How to Optimize Vendor Performance Appraisal with Automatic Vendor Evaluation
- by Patrick Imhen, Business Analyst and Senior SAP MM/SD/PM Functional Consultant, ZOCODE Limited
- February 17, 2017
Learn how automatic Vendor Evaluation in an SAP system can be implemented to optimize the appraisal of vendors’ performances and significantly reduce your supply chain risk, cut financial waste, and enhance your procurement process performance.
Reading this article, you will learn:
- How to configure and implement automatic Vendor Evaluation
- How to eliminate hidden cost drivers with the aid of Vendor Evaluation
- A methodology for achieving more effective vendor performance with Vendor Evaluation
- Insight on how to formulate effective point scores for the automatic criteria
- How to execute and analyze the vendor ranking list
Use of Vendor Evaluation is sometimes not considered an important requirement during SAP system implementations, but it is a vital tool that can help an organization experience low risk with high performance and cost-effective supply chain operations. Vendor Evaluation is located under the master records in SAP ERP materials management–Purchasing (MM–PUR), and it is used to appraise vendors’ operations based on set criteria such as price, delivery, and quality.
A company that produces household commodities saw an improvement of about 24 percent in its supply chain performance after implementing Vendor Evaluation in its SAP ERP system using my recommended methodology. Although this company had used the SAP ERP materials management module for more than six years, the Vendor Evaluation component was not active.
During a procurement process review exercise in this organization, I observed that there was no good visibility into the performance of individual vendor activities. For example, in the aspects of compliance to terms of delivery and price management, there was no well-established procedure to measure the risk involved in continuously doing business with vendors. These major factors built up to affect the company’s procurement process, especially in areas such as on-time delivery and quality integrity. I saw there was a need to have an automated way of assessing the vendors’ performances, rating them, and taking proactive steps to mitigate perceived risks in its procurement process.
I then recommended Vendor Evaluation as the solution. The Vendor Evaluation component is used to appraise the performance of vendors with the aid of criteria such as price, delivery, and quality. It can determine and measure critical activities that impact the procurement business process. The Vendor Evaluation component is fully integrated with SAP materials management (MM)-Purchasing (PUR) and can be found under the master data in SAP MM-PUR. The Vendor Evaluation component derives scores by accessing and computing points from data such as price, delivery quantity, and date in the purchase order, goods movements in inventory, quality inspection, and the audit trail in Quality Management.
After this company implemented the Vendor Evaluation component, an evaluation was carried out for most of the vendors and their scores were recorded. An impact analysis was done based on the evaluation results at the purchasing organization level and recommendations were made to eliminate drivers of poor performance for those vendors that had low scores.
The evaluation exercise continued monthly, quarterly, or yearly depending on the purchasing organization at the company. At the end of the first year, an overall performance assessment used the same formula the SAP system uses for computation of scores (computation of scores is discussed later in this article). The overall performance of all the evaluated vendors (the total scores of all the evaluated vendors) was compared with the initial performance record derived from the first evaluation. There was about a 24 percent increase in the overall performance of all the vendors, which also means about a 24 percent improvement in the supply chain.
I demonstrate how Vendor Evaluation can be used to appraise vendors and thereby increase visibility on vendor supply operations to improve supply chain performance. The article is broken down into the following sections:
- Why Vendor Performance appraisal?
- How to Eliminate Hidden Cost Drivers with the Aid of Vendor Evaluation
- Functionalities of Automatic Vendor Evaluation
- How to Configure and Implement Automatic Vendor Evaluation
- How to Use Automatic Vendor Evaluation
- A Methodology for Achieving More Effective Vendor Performance with Vendor Evaluation
- Insight on How to Formulate Effective Point Scores for the Automatic Criteria
- How to Execute and Analyze the Vendor Ranking List in the SAP System
I also provide insight on the methodology I devised and applied using Vendor Evaluation to get an effective result of improved supply chain process performance.
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