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Vendor Rating Mechanism of Purchase Department: Factors, Example And Concept

In assembly operations even if screws are not available the despatch of thousands of semi-
finished goods will be held up. Finally if packing cartons are not received in time all the
finished inventory will be idle, blocking store space and money.

Four categories A (excellent), B (very good), C (good) and D (average) can be made.
There cannot be lesser than average as such sources will be deleted. To give these four A, B,
C, D categories there has to be a common method. The ratings should have to healthy
competitions and improvements amongst the vendors.

Some companies prefer to do vendor rating only for A class items and some do for both A &
B class items. Since C class items are of low value and low annual consumption values, the
rating is not considered very essential. For high value and high annual consumption value
materials it is very essential.

Rating Factors:
1. Quality:
Percentage of rejections in batches of supplies the trend of improvement and how it compares
with equivalent vendors or vendors for same material in the guiding criteria.

2. Quantity:
This pertains to upkeep of delivery schedule and comparison with equivalent sources. Here
also percentage can be calculated based on quantity supplied against quantity on schedule and
that gives a picture of reliability on schedule.

3. Price:
Price is a case where comparable list made, on the basis of these ratings can be given.

4. Facilities:
Facilities like machineries, building, tools, measuring instruments, layout, storage etc. give an
idea of better upkeep and capability and accordingly an experienced purchase engineer can
give ratings.

5. Human Resources:
Employees’ qualities, experience, exposure, ability to adjust to new process and quality care
will enable to decide on rating.

6. Management:
Top management/owner’s interest, seriousness, co-operation and care to attend orders make
correct rating possible.

7. Financial Standing:
This is very important for buying raw materials, payment of wages and withstanding credit
facilities of customers.
8. Adjustability:
Ability to readjust to changed requirements, speeding up and taking care of extra load etc.
carry more weightage.

9. Progressive:
A vendor should be progressive to improve quality wise, technology wise and increase the
business volume and keep good relations with one and all related to business activities.
10. MIS:
In a corporate setting, the ultimate goal of the use of a MIS is to increase the value and profits of
the business.

A vendor must keep track of various prices, problems, new order opportunities and be alert
and actively adjust to forthcoming changes.

Purchase engineers can give grades A, B, C, D to different ten factors explained above. To
give one grade per vendor the purchase manager has to give more weight age
to quality, delivery schedule and price and give the rating.

For example, out of ten categories if a vendor gets ‘A’ in six categories and B&C in others,
criteria for the total grades should be A. In any case the criteria should be to give
more weight age to quality, delivery and price and more or less the grade given
in the three will be the totality grade. Hence the experience and judgement of the
purchase manager is more meaningful rather than mere statistics.

The ratings are neither permanent nor repetitive. In annual rating one who is ‘A; grade for
three years can go down to B, C or out of the list and vice-versa. This is due to dynamic

situations like change of Partnership, sale of firm, amalgamations, financial crisis, legal

disputes, environmental and natural causes, death or resignation of an important executive or

owner etc. These situations (one or more) do occur after some time and will affect the

business activity. The purchase department should annually verify and change the grades
(ratings) accordingly.

Vender Rating Example:

Work out vendor rating for following data of three companies X, Y, Z. Weightage is Quality
– 50%, Price – 20%, Delivery – 20%, TQM System – 10%

Table 4.1: Vendor rating example:

Service Details Company X Company Y Company Z

Total quantity supplied 100 Nos. 90 Nos. 80 Nos.

Total quantity accepted 95 Nos. 88 Nos. 76 Nos.

Unit price of item Rs.10.00 Rs.9.80 Rs.10.20

Delivery expected as per 4 weeks 4 weeks 4 weeks

PO

Delivery arranged 5 weeks 4-5 weeks 6 weeks

Care taken for TQM system 75% 80% 70%

Solution:
(a) Quality Rating

95/ 100 x 100 98/90 x 100 76/ 80 x 100

= 95% = 97.8% = 95%

Multiply by 50% weightage

95 x 0.5 = 45.5%

97.8 x 0.5 = 48.9%

95 x 0.5 = 47.5%

(b) Price Ratio Lowest / Simplier Price x 100

9.8 /10 x 100% = 98%

100%

9.8/ 10.2 x 100 = 96%

Multiply by 20% weightage 98 x 0.2 = 19.6%

20%

96 x 0.2 = 19.2%

(c) Delivery Rating 4/5 x 100 = 80%

4 x 4.5/100 = 88.9%

4 x 6 100 = 66.7%

Multiply by 20% weightage 16% 17.8% 13 .3%

(d) TQM System with 10% weightage = 7.5% = 8.0% =7.0%

Total rating percentage x=90.6%, y=94.7%, z=87%. Hence, vendor y is preferred for supply
of the item under consideration.

https://www.purchasing-procurement-center.com/vendor-ratings.html
Gartner, Inc., the leading provider of research and analysis on the global information
industry, holds a well documented vendor ratings process that is hotly followed by large
companies looking to contract new suppliers and review their existing vendor base. Gartner
publish their vendor ratings criteria and award one of the following ratings:
Strong Positive: The vendor is considered a strong strategic choice.
Positive: The vendor should be short listed.
Promising: The vendor shows potential in specific areas.
Caution: The vendor faces challenges in some areas.
Strong Negative: The vendor faces difficulties in multiple areas.
https://www.inc.com/guides/2010/12/7-tips-to-rate-and-evaluate-your-suppliers-and-vendors.html

Marlin Steel exports wire baskets and forms all around the world including Japan, Columbia and
China. Greenblatt points to the fact that 'about 80 percent of my vendors do 20 percent of my dollar
amount of work and about 20 percent of my vendors do 80 percent of my activity.'

By divvying up suppliers into two categories such as critical and non-critical or primary and
secondary, you can devote more time to measuring the performance of your critical suppliers.

There are common techniques for rating a supplier's performance including

1. Evaluation forms.
2. surveys
3. system metrics and
4. Software applications.
Marlin Steel tracks vendor performance using a customized program he created in
QuickBooks Enterprise Solutions accounting software, the Manufacturing & Wholesale
edition.
4.Determine Who's Calling the Shots

Once you establish the criteria for evaluating suppliers and vendors, who in your company will be
responsible for reviewing the data. It depends on how much resources you have to dedicate to
evaluating your suppliers, says Boudreaux. 'You may want to assign one person or a team with this
task.' For instance, selecting and evaluating level 1 suppliers and vendors, might require the chief
financial officer or someone from the finance department along with the president and
representatives from purchasing, operations, and engineering or IT. With level 2 and 3 suppliers and
vendors, it may be the purchasing or procurement officer who approves the supplier or vendor list
and monitors performance.

5. Maintain Good Relationships

consider your suppliers and vendors as part of the team and treat them as such.
Communicate often and openly. Technology is great but don't overlook the personal touch
of a phone conversation or face to face meetings, says Greenblatt. Also, avoid supplier and
vendor conflicts by paying on time or at least honestly addressing late payment issues and
talking with your supplier or vendor about it. Be upfront and transparent with suppliers and
vendors. Make sure they understand your needs and expectations.

'To improve our relationship and communication with our vendors, we added a page to all of
our print materials (drawings) calling out exactly how we are going to package things,' adds
Greenblatt. 'So, if it is going to be two layers of bubble wrap or an extra layer of padding
between each part so that there is no scratching. We go through that level of detail so that
we are not disappointed when parts come in.
6. Decide When to Issue a Red Flag

As you monitor a supplier's performance, you have to decide when to praise them
and when to issue a read flag, says Boudreaux. Show appreciation for a job well
done; give a supplier additional business because of excellent performance. 'A bad
supplier will provide you with mediocre or poor products and services and cause a
problem with your customers,' adds Boudreaux.

You can drop a supplier for poor performance but strategically it is better to retain
your vendors and not to flip around all of the time to replace them. By giving a
warning, you give the supplier or vendor an opportunity to correct the problem.
Use data that you have collected like on-time delivery rate, return rate, and number
of supplier corrective actions to work with your suppliers, says Boudreaux. 'This
process is not just about reviewing your suppliers but helping them to improve their
performance.'
7. Cut Loose Weak Links

No one of course should tolerate ongoing bad service. There may come a time when
you have to let go of an underperforming supplier or vendor. 'We fired a vendor that
was really cheap but was not meeting the ship dates. They were also non-responsive
to complaints. They cut corners and handed in shoddy paperwork,' Greenblatt cites
an example.

'We give a warning and then put them on notice or a short leash before we cut ties
completely,' he explains. 'We will call the vendor and give them an opportunity to
correct the situation. We will send them digital pictures, e-mails, and quality reports.
So, there is no mystery when there is a challenge or an issue.'

The relationship with your supplier is a business partnership, says Wright, and if both
parties are working to make sure that the partnership is a success it will be a
success. In the long run, having a win-win supplier and vendor relationship will be a
competitive advantage.