Making the Grade: Rating Suppliers to Control Costs

No matter what industry you work in these days, the rising costs of fuel and materials are affecting your bottom line. How do you ensure that you get the best value and lowest cost possible from your vendors? What options exist to control costs and ensure that you are receiving quality products from your suppliers?

Evaluating and rating your suppliers on a periodic, ongoing basis is an important cost-control measure. Although the process can be challenging for you and your suppliers, the payoff — in open communication, clear expectations, stronger relationships, time saved and reduced costs — can more than make up for the effort invested.

A variety of approaches can help you effectively evaluate suppliers. A common system uses a matrix or formula to break down vendor performance into key areas such as:

on-time delivery
quality
cost

Additional criteria may include the ability to be responsive to requests, work cooperatively and more. Some evaluation systems may include factors such as location, financial stability, efforts to improve or address previous shortcomings, or certifications (e.g., ISO, QS). In some cases, a vendor might provide some value-added service, such as the Delegated Inspection service that Faustson provides to Ball Aerospace. (You can read about Faustson's agreement with Ball Aerospace in the Real World Apps section of this newsletter.)

Each of these categories typically has sub-categories, and criteria are weighted based on their importance to the end product or the process. Scores are assigned and totaled based on a vendor's performance in each area.

The overall performance ratings give you an objective assessment of each vendor's capabilities and reliability. That assessment then allows you to effectively compare vendors and make decisions about which to use based on your needs and expectations.

Some vendors will be reliable workhorses that you will turn to regularly. You may choose others only when you are in a bind — facing a pending deadline, budget constraint or other issue.

For example, you may have a supplier that always meets or exceeds your quality criteria, always delivers on time and has a 5-day lead time. However, if this vendor provides parts at twice the price of a vendor who struggles to meet quality levels, sometimes misses deadlines and needs a 15-day lead time, which do you choose?

It all depends on what is most critical to you and the end-user of your product.

In the systems that companies use to rate suppliers, scales and rating systems can vary considerably. For example, one Faustson partner uses a 0-to-4 scale (with 4 being the best) to rate a supplier in each subcategory. A different partner's rating scale also uses a scale of 1 to 4, but in this case, 1 exceeds expectations, 2 meets expectations, 3 needs improvement and 4 is unacceptable and needs major improvement.

Faustson takes these partner evaluations seriously, and consistently receives scores on the high end of the scale, particularly for on-time delivery and quality criteria. In fact, Faustson is one of China's highest-ranked suppliers (a rare compliment for a U.S. company). In a recent evaluation from China, Faustson received a score of 95 percent for on-time delivery; for overall performance, the company received 3.8 out of a possible top score of 4.

You can implement your own supplier-rating system by starting with a breakdown of general areas that are critical to your success and your ability to meet your customers' expectations.

Map crucial criteria on a matrix or spreadsheet.
Break each section down into sub-areas.
Create a score or ranking system.
Weight areas as appropriate.

When you have a rating system in place, test and refine the system on a project-by-project basis.

Evaluating suppliers is an ongoing task, but one that can save your organization money and strengthen vendor relationships. To learn more about how we foster effective communications, contact the professionals at Faustson at 303-420-7422, or visit www.faustson.com.