Supplier performance reviews serve to assess how the supplier is performing against the agreed key performance indicators (KPIs) and service level agreements (SLA).
The reviews are a key component of supplier performance management, which seeks to measure and monitor the performance of suppliers to:
- reduce costs
- mitigate risks
- drive continuous improvement
If your business outsources a considerable amount of work, it is essential to review the performance of your suppliers regularly.
Advantages of supplier performance reviews
Regular reviews of supplier performance will help you:
- monitor compliance with agreed KPIs and SLAs
- identify performance gaps and areas where they fail to meet expectations
- pre-empt issues that lead to underperformance
- agree on actions needed to deal with performance failures
- benchmark the suppliers' performance against others in the industry
- motivate supplier to improve performance
- prevent complacency, especially in long-term arrangements
- hold suppliers accountable for any failures or breach of agreed terms
If you have an SLA, performance reviews may help you to assess the business/supplier relationship in the most objective way possible. See supplier service level agreements.
How to review supplier performance?
You can use supplier management software to create review forms for different services or suppliers or create a form that is specific to your business.
Common supplier review evaluation criteria will include categories for suppliers':
- performance - eg efficiency (KPIs) and delivery (SLAs) of contractually agreed services
- incidents - eg events that have negatively impacted your business
- billing - eg accuracy and timeliness of billing, order processing, etc
- quality - eg supplier responsiveness, customer service, supplier knowledge, etc
Sources of data to help you review different aspects of the supplier's performance include:
- supplier scorecards
- customer feedback
- customer surveys
- incident reports
- action plans
If, after the review process, you find that your suppliers are underperforming, service level agreement will usually provide for compensation, often in the form of rebates on monthly service charges.
Frequency of supplier performance reviews
You should carry out a performance review quarterly, bi-annually or annually. The frequency should depend on the supplier’s services and the potential risks to your business.
The initial performance review often takes place approximately three months after the services began. Before the review, it’s worth monitoring if the supplier is performing to your expectations and documenting any failings or incidents that take place. This may help you create an action plan for the ongoing performance reviews.
It is common to carry out a performance review approximately six months before renewing supplier contract. This provides an opportunity to identify performance gaps and resolve issues with the supplier before agreeing to the new contract.