a business conducts its evaluation, performing periodic assessments generates tangible metrics that illustrate the supplier's performance. Management can use these insights to determine if the vendors are meeting their standards or if they need to review company expectations.
4. Designating an Employee to Review Data
Once the business finds an evaluation method that works best for them, they must designate a qualified employee to review the assessment data. This depends solely on the company's resources and how much they are willing to dedicate to the vendor assessment process. Some businesses may find it necessary to have a financial officer conduct assessment reviews, while others may train an existing manager.
5. Building and Maintaining Partnerships
Once companies determine which vendors provide the most value to their operations, they should prioritize fostering a long, symbiotic partnership. Suppliers should be considered as part of the team and should have an open line of communication to express concerns.
Companies should also avoid actions that may lead to conflicts, such as late payments, virtual check-ins rather than personal phone calls, or non-transparency.
6. Addressing Strengths and Weaknesses
Companies should express their appreciation when vendors consistently meet or go beyond expectations, by either providing more opportunities, bonuses, or incentives.
On the other hand, management should discuss the appropriate actions for dealing with poor performance. While some vendors should be given a warning, it may benefit the company to terminate other partnerships. However, organizations should not be quick to let suppliers go as it increases turnover and requires ample time to onboard and train new vendors.
7. Pinpointing and Eliminating Weak Links
Although it may be difficult, especially when a company has utilized a vendor for a long time, businesses need to recognize when to let vendors go. If, after several warnings, a vendor is still not meeting company standards, it may be time to terminate the contract. Holding on to sub-standard suppliers can negatively impact production, customer success, and profitability.
Through vendor management, companies can perform third-party risk reviews, limiting their exposure to external threats and establishing secure partnerships. Businesses can ensure that suppliers are compliant with all regulations and standards to keep operations on schedule while maintaining quality control.