How Businesses Can Improve Vendor Performance and Manage Supplier Risk

Managing vendors is not just about finding suppliers and negotiating prices. Businesses also need to make sure vendors deliver on time, maintain quality, follow contracts, meet compliance requirements, and do not create unnecessary operational or financial risk.

When supplier performance is poor, businesses can face delayed deliveries, inconsistent quality, higher procurement costs, compliance issues, and supply disruptions.

The problem becomes bigger when vendor information, purchase requests, approvals, purchase orders, and supplier performance are managed through spreadsheets and emails.

A structured vendor performance management process, combined with supplier risk management and procurement software, can help businesses improve supplier accountability and control procurement more effectively.

What Is Vendor Performance Management?

Vendor performance management is the process of measuring and improving supplier performance against defined business requirements.

Businesses typically monitor:

• On-time delivery
• Product or service quality
• Order accuracy
• Cost performance
• SLA compliance
• Contract compliance
• Response time
• Issue resolution
• Supplier reliability

The purpose is to identify underperforming vendors early and make better supplier decisions using actual performance data.

What Problems Does Poor Vendor Performance Create?

1. Late Supplier Deliveries

Problem: Vendors repeatedly miss delivery deadlines.

Impact: Production delays, missed customer commitments, emergency purchases, and additional costs.

Solution: Track on-time delivery, lead time, order fulfilment, and delivery trends as vendor performance KPIs.

2. Poor or Inconsistent Quality

Problem: Products or services do not consistently meet agreed standards.

Impact: Rework, returns, customer complaints, wasted resources, and increased costs.

Solution: Monitor defect rates, rejection rates, quality complaints, and corrective actions through a vendor scorecard.

3. Increasing Supplier Costs

Problem: Supplier prices increase or purchasing happens without sufficient visibility.

Impact: Procurement budgets increase and businesses may lose negotiation leverage.

Solution: Track supplier pricing, contract terms, purchase history, and cost variance to identify unnecessary spending and negotiation opportunities.

4. Contract and SLA Issues

Problem: Vendors fail to meet contractual or service-level requirements.

Impact: Service disruption, disputes, penalties, and compliance problems.

Solution: Track contract obligations and SLA performance regularly instead of reviewing them only when an issue occurs.

What Is Supplier Risk Management?

Supplier risk management is the process of identifying, assessing, monitoring, and reducing risks associated with vendors and suppliers.

Common supplier risks include:

Financial Risk

A financially unstable supplier may struggle to fulfil orders or continue operations.

Operational Risk

Production problems, capacity issues, transportation delays, or staffing problems can affect supplier reliability.

Compliance Risk

Suppliers may fail to meet contractual, regulatory, or internal compliance requirements.

Cybersecurity Risk

Third-party suppliers with access to systems or sensitive information can introduce cybersecurity risks.

Supply Chain Risk

Overdependence on one supplier, limited alternatives, or geographic concentration can increase disruption risk.

How to Reduce Supplier Risk

Businesses can reduce supplier risk by:

• Conducting regular supplier risk assessments
• Monitoring critical suppliers
• Maintaining updated supplier information
• Tracking compliance documents
• Identifying alternative suppliers
• Reducing excessive supplier dependency
• Reviewing supplier performance regularly

10 Ways to Improve Vendor Performance and Manage Supplier Risk

1. Set Clear Vendor Performance KPIs

Start by defining exactly how supplier performance will be measured.

Important vendor performance metrics include:

• On-time delivery rate
• Defect rate
• Order accuracy
• Cost variance
• SLA compliance
• Response time
• Contract compliance
• Return rate

Clear KPIs remove ambiguity and give both the business and supplier measurable performance expectations.

2. Use a Vendor Scorecard

A vendor scorecard makes supplier evaluation more consistent.

Businesses can use these scores to identify high-performing suppliers and vendors that need corrective action.

3. Review Supplier Performance Regularly

Waiting until a supplier causes a major problem is too late.

Regular reviews should cover:

• KPI performance
• Delivery issues
• Quality problems
• Contract compliance
• Cost changes
• Open corrective actions
• Risk indicators

This allows procurement  teams to address problems before they become larger operational issues.

4. Conduct Supplier Risk Assessments

Supplier risk changes over time.

A supplier that was low-risk during onboarding may later experience financial, operational, compliance, or capacity problems.

Regular supplier risk assessments should consider:

• Financial stability
• Business continuity
• Compliance
• Cybersecurity
• Geographic exposure
• Supplier dependency
• Alternative supplier availability

5. Monitor Supplier Compliance

Businesses should know whether suppliers have valid contracts, certifications, insurance documents, and other required records.

A centralized supplier management process can help procurement teams track:

• Supplier documents
• Certifications
• Contract status
• Compliance requirements
• Expiry dates

This reduces the risk of missing important supplier obligations.

6. Reduce Dependency on Critical Suppliers

Relying heavily on a single supplier can increase supply chain risk.

Businesses should identify critical suppliers and determine whether suitable alternatives are available.

Possible approaches include:

• Multiple approved suppliers
• Backup vendors
• Alternative sourcing
• Geographic diversification
• Supplier contingency plans

7. Improve the Purchase Request Process

Vendor management starts before the purchase order.

It starts with the purchase request.

A structured purchase request process allows employees to submit:

• Required product or service
• Quantity
• Budget
• Business justification
• Required date
• Preferred supplier, if applicable

The request can then move through the appropriate approval process before procurement creates a purchase order.

This helps reduce unauthorized purchasing and gives procurement teams better visibility into upcoming requirements.

8. Connect Procurement With Procure-to-Pay

A Procure-to-Pay software (P2P) process connects purchasing activities from the initial request through payment.

A typical workflow is:

Purchase Request → Approval → Supplier Selection → Purchase Order → Delivery → Invoice → Payment

A connected P2P process can help reduce:

• Manual data entry
• Approval delays
• Duplicate purchases
• Maverick spending
• Procurement errors
• Poor purchasing visibility

It also gives businesses a clearer view of supplier transactions.

9. Use Procurement Software to Manage Vendors

Managing vendors through Excel and email becomes difficult as the number of suppliers and transactions increases.

Procurement software can centralize important procurement activities such as:

• Purchase requests
• Approval workflows
• Supplier onboarding
• Vendor information
• Purchase orders
• Contracts
• Supplier performance
• Compliance
• Procurement reporting

Instead of searching through multiple spreadsheets and email threads, procurement teams can work from a more centralized process.

10. Identify Underperforming Vendors Early

A vendor problem is easier to solve when it is identified early.

Procurement teams should watch for:

• Increasing delivery delays
• Rising defect rates
• Increasing costs
• Declining SLA performance
• Compliance gaps
• Slow response times
• Repeated service issues

Early identification gives the business time to improve the supplier relationship, negotiate corrective action, or find an alternative vendor.

Vendor Performance Management vs Supplier Risk Management

These processes are related but have different purposes.

Using both together gives procurement teams a better understanding of supplier health.

How Procurement Software Connects Vendor Management and Purchasing

The biggest advantage of procurement software is that it can connect activities that are often managed separately.

For example:

Employee submits Purchase Request

↓

Approval

↓

Procurement reviews requirement

↓

Approved supplier is selected

↓

Purchase Order is created

↓

Supplier delivers goods/services

↓

Vendor performance is recorded

↓

Invoice is processed

↓

Payment is completed

This gives businesses visibility across the purchasing lifecycle instead of managing each step separately.

Why Businesses Move Beyond Excel for Vendor Management

Excel can work for basic supplier tracking, but it becomes difficult when a business has:

• A large supplier base
• Multiple departments
• Frequent purchase requests
• Multiple approval levels
• Large numbers of purchase orders
• Multiple contracts
• Strict compliance requirements

Common problems include outdated supplier information, duplicate records, manual follow-ups, missed deadlines, and inconsistent vendor evaluations.

A centralized vendor management software or procurement platform can provide a more structured way to manage these processes.

When Should You Invest in Procurement Software?

Procurement software becomes particularly useful when:

• Purchase requests are managed through email
• Approvals take too long
• Procurement teams depend heavily on spreadsheets
• Supplier information is difficult to find
• Vendor performance is not measured consistently
• Purchase orders are difficult to track
• Supplier compliance is difficult to monitor
• Procurement spending lacks visibility
• Different departments follow different purchasing processes

If these problems sound familiar, automating procurement and supplier management can help create a more controlled process.

What Should a Business Look for in Procurement Software?

Before selecting a solution, businesses should evaluate whether it supports the processes they actually need.

Important capabilities may include:

• Purchase request management
• Approval workflows
• Supplier management
• Vendor onboarding
• Purchase order management
• Vendor performance tracking
• Supplier risk assessment
• Contract and compliance tracking
• Procure-to-Pay workflows
• Procurement reporting

The right solution should simplify the procurement process rather than add another disconnected system.

Conclusion

Improving vendor performance requires more than simply monitoring suppliers.

Businesses need clear KPIs, regular supplier reviews, risk assessments, compliance tracking, structured purchase requests, and better visibility into procurement activities.

By combining vendor performance management, supplier risk management, procurement management software, and Procure-to-Pay, businesses can create a more controlled purchasing process.

From the initial purchase request to supplier selection, purchase orders, delivery, invoice processing, and payment, each stage can be tracked more effectively.

This helps procurement teams identify supplier problems earlier, reduce risk, control purchasing, and make better vendor decisions.

Ready to Improve Your Vendor Management and Procurement Process?

If your business is managing vendors, purchase requests, approvals, and procurement workflows through spreadsheets and emails, a centralized procurement solution can help simplify the process.

Book a Free Demo to see how procurement software can help your business manage suppliers, improve vendor performance, streamline purchase requests, and build a more efficient Procure-to-Pay workflow.

FAQs

What is vendor performance management?

Vendor performance management is the process of measuring and improving supplier performance using KPIs such as delivery, quality, cost, service, and compliance.

How can businesses improve vendor performance?

Businesses can improve vendor performance by setting clear KPIs, using vendor scorecards, conducting regular supplier reviews, monitoring performance, and taking corrective action when required.

What are the most important vendor performance metrics?

Common metrics include on-time delivery, defect rate, order accuracy, cost variance, SLA compliance, response time, and contract compliance.

What is supplier risk management?

Supplier risk management involves identifying, assessing, monitoring, and reducing financial, operational, compliance, cybersecurity, and supply chain risks associated with suppliers.

How can businesses reduce supplier risk?

Businesses can reduce supplier risk through regular risk assessments, supplier diversification, compliance monitoring, contingency planning, and continuous performance monitoring.

What is a vendor scorecard?

A vendor scorecard is a structured method for evaluating suppliers against criteria such as delivery, quality, cost, service, and compliance.

How does procurement software help with vendor management?

Procurement software can centralize supplier information, purchase requests, approvals, purchase orders, vendor performance, compliance, and procurement reporting.

What is Procure-to-Pay?

Procure-to-Pay, or P2P, is the complete purchasing process from purchase request and approval through supplier selection, purchase order, delivery, invoice, and payment.

What is a purchase request?

A purchase request is a formal request raised by an employee or department to purchase a product or service. It typically goes through an approval process before a purchase order is created.

When should a business use procurement software?

Businesses should consider procurement software when manual purchasing creates approval delays, poor supplier visibility, uncontrolled spending, difficult vendor tracking, or disconnected procurement workflows.