Vendor management KPIs you need for success
Learn what vendor management KPIs are and why they’re important for supplier management + get the low-down on the 10 top metrics to track for vendor success.
Most leaders understand the importance of tracking KPIs to measure performance and hold their teams accountable.
Just as critical, however, is vendor management, the process of managing supplier relationships to ensure contract compliance, improve return on investment, and make certain there is an ongoing mutual fit between the two parties.
To manage vendors effectively, you need to quantify performance against expectations using KPIs (key performance indicators).
KPIs are performance metrics that include both a measurement (such as compliance rate), and a benchmark expectation (such as 99%). They’re used to objectively track vendor performance to ensure contractual obligations are met.
In this article, we’ll discuss the importance of vendor management KPIs in today’s business environment and outline the 10 most important metrics to track to strengthen partnerships and keep your suppliers accountable.
Importance of vendor management KPIs
Most business leaders agree that supplier management is important. The more critical question, however, is how business leaders should measure the value of a supplier relationship.
For many businesses, this can be a subjective process. If everything is going well and you have a kind, charismatic, helpful Account Manager on the vendor side, you’re likely to consider that a good and mutually beneficial vendor relationship.
If something goes wrong, however, things can change quickly.
For example, your team gets a new AM, and personalities clash, despite the supplier still delivering the same service. Or perhaps a supply chain delay on your vendor’s side significantly impacts your ability to deliver on orders one month. Are these still good relationships?
This kind of reactive relationship assessment can be dangerous, leading to heat-of-the-moment decisions to switch suppliers.
Vendor management KPIs are the solution to this problem.
KPIs quantify aspects of the supplier relationship that are a little harder to understand without a numerical measurement.
Take defect rate,, a KPI that tracks the percentage of orders you receive that are faulty (or in the software world, the percentage of technical issues you experience.
At high volumes, there is bound to be some error. You might set an uptime defect expecation of 99.8%, meaning there is space for downtime 0.02% of the time.
Now you can objectively measure performance in this aspect of the relationship and hold data-driven conversations with your vendors if they fall below expectation.
It also makes it easier to set expectations when you’re buying new SaaS, as you can clearly communicate with potential vendors how you’ll measure their success.
10 vendor management KPIs you need to track
Not all of the KPIs we’re about to discuss will apply to your business. Some will only apply to manufacturing physical products. Others will also be relevant to the SaaS procurement process.
The goal here is not to tell you which vendor management KPIs you must be tracking, but to give you insight into the most important ones across the board. From there, you can determine which are most applicable to your organization and build a dashboard for monitoring performance against the KPIs that matter.
1. Return on investment (ROI)
(Dollars generated or saved as a result of the product) / (Dollars spent on the product) = ROI
ROI describes the value you’re receiving from a supplier in dollar terms. With any supplier relationship, the goal is to either drive more revenue or reduce expenses, so quantifying this impact is crucial.
How you measure ROI depends significantly on the product in question.
Measuring ROI for a CRM platform, for instance, is likely to involve its impact on revenue growth. CRMs support the marketing and sales processes, key in driving revenue, but not so much in reducing expenses.
ROI from a SaaS procurement management platform, however, is more about cost reduction. The goal of this purchase isn’t to drive new revenue, its to reduce costs by identifying areas of overlapping spend and negotiating contracts based on industry purcahse data.
When calculating ROI for this kind of software, you’ll measure how much money you saved compared to spent with that vendor.
2. Compliance rate
(# of SLA Requirements Met) / (# of Total SLA Requirements) = Compliance Rate
Compliance rate measures how often your vendors meet the requirement in their contracts and SLAs (service level agreements).
You’re probably going to have multiple KPIs here by which to measure compliance against specific clauses in your contract.
Naturally, some KPI expectations will be more stringent than others.
For instance, if you’re manufacturing a food product, the need for suppliers to meet food safety regulations is a non-negotiable. Delivery time, however, might be a little more flexible.
Track compliance rate on the whole, but then get detailed by outlining which contract clauses you’ll measure specifically.
3. Supplier lead time
(# of days per order summed) / (# of total number of orders) = Supplier lead time
Supplier lead time is the number of days it takes a vendor to ship an order after it’s been requested.
This clearly impacts how soon you receive your order, so putting an expectation in place is crucial.
This vendor management KPI is applicable to physical product industries, but it can also apply in the software world. For instance, how long does it take for your Account Manager to add a new set of users once requested?
4. Support ticket resolution time
(Sum of # days taken to resolve each support ticket) / (Total # of support tickets lodged) = Support ticket resolution time
No supplier relationships are without hiccups.
Supply chain issues occur, software platforms experience technical issues, and human error is, unfortunately, part of the process.
The important factor here, though, is how quickly your vendor resolves an issue once it arrives.
The best way to track this is with a KPI known as support ticket resolution time. That is, once you log a customer support ticket, how much time (usually measured in days) does it take for them to fix the issue and close the ticket?
5. Product/service defect rate
(# of defects received or experienced) / (Total number of orders placed) = Product/service defect rate
Defect rate differs depending on what you’re buying from a vendor.
If you’re purchasing a physical product, then the defect rate tracks the percentage of components you receive that are broken or otherwise unusable.
In the SaaS world, it’s about how often you experience a technical issue. In this case, you should measure defect rate in conjunction with support ticket resolution time, so you’re measuring:
- How often something goes wrong
- How quickly they fix the issue when something does go wrong
6. Order accuracy
(# of correct orders received) / (Total # of orders placed) = Order accuracy
Order accuracy measures how often you receive what you order (or, more importantly, how often you don’t).
Note that this is different from the defect rate. Defect rate measures how often something arrives broken or how often your software platform experiences downtime. Order accuracy measures how often you receive the wrong order. For instance, you ask for three additional seats, but your Account Manager only opens up two.
This is a critical KPI as incorrect orders slow production and drive up costs, impacting your ROI and ability to deliver on customer orders.
7. Order capacity
(# of times your order capacity is able to be fulfilled) / (Total number of orders placed) = Order capacity
Order capacity tracks the percentage of time a vendor is able to fulfill your requested order quantity.
For instance, you order 100TB of cloud storage, but your provider can only give you 80TB right now.
Tracking order capacity allows you to understand your supplier’s ability to satisfy your growing needs. If they aren't able to fulfill your order capacity, then you need to:
- Delay production schedules
- Reduce production capacity
- Look for an alternative vendor to fulfill the remaining quantity
The competitiveness KPI refers to pricing. That is, how competitive is your vendor’s pricing compared to the market?
Obviously, you’re going to have contracts in place — meaning pricing will be fixed for a period of time — so this is not something you’re going to look at every week.
You should, however, track how often your suppliers raise prices, and how quick they are to adjust to downward market pressure (i.e., do they drop their prices when their competitors do?).
9. Risk assessment
There are many different types of risks associated with working with third-party suppliers.
Let’s say your company is heavily reliant on them. Without the thing they sell, you can’t make the thing you sell. If they go under, then you’re in trouble.
In that case, you could ask for evidence of financial stability, for example.
PR risk is another example.
If it gets out that your supplier is sourcing their components unethically, this could reflect badly on your organization and become a PR nightmare. In this case, it’s important to ask about the origins of their products.
Innovation measures how much value your vendors provide over and above what’s already expected.
This is most commonly seen in new product developments. A vendor might improve their manufacturing process to deliver a superior product at a lower price.
In the software world, we’re talking about releasing new product features (especially if they’re automatically included in your existing plan at no extra cost).
Working with vendors who innovate is a great way to continue increasing value and ROI, without having to constantly source new suppliers or pay extra for new features.
Streamline vendor performance management using automation
Reporting on vendor KPIs shouldn’t be a time-consuming process. Ideally, you’ll be able to visualize supplier performance in real time.
That means the traditional Excel spreadsheet model is out the door. You need a centralized location for managing vendor scorecards, tracking KPIs, and measuring ROI and associated cost savings. Vendr is the Saas buying and vendor management solution that provides a single point of truth for tracking vendor KPIs, monitoring spend, and contract management.