Vendors play a major role in a firm’s performance. Firms use vendor analysis to select the right vendors for their organization. In this lesson, learn what vendor analysis is and how it is used.

What Is Vendor Analysis?

A vendor is a firm or an individual that has a product or service for sale. Firms depend on a vendor’s ability to meet their needs in order to efficiently perform the functions of their business. Therefore, it is important for a firm to choose vendors who are able to meet their requirements. Firms use a process known as vendor analysis to assess the ability of existing or prospective vendors.

Vendor analysis identifies the strengths and weaknesses of each vendor, then compares them to find the vendor that best matches the needs of their company. A vendor analysis is conducted whenever a firm needs to find a new vendor or review the performance of its existing vendors. Let’s look at the process of vendor analysis.

Assess Your Needs ; Priorities

In order to understand which vendor is the right one for you, it is necessary to understand your firm’s immediate needs for a vendor. For instance, a firm may open a new store in a different region and may look for a vendor that offers products indigenous to that area. Many companies review things such as a vendor’s reputation, financial strength, sales, capacity, prices, services, payment terms, qualities, or reliability.

It is important for a firm to identify what is important to them and what their deal-breakers are. Finding vendors that are reliable, have competitive pricing, and quality products may be important vendor characteristics for a firm. A bad reputation or not offering certain services may be deal-breakers.

Set Goals ; Guidelines

Firms conducting a vendor analysis should set SMART goals, specific, measurable, attainable, relevant, and timely goals, for what they want to accomplish. Setting a goal of decreasing inventory-carrying cost by 20% over the next four months is an example of a SMART goal.

The next step in this process is to set up guidelines that are easily understood. For instance, a vendor’s quality may be rated on a scale of 1 to 5, with 5 being the worst. The number 1 may signify exemplary quality, 2 may signify the product is a quality product but made out of cheaper materials, and so on, with each number signifying a worse quality then the number before.

Create & Edit a List

Create a comprehensive list of all existing and potential vendors. You may be wondering why existing vendors would need to be added to this list. Existing vendors may be able to fulfill your requirements. However, they may not be your best option. So, it is always good to evaluate and compare vendors new and old.

Now that you have a large list of vendors to choose from it is time to eliminate most of them. Researching a vendor is a great way to narrow your selection. You can talk to the vendor’s customer regarding their experiences, visit the website, and visit the premises. You may also submit a questionnaire for them to fill out and return.

After completing research on each vendor, the selection can be narrowed by reviewing your needs, priorities, deal-breakers, and goals. Every vendor that does not meet those requirements should be eliminated.

Make a Decision ; Share Results

The vendors that remain after the list has been narrowed should be compared to each other to identify which vendor best meets the needs of the firm. You then make a final decision.

Finally, the results of the vendor analysis should be shared with the vendors. The results are shared so that the vendors have a chance to evaluate themselves and make adjustments if necessary. This is also why it is important to set up guidelines that are easily understood.

Lesson Summary

A vendor is an individual or firm that has goods or services for sale. Choosing the right vendor is critical to firm performance. Firms use vendor analysis to determine which vendor is right for their firm. Vendor analysis is a tool that businesses use to assess the abilities of new or prospective vendors and is conducted whenever a firm needs to find a new vendor or review the performance of its existing vendors. The vendor analysis process includes the following steps:

  1. Assess your needs
  2. Identify priorities and deal-breakers
  3. Set goals
  4. Create a list
  5. Set up guidelines
  6. Narrow selection
  7. Make a decision
  8. And, finally, share the results