Vendor Performance Evaluation: The Procurement Exit Route Nobody Uses

Every growing business reaches a point where it has more vendors than it can remember. The vendor master runs to a few thousand codes and nobody can say with confidence which of those suppliers are actually good. Entry into your supply base was controlled. Exit was never designed at all.

That gap costs money quietly. A vendor who delivers late, short or defective does not send you an invoice for the disruption. It surfaces as overtime, expedited freight, rework and lost production, spread across departments where nobody connects it back to the supplier who caused it.

Why vendor performance evaluation is a control, not a formality

Most businesses do run some form of vendor rating. It is usually a spreadsheet the purchase department fills in once a year, in the same handwriting, with every vendor scoring between seven and eight. That is not evaluation. That is documentation.

A real evaluation draws its inputs from systems the buyer does not control:

• On-time-in-full delivery, taken from goods receipt dates against the promise date on the purchase order, not from the buyer's recollection

• Rejection and rework rates from quality records, as a percentage of quantity received

• Price movement against your own weighted average cost for the same item across all vendors

• Debit notes raised, and how many were actually recovered rather than “adjusted later”

• Credit period actually taken against the credit period agreed

Every one of these already sits in your ERP. The control failure is that nobody joins them up.

The vendor who fails and still gets the order

Ask your CFO for one report: for the top 25 vendors by spend, the rejection percentage and average delivery delay in days over the last four quarters, against the value of purchase orders released to each in the most recent quarter.

Run this for the first time and two or three names usually stand out — vendors with the poorest service record whose volumes are rising. There is often a legitimate explanation: a customer-nominated supplier, tooling at their plant, a single approved source. Sometimes there is not, and the explanation is a relationship nobody has examined.

This is where performance data doubles as a fraud indicator. A supplier who underperforms and still gains share is among the most reliable red flags in procurement, and it costs nothing to test.

De-listing should be a decision, not a drift

Vendors usually leave a supply base by drifting out: nobody calls them and the orders stop. That is unsafe, because nothing is recorded, the code stays active in the master, and the relationship can restart the day the buyer changes.

A disciplined process has four parts:

• A defined trigger: two consecutive quarters below the minimum score, a quality escape, a statutory or compliance failure, or an undisclosed conflict of interest

• A written show-cause and a stated improvement period, so the decision is defensible

• Formal blocking of the vendor code in the ERP, with the change log showing who blocked it and when

• Settlement of every open item before the file is closed — advances, retention money, rejected material, and moulds, dies or returnable packing lying with the vendor

The last point is where real money is lost. Advances paid to suppliers who stopped delivering two years ago sit in the ledger until somebody writes them off.

The bottom line

Companies crossing the Rs 200 crore turnover threshold must appoint an internal auditor under Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014. Vendor performance belongs in that scope, because it is where commercial loss and control failure overlap.

Three questions will tell you whether the control exists. Show me the last de-listing decision, with the reason recorded. Which vendors scored lowest last year, and what share of spend did they get this year? What is lying with vendors we no longer buy from? If the first draws a blank, you do not have an exit process — you have a list.

By CA Dhruv Seth, Seth & Associates, Chartered Accountants, Lucknow | dhruv@sethspro.com

This article is for general information and does not constitute audit, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.