Vendor rating is a process where the suppliers are provided a status or a title based on several factors such as credibility, delivery time, price, quality of the goods supplied, and or a set of such mixed variables.
The ratings are based on the vendor’s performance and can have several levels from good, average to best or anything that the firm decides on.
This system is a by-product of the just-in-time approach.
Just in time (JIT) is a lean manufacturing methodology designed to reduce waste of time and resources by receiving goods only as they are needed. JIT process was developed in Japan to make the maximum utilization of limited natural resources.
One of the important objectives of this system is that it helps the buyers to carefully choose the 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.
- It helps the buyer to understand the vendor from every important aspect and will help in knowing if the vendor is suitable to deal with or not. It does not plainly 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.
- Ensuring a constant standard of vendor performance with updated reviews of their performance.
Vendor rating techniques
- Categorical plan: managers from various verticals make a list of factors that are crucial for a vendor to own 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. An example is given below for calculating the same.
- Cost ratio plan: Supplier rating is done based on different costs incurred for procuring the materials from different suppliers. The cost ratios are ascertained for the different rating variables such as quality, price, timely delivery. The cost ratio is calculated in percentage based on the total individual cost and the total value of the purchase.
- Eavastons’s vendor selection: previous performances of the vendor is considered for choosing them.
- Forced decision matrix: the attributes of rating like quality, service, price, reliability of the vendor, lead time of supply are identified first. Then these factors are compared between themselves. If something is more important it will be assigned with the weight of one 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 Labour 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, which is Lot Quality Index(LQI). It assesses lots received against lots rejected.LQI is given by X/L.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.
- 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
Supplier rating example
We are using Weighted Point Plan for this example.
Let us rate two companies A and B.
Factors consider are, quality, price, delivery.
Weights for each of the above factors is
- quality – 60%
- price – 20%
- delivery – 20%
If we multiply each of the values of the factors by their weights, we can derive ratings and compare which one 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)X100=80%
Price rating =(10/10)X100=100% [ price rating =(Price Ratio Lowest / Simplier Price) x 100 ]
Delivery rating = 100 – 20= 80%
weighted vendor rating of company A= (80X60+100X20+80X20)=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)X100=90%
Price rating =(10/16)X100=62.5% [ price rating =(Price Ratio Lowest / Simpler Price) x 100 ]
Delivery rating = 100 – 10= 90%
weighted supplier rating of company B= (90X60+62.5X20+90X20)=84.5
Though the price per unit of company B is more than company A, still company B wins because of overall rating is high.
Many of the enterprise resource planning (ERP) solutions are available with supply chain management solutions (SCM) that have an inventory module that includes vendor rating and evaluation mechanisms.
The system needs to be implemented a company-wide in order to get accuracy in supplier evaluation. The evaluation should be made only based on measurable performance instead of opinions.