Vendor rating (also called supplier rating or supplier evaluation) is the practice of scoring a supplier’s performance against measurable criteria, usually quality, delivery, price, and service, so a buyer can compare suppliers objectively and decide whom to keep, develop, or drop. Instead of relying on opinion or reputation, it turns each supplier’s track record into a single, comparable score.
Purchasing teams use that score to select suppliers, negotiate from evidence, and hold existing vendors to a consistent standard. The three most widely used methods, shown with their formulas and a worked example below, are the categorical, weighted-point, and cost-ratio methods.
This blog post will explain vendor rating, its criteria, how to calculate vendor rating, eight techniques for supplier evaluation, types of vendor rating, tips to improve vendor performance, and what you should look for when assessing a vendor.
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Video Introduction
Vendor Rating Criteria
When it comes to rating suppliers, there are key elements that buyers take into consideration.
Quality
The quality of the products or goods the vendor supplies is the main factor. The vendor can maintain good quality by improving production and having quality planning in the supply chain.
Quality factor consists following things.
- The supplier should follow the terms and conditions mentioned in the purchase order.
- The vendor’s products or services must meet the specifications mentioned in the proposal and purchase order request.
- The product failure rate should be within the appropriate limit.
- The vendor should do proper repair or rework.
- He should provide an adequate time duration for replacement.
Price
A company always wants to get the materials at less expense to reduce its manufacturing cost to increase its profit. Hence the vendor needs to set a competitive price for his products. It includes the following things.
- Stable price: The price of the product or service must be stable over time.
- Accurate price: There should not be much difference between the purchase order and invoice prices.
- Prior notice about price changes: They should inform about price changes in advance.
- Billing: They must provide easily readable and understandable bills.
Evaluate purchase order finance using our Purchase Order Financing Online Calculator.
Delivery
The supplier has to develop the ability to deliver the goods on a scheduled date. This factor consists following things.
- Lead time: Lead time is between the actual delivery day and order placement day. The shortest lead time helps to get a good impression of the supplier. The vendor should deliver products on or before the promised date.
- Quantity: They must deliver the correct amount of products as mentioned in the contract.
- Packing and documentation: Packing of the products must be suitable, studied, and undamaged. The vendor should provide proper documents along with the delivered products.
- Emergency delivery: The vendor must be able to deliver products in case of emergency requirements.
You can calculate your vendors’ delivery performance with the Delivery Performance Online Calculator.
Service
It is one of the crucial criteria for the suppliers. They have to provide good service by providing an updated catalog, pricing, technical information, etc.
- The vendor must have the ability to handle complaints effectively.
- The vendor should provide technical support for installation, maintenance, and repair.
- The supplier should support in the emergency condition of product failure or repair.
- The supplier should find the solution to the problem on time.
The supplier rating system is a by-product of the just-in-time approach.
Just in time (JIT) is a lean manufacturing methodology designed to reduce the waste of time and resources by receiving goods only as needed. The JIT process was developed in Japan to maximize limited natural resources.
One of the essential objectives of the supplier assessment system is that it helps buyers carefully choose suppliers for future transactions.
The available data can also help to negotiate better and help the buyer with any information that might be useful during the process.
Composite Vendor Rating
Composite suppliers rating means rating vendors based on their product price, service, delivery performance, and quality of the product or services.
Composite vendor rating procedure
Following are the four primary rating criteria for composite rating.
- Quality rating: Rate the quality of the product by considering two factors. They are quality acceptance and certification.
- Quality acceptance means material purchased by the vendor should pass the first inspection level only so that we can consider that the quality of the product is good.
- The material should have some quality certification like ISO(International Organization for Standardization) certification, IRS, ABS, DQA(WP), and DQA(N).
- Price rating: Compare the price of the present vendor with other vendors and compare the material’s current worth with the material’s average cost for a chosen period.
- Delivery rating: Rate the delivery performance of the vendor by comparing the actual delivery date with the predetermined delivery date.
- Service rating: Rate the service based on the support provided by the vendor during post and pre-purchase orders and consider the warranty period.
This way, do the composite rating by rating all the above factors and choose the best vendor for your business.
Benefits of Vendor Assessment
The following are significant benefits.
- It helps the buyer understand the vendor in every critical aspect, and it helps to know whether the vendor is suitable to deal with. It does not deal with prejudices and word-of-mouth. It is more dependent on data.
- It helps the buyers to strike the right kind of communication required.
- It ensures a consistent vendor performance standard with updated performance reviews.
- It helps the buyer identify areas of weakness in the vendor’s performance and allows the buyer to take corrective actions.
Disadvantages of Vendor Rating
Rating your vendor helps you to enhance your supply chain. But its significant disadvantage is losing trust.
When you evaluate and rate your vendor, they might feel you do not trust them.
It may impact your relationship with your vendor/supplier. However practical supplier evaluation helps the supplier to perform well.
Supplier Evaluation or Vendor Rating Techniques
- Categorical plan: Managers from various verticals list crucial factors for a vendor and assign performance ratings to each vendor in categorical terms such as “good”, “neutral”, and “poor”. They give ratings based on their personal experiences, and vendors are compared based on the same.
- Weighted point plan: Factors are categorized, and weight is assigned to each factor based on vendor performance.
- Cost ratio plan: Supplier rating is based on different costs incurred for procuring the materials from other suppliers. The cost ratios are ascertained for the various rating variables such as quality, price, and timely delivery. The cost ratio is calculated in percentages based on the total individual cost and the total value of the purchase.
- Forced decision matrix: The attributes of rating like quality, service, price, reliability of the vendor, and lead time of supply are identified first. Then these factors are compared between themselves. If something is more important, it will be assigned with one’s weight, and the other will be zero for evaluation.
- Service cost ratio: Subjectively measuring other intangible aspects of a supplier’s services. Aspects to consider could be labor stability, financial stability, flexibility in production for rush orders, research, and development (R&D).
- Bell quality rating system: This is developed by the Bell helicopter company Lot Quality Index(LQI). It assesses lots received against lots rejected. X/L gives LQI. Where, L = total number of lots received during the period, X = (L1 x 1.00) + (L2 x 2.10) + (L3 x 2.90) + (L4 x 3.10)+ (L5 x 3.90)
- L1 = number of lots acceptable as received.
- L2 = number of lots rejected by sampling inspection but labeled.
- L3 = number of lots rejected and dispositioned, rework at supplier’s end.
- L4 = number of lots rejected and dispositioned, returned, not usable.
- L5 = number of lots rejected and dispositioned rework at Bell Helicopter Company.
- This formula can be modified easily to suit the needs of a particular company.
- The IBM quality rating system: It uses quality costs as the basis for rating vendors. The formula is VGR= ((Desired cost of inspection)/(Actual cost of inspection)) x 100
Types of Vendor Rating
Generally, there are three types of supplier evaluation.
Evaluation with the help of records
In this type, you can use documents such as financial reports, logbooks, and journals to collect information about the supplier. Then, depending on the evaluation result, you can choose a suitable vendor for your business.
After the event evaluation
You must find answers to questions like what happened. How did it happen? How did it fail? This data helps you to evaluate the vendor.
Before the event evaluation
In this type, collect the historical data of the vendor to find his capabilities.
Vendor or Supplier Selection Process
No matter which business you run, the vendor is important to your company. So, how do you select a good vendor or supplier?
You can select a good vendor by evaluating the vendor. Below is the vendor evaluation process.
- First, set performance criteria for the vendor. For example, consider your vendor’s qualities, the vendor’s financial condition, complaint history, quality management system, production process, and product quality. Based on these things, you can establish the performance of the vendor.
- List out the vendors who meet your criteria. Now choose your vendor from that list by considering his services.
- Keep on evaluating vendors quarterly/ yearly. Periodically do the audit to monitor the vendor.
- Depending on the resources available, assign a person or a team to assess the vendor frequently.
- Consider the type of relationship that the vendor has with you while selecting your vendor or supplier.
Vendor Rating Formula
Most quantitative vendor rating uses the weighted-point method. You score the supplier on each criterion, then combine those scores with weights that reflect how much each criterion matters to your business:
Vendor rating = Σ (criterion weight × criterion score)
The weights add up to 100% (or 1.0), and each criterion score is a percentage worked out from the supplier’s actual record. The three scores buyers use most often are:
- Quality rating = (accepted quantity ÷ quantity received) × 100
- Delivery rating = (on-time deliveries ÷ total deliveries) × 100, or 100 minus the percentage of late deliveries
- Price rating = (lowest price offered ÷ this vendor’s price) × 100
Each score comes out as a percentage, and the weighted sum gives one overall rating you can line up side by side across suppliers. The example below works through it from raw figures to a final score.
Vendor Rating Example
Let us rate two companies, A and B.
Factors considered are quality, price, and delivery.
Weights for each of the above factors. That is
- Quality – 60%
- Price – 20%
- Delivery – 20%
If we multiply each factor’s values by their weights, we can derive ratings and compare which is better.
Company A inputs:
Total quantity supplied: 10 units, total quantity accepted: 8 units, price per unit: $10, Delay in delivery 20% time delay.
Quality rating = (8 ÷ 10) × 100 = 80%
Price rating = (lowest price ÷ this vendor’s price) × 100 = (10 ÷ 10) × 100 = 100%
Delivery rating = 100 − 20 = 80%
Weighted rating of Company A = (80 × 0.60) + (100 × 0.20) + (80 × 0.20) = 48 + 20 + 16 = 84
Company B inputs:
Total quantity supplied: 20 units, total quantity accepted: 18 units, price per unit: $16, Delay in delivery 10% delay.
Quality rating = (18 ÷ 20) × 100 = 90%
Price rating = (lowest price ÷ this vendor’s price) × 100 = (10 ÷ 16) × 100 = 62.5%
Delivery rating = 100 − 10 = 90%
Weighted rating of Company B = (90 × 0.60) + (62.5 × 0.20) + (90 × 0.20) = 54 + 12.5 + 18 = 84.5
Side by side, the two suppliers compare like this:
| Criterion (weight) | Company A | Company B |
|---|---|---|
| Quality (60%) | 80% | 90% |
| Price (20%) | 100% | 62.5% |
| Delivery (20%) | 80% | 90% |
| Weighted rating | 84 | 84.5 |
Though Company B charges more per unit, it wins on the overall score, because its stronger quality and delivery, weighted at 80% of the decision, outweigh its higher price. That is the whole point of a weighted rating: it stops a low sticker price from hiding poor quality or late delivery.
Gartner Vendor Rating
Gartner vendor rating is a method that provides the best content to the customer to evaluate vendors or providers for mutual benefits.
It considers things like,
- Product/Service offered by the vendor
- Support provided by the vendor
- The pricing structure of the product or services
- Technology
- Strategy
- Corporate Viability
It rates each vendor on a five-point scale, from strong negative at the bottom to strong positive at the top.
- Strong Positive: The top rating. The vendor has strong focus, quality products or services, and a solid market position, and is a safe strategic choice for new investment.
- Positive: A capable vendor with good products or services. Customers can keep working with them and plan investments with confidence.
- Promising: The vendor shows potential but has not yet proven it at scale. Weigh the vendor’s maturity and the short-term and long-term effects of the relationship before committing.
- Caution: A vendor with real limitations. The customer should understand those limits and plan around the risk and future business impact.
- Strong Negative: The lowest rating, for vendors with poor performance. Use them only for a committed investment already in place and line up an alternative supplier.
Types of Vendor
To choose a good vendor for your business, check out the type of vendor in the market. We can differentiate the vendors depending on their experience and dependence shown in the below image.
You need to think about the experience and knowledge of the vendor when deciding to work with them.
10 C’s of Supplier Evaluation
The 10 C’s of supplier evaluation were defined by Ray Carter, director of DPSS Consultants. He introduced the original 7 C’s in a 1995 article in the Journal of Purchasing and Supply Management and later expanded the model to 10 C’s.
According to Carter, an organization must consider these 10 C’s while rating or evaluating its vendors.
They are:
- Competency – How competitive is the supplier?
- Capacity – How capable is the supplier of fulfilling requirements?
- Commitment – Is the vendor committed to supplying expected quality products or services?
- Control – Does the supplier have control over policies and procedures?
- Cash – What is the financial status of the supplier? Are they able to supply raw materials on time?
- Cost – What is the cost offered by the supplier for their products? Is it worth it?
- Consistency – Is the supplier able to provide quality products or services consistently?
- Culture – What is the business culture of the supplier? Is that culture match your culture?
- Clean – Does the vendor follow sustainable practices and green management rules? Is the vendor’s business ethical?
- Communication – What is the communication process? What is the response time?
How do you Improve your Vendor’s Performance?
Here is a list of tips to encourage and improve supplier performance ratings.
Make higher management participate in the process
It is essential because you can only get sufficient resources to execute this process if you involve higher management.
Set a performance measurement
Set key performance indicators (KPIs) and make sure that they cover areas like vendor service, vendor response capacity, vendors’ managing skills, and sales support. Let them know that you are monitoring them and reviewing their performance.
Clearly define your expectations
Communicate with the vendors about what you want and what they need to focus on. For example, provide a unique requirements list to each vendor instead of giving all vendors a general requirements list so they can quickly identify your needs.
Do a realistic analysis of the supply chain management system
Explore your purchase and supply chain management practices to discover their strengths and weaknesses.
Have a good team for supplier management
Based on the complexity of the supply chain, have team members for quality checks, logistics, planning, and engineering. In addition, let the team members share supplier management plans and targets so that this team approach helps to boost vendor performance.
Train your team members
Train them about approaching the vendors, making them understand your needs, and reaching their goals. While training, concentrate on what you want from your vendors and how to approach them.
Keep a good relationship with your vendor
Analyzing and evaluating the vendors is insufficient. Instead, have a friendly relationship with them. Visit their place, and greet them when they come to your place. It improves their confidence and performance.
Where vendor rating is heading
Two shifts are changing how companies rate suppliers, and both are already underway rather than speculative.
The first is automation. Instead of a buyer building a scorecard by hand each quarter, rating engines now pull delivery, quality, and price data straight from the ERP and procurement system and update scores continuously. Running predictive analytics over that history flags a supplier drifting toward late deliveries before the pattern turns into a shortage, which moves the review from backward-looking to early warning.
The second is a wider definition of performance. Cost, quality, and delivery still anchor the score, but supplier risk and sustainability have become rating dimensions in their own right. Financial-health signals, cybersecurity posture, and ESG measures such as carbon footprint and labor practices now sit alongside on-time delivery, driven in part by supply-chain disclosure rules. Dedicated third-party risk platforms have grown up around this need and feed those signals into the same vendor scorecard.
FAQs
What is the product vendor’s meaning?
A product vendor is a business that sells products to other companies. The term “vendor” typically applies to any company selling physical or digital products. In addition, vendors often provide their customers with branding, marketing, distribution services, and products.
What are the drawbacks of having multiple vendors?
Vendor evaluation helps you keep away from multiple suppliers. Some of the drawbacks of having numerous vendors are
– You may face problems while sharing information.
– If you have many vendors, the order volume will be less. Hence there will be no chance of bargaining.
– It is challenging to have a good relationship with all the suppliers. Unfortunately, that leads to less interest by the supplier in your organization, which may affect responsiveness during an emergency.
– Having many vendors consumes more time and money while managing, executing processes, and negotiating contracts.
Conclusion
Many supply chain management solutions (SCM) are available with an inventory module that includes supplier rating and evaluation mechanisms.
Management should implement the system company-wide to evaluate suppliers accurately. In addition, the review should be based only on measurable performance instead of opinions.
We have provided you with helpful techniques that will help guide your assessment process to confidently rate a new supplier or evaluate one of your current suppliers when necessary.
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