Most executives realise the value of Vendor Management KPIs for performance measurement and team accountability.
Vendor management, which ensures contract compliance, ROI, and mutual fit, is equally important.
Effective vendor management requires KPIs to measure performance against expectations.
KPIs are performance measurements that measure (compliance rate) and benchmark (99%). To ensure contractual compliance, they objectively track vendor performance.
In today’s business environment, vendor management KPIs are crucial. Here are the 10 most significant indicators to track to improve partnerships and hold suppliers accountable.
The Importance of Vendor Management KPIs
Most business leaders value supplier management. How business leaders measure supplier relationships is the most important question.
This can be subjective for many businesses. If your vendor has a nice, charismatic, helpful Account Manager and everything is going well, you may consider it a good and mutually beneficial vendor relationship.
Things might change fast if something goes wrong.
Your team receives a new AM, and personalities clash despite the supplier providing the same service. Your vendor’s supply chain delay may prevent you from fulfilling orders for a month. Still good relationships?
Risky reactive relationship assessment can lead to last-minute supplier switching.
Management of vendors KPIs solve this.
KPIs quantify supplier relationship factors that are tough to understand without numbers.
Consider defect rate, a KPI that measures the percentage of defective orders or technical faults in software.
At high volumes, errors are inevitable. Set an uptime defect expectation of 99.8% to allow 0.02% downtime.
These metrics allow you to objectively evaluate vendor performance and have data-driven conversations if they fall short.
It also helps you set expectations when buying new SaaS by letting providers know how you’ll measure their success.
10 vendor management KPIs to monitor
The KPIs we’ll cover may not apply to your business. Some are for physical product manufacturing exclusively. Others will also affect SaaS procurement.
This is not a list of vendor management KPIs to track, but rather an overview of the most significant ones. From there, you can choose the ones that matter most to your company and create a dashboard to track success.
1. Return on investment
CRM platform ROI may depend on sales growth. CRMs help drive income through marketing and sales, but not by cutting costs.
However, SaaS procurement management platform ROI is primarily about cost savings. This buy identifies duplication and negotiates contracts b (ROI): dollar amount generated or saved / dollar amount spent = ROI.
ROI measures supplier value in dollars. Any supplier connection should increase income or decrease expenses, thus evaluating this impact is vital.
How you assess ROI depends on the product.
Based on industry purchase data to cut costs, not generate new revenue.
This software’s ROI is the difference between what you saved and what you spent with the vendor.
2. Compliance Rate
The compliance rate is calculated by dividing the number of SLA requirements met by the total number of requirements.
Compliance rate shows how often vendors meet contract and SLA requirements.
You’ll likely employ numerous KPIs to measure contract clause compliance.
Naturally, some KPIs will be stricter.
If you make food, suppliers must meet food safety standards. Delivery time may be more flexible.
Track compliance overall, then specify contract sections to measure.
3. Supplier Lead Time
To calculate supplier lead time, divide the number of days per order by the total number of orders.
Supplier lead time is the number of days a vendor takes to ship an order on request.
Having expectations about when your order will arrive is key.
This vendor management KPI works for software and physical products. How long does it take your Account Manager to add new users when requested?
4. Support Ticket Resolution time
The resolution time for support tickets is calculated by dividing the number of days it takes to resolve each ticket by the total number of tickets lodged.
No supplier relationship is perfect.
Sadly, supply chain issues, software platform challenges, and human mistake occur.
However, how soon your vendor handles an issue is crucial.
This is best measured by support ticket resolution time. How long (typically in days) does it take customer support to fix and close a ticket?
5. Defect Rate
Calculate product/service defect rate by dividing the number of defects by the total number of orders placed.
Defect rate varies by vendor and product.
When buying a physical product, the defect rate is the percentage of broken or unusable parts.
The frequency of technical issues in SaaS matters. Defect rate and support ticket resolution time should be measured together:
- How often problems occur?
- The speed with which they fix problems
6. Order accuracy
(correct orders received / total orders placed).
Order accuracy evaluates how often you get what you order (or don’t).
This is not the defect rate. The defect rate evaluates how often anything breaks or your software platform is offline. Order accuracy quantifies incorrect order frequency. You request three seats, but your Account Manager only opens two.
Incorrect orders hinder manufacturing and raise costs, affecting ROI and client delivery.
7. Order Capacity
Order capacity is the number of times your order capacity can be fulfilled based on the total number of orders placed.
The proportion of time a vendor can fulfil your order quantity is called order capacity.
Say you order 100TB of cloud storage, but your provider can only supply 80TB.
Tracking order capacity shows your supplier’s ability to meet escalating needs. If they can’t meet your order volume, you must:
- Miss production deadlines
- Cut production.
- Find another vendor to finish the job.
8. Competition
It’s competitive KPI is price. How competitive is your vendor’s pricing given the market?
You won’t check this weekly because you’ll have contracts with fixed prices.
However, you should examine how often your suppliers raise prices and how quickly they adapt to downward market pressure (do they reduce prices when competitors do?).
9. Risk assessment
Third-party providers pose several dangers.
Imagine your organisation relies on them. Without their product, you can’t make yours. They fail, you’re in trouble.
You could request financial stability proof.
Another example: PR risk.
Your company could suffer a PR disaster if your supplier sources components unethically. Ask about product sources in this scenario.
10. Innovation
Innovation assesses how much value your vendors add beyond expectations.
This is typical of new product development. A vendor may upgrade their production method to offer a cheaper, better product.
New software features (especially if they’re free) are released.
Working with innovative vendors increases value and ROI without having to find new suppliers or pay for new features.
