Supplier Evaluation

How does a supplier evaluation work?

A supplier evaluation runs through recurring steps: first the evaluation criteria and their weighting are defined, then data is collected for each criterion, translated into points or grades and condensed into an overall rating. The result is usually expressed as a percentage, as a grade or as a classification (such as an A, B or C supplier) and updated at fixed intervals – quarterly or annually. Concrete measures follow from the rating: favouring good suppliers, development discussions with weaker ones, or the search for alternatives.

A distinction is made between hard and soft criteria. Hard criteria are objectively measurable and can be calculated directly from transaction data – such as the complaint rate, on-time delivery or price development. Soft criteria are based on judgements gathered through a standardised survey of the departments involved, for example quality of advice, flexibility or willingness to cooperate. A good evaluation combines both sides, because measured values alone do not fully capture the collaboration.

Why supplier evaluation matters

Procurement determines a considerable share of a company’s costs, product quality and delivery reliability. If a supplier fails through late or defective deliveries, this has a direct impact on production, inventory levels and customer satisfaction. A structured supplier evaluation makes such risks visible early, before repeated small problems turn into a supply failure. It thereby creates transparency about the real performance of the supplier base.

At the same time, the evaluation is a management instrument. It provides arguments for price and terms negotiations, justifies the distribution of order volume across multiple sources of supply and supports decisions on single or dual sourcing. Good suppliers can be deliberately retained and developed, weaker ones supported with clear target agreements or – if necessary – replaced. For certified companies the evaluation is also mandatory: ISO 9001 requires that external providers be assessed, selected and monitored according to defined criteria.

Supplier evaluation in the ERP system

The practical value of a supplier evaluation depends on how easily the data can be obtained – and this is exactly where the ERP system plays to its strengths. On-time delivery results from comparing the confirmed and actual goods receipt date, quantity accuracy from ordered versus delivered quantity, quality from recorded complaints and returns, price behaviour from invoice verification. Because this transaction data is linked to the supplier master record, the system can calculate metrics per supplier largely automatically, instead of laboriously compiling them by hand.

Many ERP and inventory management systems offer dedicated functions for this: configurable criteria catalogues with weighting, automatic analyses of on-time and quantity accuracy, complaint recording and periodic evaluation runs. If a specialised module is missing, the raw data can be exported via standard reports or an API into a reporting or quality management tool. In any case, the prerequisite is high data quality – only if goods receipts, dates and complaints are recorded cleanly and completely is the resulting evaluation reliable.

Distinction: supplier evaluation, supplier selection and supplier management

The terms are often mixed up, but refer to different phases. Supplier selection takes place before the collaboration: from a shortlist of possible providers, the suitable supplier is chosen based on quotes, references and initial assessments. Supplier evaluation follows afterwards and assesses actual performance during the ongoing business relationship based on real transaction data. Both use similar criteria, but differ in timing and in the data basis.

Supplier management is the overarching framework: it encompasses selection, ongoing evaluation, supplier development and, where appropriate, parting with suppliers across the entire lifecycle. Within it, the evaluation is the measuring, analytical building block that backs decisions with figures. Supplier development, in turn, is the active response to evaluation results – for example joint action plans to improve the quality of a strategically important but still weak supplier.

DACH specifics and data quality

In the DACH region, supplier evaluation is closely interlinked with quality management. In many industries – such as the automotive supply industry or medical technology – a documented, traceable evaluation is not only common but prescribed by standards and customer requirements. Anyone certified to ISO 9001 must demonstrably document the criteria, the execution and the results of the evaluation so that it holds up in an audit.

Newer legal requirements expand the criteria catalogue. The Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) in Germany requires larger companies to examine human rights and environmental risks at their suppliers – aspects that are increasingly becoming part of supplier evaluation. This puts sustainability, compliance and supply chain transparency alongside the classic criteria of quality, delivery and price.

Above all stands data quality. An evaluation is only as good as the data it is based on: duplicate supplier records distort metrics, incompletely recorded goods receipts skew on-time delivery, undocumented complaints make a supplier look better than it is. A cleanly maintained supplier master record and disciplined recording processes in the ERP are therefore the basic prerequisite for a supplier evaluation you can trust.