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.

Why Vendor Performance Appraisal?

How relevant is vendor performance appraisal to the success of a business? To answer this question, you need to consider the impact of the following likely problems caused by inadequate vendor evaluation in an organization:

• Supply management risk: Non-availability of material when it is due because of a vendor’s inability to meet a delivery time can have a financial and operational impact on the supply chain process. The risk of poor-quality material supplied by vendors can also cause loss of market share that again affects finance.
• Higher cost of supply: This directly affects the organization’s budget and profit margin.
• Policy risk: It is a risk for an organization when its policies are not effectively implemented due to inadequate visibility into the supply performance of its vendors.

These are some of the factors that adversely affect the prosperity of a business. Organizations that do not know the facts or understand the specifics about how their vendors are performing end up making their policies and management based on poor insight. With a well-structured vendor appraisal system, an organization has better visibility into the standard of its progressive business relationship with vendors. The organization can also continuously and properly manage price and encourage efficiency in the delivery and quality of materials or services. This efficiency further helps the organization to drive sustainable improvement in its supply chain process, increase its profit margin because of reduced cost, and boost its market share because of product or service credibility and availability.

How to Eliminate Hidden Cost Drivers with the Aid of Vendor Evaluation

With the aid of the automatic Vendor Evaluation functionalities, you can get certain measurable figures of vendors’ performances based on agreed-upon criteria and scoring points by the organization’s management. There are sometimes hidden cost drivers in the procurement process that could be from unplanned delivery costs, hidden freight charges, avoidable quality inspection exercises, poor policy making due to inadequate insight into business relationship with vendors, settling of quality disputes, and late or incomplete deliveries. As organizations employ Vendor Evaluation, they can gain continuous visibility and thereby gain better insight into the vendor’s performance, perceived risks, and avoidable costs. Based on these figures, measures can be taken to remove these unwanted costs in the supply chain process. To learn more about this process, consider the following scenario: A company that produces household commodities has more than 200 vendors (both local and international) that supply the company with different materials and services. The company has been using an SAP ERP system, but it just implemented Vendor Evaluation in MM. A vendor evaluation policy to appraise the company’s vendors on a monthly or quarterly basis was also introduced. SAP automatic Vendor Evaluation was used to appraise the vendors according to chosen criteria; in this case, the company used price, delivery, and quality. After running Vendor Evaluation, the company obtained the scores for vendors that supply pumpkin leaf that the company uses in producing soap. Table 1 lists the resulting scores.

Vendor	Evaluation score (overall score)
Hydiene	80
Glassad	72
Vontrix	56

Based on the company’s scorecard baseline, any overall score below 80 is a caution alert, any overall score below 60 is a risk alert, and any overall score below 50 is a high risk alert. A score of 80 is a good performance. Therefore, for this particular evaluation, Hydiene is a good performance, Glassad is a caution alert, and Vontrix is a risk alert. The scores triggered the attention of the purchasing organization to further analysis to identify specifics. A further investigation on the evaluation main criteria (price, quality, and delivery) and subcriteria showed the results listed in Tables 2, 3, and 4, for Hydiene, Glassad, and Vontrix, respectively.

Hydiene (overall score = 80)
Main criteria	Score	Subcriteria	Score
Price	60	Price level	70
		Price history	40
Quality	100	Goods receipt (GR) lot	100
		Audit	100
Delivery	79	On-time delivery	51
		Quantity reliability	100

Glassad (overall score = 72)
Main criteria	Score	Subcriteria	Score
Price	50	Price level	50
		Price history	50
Quality	100	Goods receipt (GR) lot	100
		Audit	100
Delivery	66	On-time delivery	20
		Quantity reliability	100

Vontrix (overall score = 56)
Main criteria	Score	Subcriteria	Score
Price	37	Price level	40
		Price history	30
Quality	82	Goods receipt (GR) lot	79
		Audit	87
Delivery	50	On-time delivery	15
		Quantity reliability	76

From the above evaluation breakdown, further investigation showed that Vontrix has a poor transportation management system that regularly affects its delivery and causes unplanned delivery costs. Depreciation of the material in transit affects product quality. Investigation showed that the Vontrix logistics unit does not have a well-established transport schedule, and therefore, sometimes the material is ready, but no vehicle is available to move the material as required. The evaluation breakdown also discovered that the refrigerators in most of Vontrix’s delivery vans were working below 50 percent efficiency and the delivery delay caused the quality of the pumpkin leaves to depreciate before getting to the receiving plant. This depreciation reduced the volume and quality of the extracts from the leaf. Extra efforts and time were also wasted sorting out the leaves that had decomposed or could not be used, and sometimes there were disputes between the quality inspector officers and the vendor’s representatives. These factors usually caused delayed delivery and increased costs because of unplanned delivery costs, reduced quality, returns, material shortages, slowdown of production, and the inability to meet market demand for the product. One advantage of automatic Vendor Evaluation is that it provides you with factual figures without interference from users. Solution: A third-party freight company with a well-established transport system was hired because there was no other vendor option at the moment, so Vontrix could not be dropped. After the company landed a long-term deal with a third-party freight company, delivery was now done as scheduled, with very few cases of spoiled leaf because the refrigerators in the third-party freight company’s delivery vans worked fine. Time for sorting out spoiled leaves was reduced by 70 percent, with no more quality disputes. Quality inspection time was reduced, material availability was increased, quality and quantity of extracts were increased, and production was boosted. These hidden costs were eliminated with the leverage of automatic Vendor Evaluation. Automatic Vendor Evaluation uses the following elements to derive accurate information:

• Price level: The function of the price level subcriterion is to compare the vendor’s price with the market price at specified times. The vendor receives a high score if the price is lower than the market price, while a lower score is given when the vendor’s price is higher than the market price. This function helps to trigger the probability of high costs that can be investigated and the cost drivers removed.
• Price history: The price history, on the other hand, compares the buildup of the vendor's price with the changes in market price over a certain period. If it decreases, the vendor gets a high score, but if it increases above the market price, the vendor gets a low score. This also triggers the probability of hidden costs that can be investigated and removed.

These price indicators (price level and price history) give visibility into possible costs that can be eliminated.

Functionalities of Automatic Vendor Evaluation

In an SAP ERP system, Vendor Evaluation has three types of methods; automatic, semi-automatic, and manual. The automatic method can only be used for materials. Some of the benefits of using automatic Vendor Evaluation are:

• Accuracy: It is more precise with factual figures than guesswork done without an automated system.
• Objectivity: Subjective impressions, considerations, or judgments are eliminated because the evaluation is done according to set criteria and the score is automatically generated with zero user interference.
• Standardization: With automatic Vendor Evaluation, criteria that are configured are reused over and over to give consistent results.
• Flexibility: Different evaluation criteria can be set for different purchasing organizations.

The following functionalities are available with Vendor Evaluation:

• Organizational level: The process of evaluating a vendor is maintained at the PUR organizational level in the MM organizational structure, and so the appraisal of vendors is done by the purchasing organization independently according to the vendors assigned to them.

• Procurement: Automatic Vendor Evaluation is used in the procurement process for materials to continuously track the vendor’s performance in areas such as pricing, delivery, and quality. For external services, appraisals can be done using the manual method.

• Scoring and criteria: Scoring and criteria are vital functions of automatic Vendor Evaluation. These functions are the mechanism used by the system to track operational information and compute and score vendors based on their performances.

A vendor’s performance can be determined and compared by its overall scores. Furthermore, the overall score is derived from the computation of the scores of the main criteria, and the main criterion is derived from the scores from the subcriteria (Figure 1). The scoring range in the standard SAP system is from 1 to 100 points for appraising a vendor’s performance on the basis of the main criteria (price, quality, delivery, general service/support and external service) shown in Figure 1. These criteria are used to derive an overall score. With the exception of external services, other main criteria (price, quality, delivery and general service/support) are used to appraise vendors that supply materials. The external service criteria are used for services provided by external vendors that are entered and accepted in the SAP service entry sheet before invoice verification. That is different from general service/support, which relates to services such as after-sales support or other services defined as non-stock materials in the material master record. Overall score: This is the total computed score derived from the main criteria scores. It is the score used to appraise a vendor holistically. Main criteria: These are certain factors or criteria that are used to measure a vendor’s performance. In the standard SAP system, you have the following main criteria as shown in Figure 1; they can be price, quality, delivery, general service/support, and external service. Their scores are derived from the subcriteria. Subcriteria: The score received by the vendor for subcriteria is used to derive the main criteria scores. It is the lowest level for evaluating the performance of the vendor. Subcriteria can be manual, semi-automatic, and fully automatic. The following are subcriteria according to their main criteria:  

Price

  The subcriteria that the price main criteria are derived from are price level and price history. I already described price level and price history in the section titled “How to Eliminate Hidden Cost Drivers with the Aid of Vendor Evaluation.”  

Quality

  The subcriteria that the quality main criteria are derived from are goods receipt (GR) lots, quality audits, and shop floor complaints/rejections GR: During GR, quality inspection takes place and it is used to evaluate the quality of the material delivered by the vendor. Quality audit: The quality audit is a subcriterion used to evaluate the quality assurance trail in a company. Shop floor complaints/rejections: This subcriterion is measured on the basis of the shop floor complaints or consistent rejection of some or all materials delivered by a vendor because of faults. This is one cause or driver of cost in the supply chain process because rejections can attract expenses or loss of time due to reworking or loss of production time and capacity. The data is derived from the quality management key figure from the Quality Management module in the SAP system.  

Delivery

  The subcriteria that the delivery main criteria are derived from are on-time delivery, quantity reliability, shipping instruction, and notification reliability. On-time delivery: The on-time delivery subcriterion is used to measure how accurately a vendor keeps to agreed-upon delivery dates. Quantity reliability: The quantity reliability subcriterion is used to measure how accurately a vendor delivers the quantity specified in the purchase order. Shipping instructions: The shipping instruction is used to measure how compliant a vendor is with the shipping instruction for a material. Notification reliability: This subcriterion uses a confirmation date to measure how compliant a vendor is in delivering materials on the confirmed or agreed upon delivery date on the purchase order document.

Scoring Methods

The scoring methods are manual, semi-automatic, and fully automatic. Manual: You manually enter subcriteria scores to appraise vendors. Semi-automatic: You manually enter subcriteria scores for important materials, or for service quality and timeliness. The main criteria and overall scores are automatically derived by the system. Fully automatic: For the automatic scores, the system extracts data of the subcriterion automatically from other areas outside Vendor Evaluation and uses this data to derive the main criteria and overall scores without any manual interference. This makes automatic scoring free of subjective appraisal or judgment. Automatic Vendor Evaluation, which is the main focus for this article, is used for material procurement only. It does not have subcriteria to measure external service.

Weighting Factor

The scale of a subcriterion can be higher than another when computing the main criteria even though their scores are the same using the weighting factor. This means that a vendor can be awarded 90 for price level and 90 in price history but the price level can have a higher rating at the main criteria computation if it has a higher weighting factor. A higher weighting factor is used to indicate the relevance of one criterion over another.

Weighting Keys

Several main criteria can be grouped using an identifier named weighting key. It is used to organize the main criteria into those that allow equal weighting and those that allow unequal weighting. These are some of the important functionalities of Vendor Evaluation.

How to Configure and Implement Automatic SAP Vendor Evaluation

To use Vendor Evaluation, you need to configure certain settings in the IMG. Step 1. Check the weighting keys for automatic vendor evaluation. To check the weighting keys follow SAP IMG menu path > Material Management > Purchasing > Vendor Evaluation > Define Weighting Keys. Click the execute icon beside Define Weighting Keys. This action displays the screen shown in Figure 2. In the standard SAP system, the 01 and the 02 weighting keys are set by default. After you confirm that the weighting keys are available, click the back icon  to return to the SAP IMG. Step 2. Define criteria for automatic Vendor Evaluation. To define the main criteria and subcriteria follow SAP IMG menu path > Material Management > Purchasing > Vendor Evaluation > Define Criteria. Click the execute icon beside Define Criteria. This action displays the screen in which the main criteria are listed (Figure 3). If you want to create new main criteria, click the New Entries button and enter your data or click the copy icon  and edit to meet your requirement. Only the price, quality, and delivery main criteria are relevant for automatic Vendor Evaluation. After the main criteria are set up, click the save icon . Next, define the subcriteria for the three main criteria (price, quality, and delivery). Select the particular main criterion for which you want to define the subcriteria. Then click the Subcriteria folder in the left pane (in my example, I used the main criterion price) as shown in Figure 4. To define the subcriteria (Price Level, Price history) click the New Entries button or use the Copy As method by clicking the copy icon. Input the Subcriteria numbers and description and assign the appropriate scoring methods to the subcriteria. This action displays the screen shown in Figure 5. Assign Scoring Method 4 to Price Level and Scoring Method 5 to Price history. These settings are relevant for automatic Vendor Evaluation (to assign scoring methods to the subcriteria, from the drop-down list under the Scoring meth (scoring method) column, select the appropriate scoring method and click the copy icon or press the Enter key on your keyboard). After assigning all the necessary subcriteria entries, click the green checkmark icon or press the Enter key on your keyboard to confirm all the entries that appear in the next screen (Figure 6). Market behavior is optional in this case because it uses the Semi-Automatic Scoring Method, which is not the focus of this topic. This process can be repeated for the quality and delivery main criteria. After setting them up, click the save icon. Step 3. Maintain purchasing organization data. To complete this step, follow SAP IMG menu path > Material Management > Purchasing > Vendor Evaluation > Maintain Purchasing Organization Data. Click the execute icon beside Maintain Purchasing Organization Data. The SAP system then displays a list of the assigned purchasing organizations (screen not shown). If you need to set up a new purchasing organization, click Edit in the menu bar and select New Entries or click the New Entries button on the application tool bar. You can also use the copy icon. To configure settings for purchasing organization 1000, select purchasing organization 1000, click Goto in the menu bar, and then select Details from the list of options (Figure 7). In the next screen (Figure 8), input the relevant data for the purchasing organization according to your requirements. I now explain the functions of several fields in Figure 8. The Best Score field is used to set the system evaluation score range. The Applicability Period field defines the period the system takes into account during evaluation. In my example, the system evaluates values from a 200-day-old period, and any data beyond 200 days is not considered in the evaluation. Note that this is not relevant for the price level and price history subcriteria because the price level builds up the price history and the price history is a long-term element for measuring a vendor’s price performance. The Single/Sole Source is relevant for a business case where there is only one chosen source of supply for a material and no market price or other info record exists for such material. If the check box is selected, the system derives the price level and price history scores from the vendor effective price. In this case the vendor’s effective price is considered for the market price because it is the only considered source for the material.. In the Complaints/Reject Level section, the ShareBusnVolume% (the business volume for calculating a reject score) field specifies the percentage for the business volume that the system considers when computing the partial criterion complaint. In the Quality Audit section, when the Average of All Lots check box is selected, the system computes the average of the quality audits that took place within the relevant period defined for all the plants. If this check box is not selected, the system applies only the most recent audit for evaluation purposes — irrespective of when it took place (i.e., the score for the most recent audit is simultaneously the score for the subcriterion). In the On-Time Delivery section, the value you enter in the StdDelVar (standardizing value for delivery date variance) field specifies how many days variance from the planned delivery date are to count as a 100 percent variance. This value from StdDelVar field is required if the check box MinDelQty/StdDITmVar from material (minimum delivery quantity/standard delivery time variance from material is not selected and required fields are not maintained in the material master record (purchasing value key). In the MinDelVar. (minimum delivery quantity in percent) field, the minimum percentage of the purchase order quantity that must be delivered for the GR to be determined in the vendor evaluation is entered. This field is relevant when the relevant field in the material master record (purchasing value key) has not been maintained. When the MinDelQty/StdDITmVar (minimum delivery quantity/standard delivery time variance) check box is selected, the data is to be taken from the relevant fields in the material master record (stored in the purchasing value key). If the fields have not been maintained in the material master record, the values are automatically taken from the MinDelVar. and StdDelVar fields. After setting up these parameters as required, click the save icon and click the back icon to go back to the Purchasing organization overview screen (Figure 9). Now assign the main criteria and subcriteria to the purchasing organization as required. In my example, I use purchasing organization 1000. In Figure 9, select purchasing organization 1000 and click the Main Criteria folder on the left pane. To assign the Main Criteria to the Purchasing Organization, select the Purchasing Organization (in this case I used Purchasing Organization 1000). Click the New entries button or use the Copy As method by clicking the copy icon. Select the various Main Criteria such as price, quality, and delivery (those relevant for automatic Vendor Evaluation). Click the enter icon or press Enter on the keyboard. This action displays the Main Criteria section shown in Figure 10. When you are done with the main criteria, the next step is to assign the subcriteria and assign the weighting factor to the subcriteria. Select a main criterion to which you want to assign the subcriteria. In my example I used Price as the main criteria. Select the Price main criteria and click the Subcriteria folder on the left pane. The assigned subcriteria appear in the next screen as shown in Figure 11.   To assign a new subcriteria, click the New Entries button or use the Copy As method. Select the Subcriteria and click the enter icon or press Enter. After assigning the subcriteria, assign weighting factors to them according to their relevance. (I recommend that you consult with the organization’s management or purchasing organization to get agreed-upon weighting factors.) This step should be repeated for the quality and delivery subcriteria. Now assign a weighting key and a weighting factor to the main criteria. Click the Weighting folder in the left pane. This action displays the Weighting section shown in Figure 12. Depending on the requirement, if you need all the scores to be of equal weighting, assign weight key 01 in the Wgt.Key (weight key) column and make all the weighting factors to be equal for all the criteria. For example, in Figure 12, for weighting key 01, price, quality, and delivery all have an equal weighting factor of 1. To configure this setting, you enter 1 in the fields under the Weighting column for price, quality, and delivery for weight key 01. For unequal weighting key 02, the weighting factors are not set equally, as shown in Figure 12. After you set the weighting factor, the next step is to assign scores to the subcriteria. The scoring range for vendor appraisal in the standard SAP system is from 1 to 100 points. Lastly, click the Point Scores for the Automatic Criteria folder. The point scores in this folder are used to assign an agreed-upon scoring scale by the organization’s management to the subcriteria relevant for automatic scoring methods such as price level, price history, and on-time delivery. To set up the Point Scores for Automatic Criteria, click the New Entries button or use the Copy As method. Select the appropriate Subcriteria automatic scoring methods at the first column from the left and assign the scoring scale (percentage for price variance and relative scores at the Percentage and Sco. columns, respectively) to the subcriteria scoring methods selected. When the assignments are done, click the green checkmark icon or press the Enter key on the keyboard. This action displays the screen in Figure 13. (Note that the scoring scale would have been modeled and agreed upon by the organization’s management or purchasing organization. Therefore, I recommend that proper consultation be done before implementing the scoring scale to subcriteria here.) For example, the price level is scaled between 0 percent and 99.9 percent variance (for cases when the vendor’s effective price is higher than the market price). When the vendor’s effective price is lower than the market price, the price level is scaled between 5.0 percent (-5.0 percent) and 99.9 percent (-99.9 percent). This means that if a vendor’s price is higher than the market price with a variance of 0% - 4.9% the vendor gets a score of 40 points. On the other hand, if the vendor’s price is lower than the market price with a variance of 99.9-% (-99.9%), the vendor scores 100 points. Figure 14 shows a drop-down menu of Subcriteria scoring methods when you click the Scoring meth column. Select only Scoring Methods relevant for Automatic Determination of Scores. (Only Scoring Methods 2 through 9 and A and B are relevant for automatic Vendor Evaluation.) With these settings, vendors in purchasing organization 1000 can be evaluated automatically. Now I explain how this configuration works at the front end.

How to Use Automatic Vendor Evaluation

Consider a scenario in which you are given a task to carry out a vendor evaluation for vendor 9999 (Fidizon) in purchasing organization 1000. To carry out this task in the SAP system use transaction code ME63 or follow SAP menu path Logistics > Materials Management > Purchasing > Master Data > Vendor Evaluation > ME 63 -Automatic New Evaluation. Double-click Automatic New Evaluation. This action displays the Calculate Scores for Semi-Automatic and Automatic Subcriteria screen (Figure 15) in which you enter a number in the Vendor field. In my example, it is 9999. Enter a number in the Purchasing Organization field (in my example it is 1000). (The Not Evaluated Since field is optional and is used when there is a need to indicate a period for the evaluation.) Click the execute icon to run the evaluation. After you click the execute icon in Figure 15, a pop-up screen for inputting data for a weighting key appears (Figure 16). Note that before a weighting key can be used for evaluation, the criteria must have been assigned to it. In this case, the criteria were assigned to both key 01 (equal weighting) and key 02 (unequal weighting). First scenario: Execute the evaluation with key 01 (equal weighting). After inputting 01, press the Enter key on your keyboard and the automatic evaluation is executed. The evaluation results for vendor 9999 (Fidizon) appear on the screen as shown in Figure 17. The evaluation results in Figure 17 indicate that vendor 9999 (Fidizon) has an overall score of 58. The price main criteria score is 10, quality is 100, and delivery is 63. A further breakdown shows that the subcriterion on-time delivery score is 1 (under delivery main criteria). This data shows that the vendor may have been performing poorly in delivering materials based on the confirmed date. A score of 10 is also poor for price level. This means the variance between the market price and the vendor’s effective price is high. This calls for an investigation to find out the cause and resolution on the vendor, which is dependent on the organization’s policy. You can further probe this result by clicking Goto in the menu bar and selecting All logs or clicking the All logs button (not shown) on the application tool bar. This action displays the screen shown in Figure 18. This screen gives a more detailed analysis of the evaluation result. Click the save icon to save the evaluation. Once it is saved you get the message Evaluation record created. To display Vendor Evaluation shown in Figure 19, display the evaluation directly by clicking Goto in the menu bar and selecting Evaluation of Vendor from the list of options or clicking the display Evaluation button  on the application toolbar in the Overview screen for vendor evaluation scores (Figure 17). You can drill down further to the subcriteria level by first selecting the check box of the main criteria to which you want to drill down. Then from the menu bar click Main Criterion > First Main Criterion or click the Main Criterion button on the application tool bar. This action displays the screen shown in Figure 20. At this point, I want to use the other weighting key 02 (unequal weighting) to see the outcome. So I will go through executing the automatic evaluation again, but this time with weighting key 02 (unequal weighting). To carry out this task in the SAP system use transaction code ME63 or follow SAP menu path Logistics > Materials Management > Purchasing > Master Data > Vendor Evaluation > ME 63 -Automatic New Evaluation. See Figure 15 for reference to the required steps before applying the Weighting key 02. After you have repeated the step in Figure 15, input the Weighting Key 02 as seen in Figure 21. After inputting the weighting key 02, press the Enter key on your keyboard. The results appear on the next screen (Figure 22). Unlike the first evaluation with the weighting key 01 (equal weighting), the above evaluation result shows that vendor 9999 (Fidizon) has an overall score of 46 even though the scores of the main criteria and subcriteria remain the same as that of the weighting key 01. This is based on the unequal scaling of the main criteria.

A Methodology for Achieving More Effective Vendor Performance with Vendor Evaluation

In 2014, I developed a methodology that was used by my team to implement and operate Vendor Evaluation using SAP ERP (Figure 23). My methodology is called the PI Vendor Evaluation Methodology^TM. (PI stands for procurement iteration.) Its concept makes communication the central element in the Vendor Evaluation procedure because effective communication had been one of the major challenges with most vendor evaluation procedures. With a consistent flow of structured communication every stakeholder is carried along and risks are quickly reported and mitigated. This greatly enhances the achievement of the evaluation objective, which is to achieve optimal vendor performance by ensuring consistent product quality integrity, reduced waste, saved costs, and high delivery integrity.

PI Vendor Evaluation Methodology

This methodology has six phases: structured communication, policy management, evaluation modeling, evaluation execution, impact management, and reward system. Structured communication: This is the first phase and central component in this evaluation procedure because at every point there is a back-and-forth communication flow. This phase is very important because everyone has to be on the same page and objectives have to be clearly defined, adopted, and adapted to. There should be a well-defined communication structure: Why the evaluation (need for the evaluation, objective, benefits), who to communicate to (management, team members, vendors, operators, staff community), what to communicate (policy initiation, policy formulation, policy review, vendor commitment), and best medium to communicate (meetings, seminars, trainings, letters, telephone). Policy management: This phase entails formulation, enforcement, monitoring, and policy review of the Vendor Evaluation policy. Evaluation modeling: The activities in this phase include implementation of the Vendor Evaluation component, change requests when required, and scores modeling and rating. Evaluation execution: This is the proper running of the Vendor Evaluation to appraise vendors’ performance based on the stipulated policy of the organization. Impact management: At this phase, the impact of the evaluation to the operation of the organization is considered. Also the measures to be taken as a result of such impact are decided at this phase. Reward system: Good work is encouraged to further motivate and sustain vendors’ performance base on the stipulated policy. A vendor can be rewarded with increased supply quota for good appraisal scores.

A Business Scenario

I recommended the implementation of Vendor Evaluation for a household commodity production company using the PI Vendor Evaluation Methodology and the operation has been very successful with significant improvement in its supply chain performance. The methodology is focused on sustainable long-term improvement of the objective, which is to achieve optimal vendor performance by ensuring consistent product quality integrity, reduced waste, reduced costs, and high delivery integrity, all of which sum up to boost supply chain management performance. First, communication was established in writing to the management using a proposal with a business case. When approved, the task and objective were well spelled out for the team through several meeting sessions. Also the vendors where invited for seminars to properly communicate the desired performance requirements of the organization. Their suggestions were also taken into consideration. Every stakeholder was involved because the supply chain area is a vital aspect of the business. The next line of activity was the Policy Formulation in the Policy Management phase. This included a reward system, which was approved. The basis for scoring was established in terms of criteria to be used and their relevance (how they will be weighted). In some purchasing organizations, quality criteria were weighted highest, then delivery before price, while in other purchasing organizations price had the highest weighting factor, then quality, before delivery. It was stipulated that appraisals should be carried out monthly, quarterly, or yearly depending on the purchasing organization and purchasing group. For example, vendors under the monthly appraisal who performed well consecutively for three months scored a reward point. Also the penalties for consistent low performing vendors were established. At the evaluation modeling phase, the criteria, weighting factors, scores, and rating were modeled in line with the Vendor Evaluation policy requirements. For instance, a vendor appraisal overall score below 60 is flagged as the Orange Color Zone, which indicates risk. Scores below 50 are flagged as the Red Color Zone, which indicates high risk. The setup of the Vendor Evaluation in the SAP system was realized at this stage. It took one month to implement the solution and conduct relevant training. After the Vendor Evaluation component was fully implemented in the SAP system and training of users was completed, the several purchasing organizations started running evaluations using the automatic Vendor Evaluation to appraise the vendors assigned to them. This is at the evaluation execution phase. At the impact management phase, the users where amazed at the scores generated by automatic Vendor Evaluation. It was obvious that some of the vendors had caused the company unnecessary waste and cost. Queries were then sent to the various buyers and inventory officers to get further clarifications on some issues that had to do with poor quality, high unreliable material quantities supplied, issues on slow delivery, and the price of some vendors with high variance from the market price. Proper investigation and assessments are being carried out every time the evaluations are done to appraise the vendors and rate the impact on the business operations of the company. Vendors were also communicated to, to find out their challenges and how they could improve. They were also cautioned to avoid subsequent low performance. For instance, after the third appraisal exercise in the purchasing organization with monthly schedule for appraisals, some vendors who could not make significant improvements were dropped. The organization experienced a significant improvement in their vendors’ performance and reduced cost. At the reward system phase, some vendors who performed consistently well and had good reward points either had their quota increased or were given opportunities for new business deals. Some were given gifts with recommendation plaques. The PI Vendor Evaluation Methodology is a continuous improvement circle with the effect of the structured communication process and can be used for both automatic and manual Vendor Evaluation.  

Insight on How to Formulate Effective Point Scores for the Automatic Criteria

  Point scores used for automatic Vendor Evaluation are the major factors that determine the overall scores for automatic Vendor Evaluation. It is therefore very important that caution be taken when modeling the point scores, because automatic Vendor Evaluation is totally independent of user interference. The value of the scores determines how the scores (subcriteria, main criteria, and overall scores) are derived. In the point scores derivation, the standard SAP system score range is from 1 to100. The degree of variance between a vendor’s point attained from the SAP system and the defined standards are graded by the score range (Figure 24). In Figure 24, price level is graded as follows. If the effective price of a vendor is equal to the market price, which means there is 0 variance, the vendor receives 40 as a score. If the variance is between 5 percent and 14.9 percent higher, the score is 20. For lower variances, such as 20 percent lower in price, the score is 95. This is how the automatic scores are awarded for the subcriteria. Let us take a look at quantity reliability. Figure 25 shows point scores for quantity reliability. If there is no variance, the score is 100, with a variance of 2 percent, the score is 95 and so on. This is how the point scores are derived.

How to Execute and Analyze the Vendor Ranking List in the SAP System

The ranking list is a Vendor Evaluation report used to generate a list of vendors in descending order according to the overall score. One of the major objectives of this ranking list is to see which vendor performs best, see the average value of all the vendors in the group, and determine the variance of a vendor from the average value. The ranking list displays the vendor with the best score, the ones with average scores, and the ones with below the average scores. To generate a Vendor Evaluation ranking list use the transaction code ME65 or follow menu path > Logistics > Materials Management > Purchasing > Master Data > Vendor Evaluation > List Displays > ME65 - Ranking Lists. In the Ranking List of Vendors sorting screen (Figure 26), input the required purchasing organization, the range of vendors for whom you want to rank scores, and a weighting key. Click the execute icon to generate the ranking report. The ranking list for purchasing organization 1000 is generated after you click the execute icon (Figure 27). Figure 27 shows that two vendors have evaluation scores and vendor 5210 (Xophon) has the highest score (80). The average score value is 55, and vendor 5200 (Tatiba) has its score as 29 with a negative deviation value of -47.27 percent (low score) from the average score. You now have a better insight into how you can use Vendor Evaluation to improve supply chain performance and you have learned how to configure automatic Vendor Evaluation.