Once the portfolio analysis is completed, the buyer must then dive into the category and evaluate individual suppliers as to their suitability, narrowing the list down to a critical few. The ultimate result of this step is to make supplier recommendations, so the buyer must first identify current and potential suppliers, determine any information technology requirements and identify opportunities to leverage the commodity expenditures with similar commodities.
Most procurement experts will agree that there is no one best way to evaluate and select suppliers, and organisations use a variety of different approaches. Regardless of the approach employed, the overall objective of the evaluation process should be to reduce procurement risk and maximise overall value to the buying organisation.
Figure 3.5 Supplier evaluation and selection process
Although it may not be possible to obtain all the relevant information, whatever data that can be obtained will definitely help the buying organisation assess the potential for a successful match.
- Process and design capabilities: Suppliers should have up-to-date and capable products, as well as process technologies to produce the material needed. Because different manufacturing and service processes have various strengths and weaknesses, the buying organisation must be aware of these characteristics upfront. When the buying organisation expects suppliers to perform component design and production, it should also assess the supplier’s design capability. One way to reduce the time required to develop new products is to use qualified suppliers that are able to perform product design activities.
- Quality and reliability: Quality levels of the procurement item should be a very important factor in supplier selection. Product quality should consistently meet specified requirements since it can directly affect the quality of the finished goods. Besides reliable quality levels, reliability also refers to other supplier characteristics. For example, is the supplier’s delivery lead-time reliable? Otherwise, production may have to be interrupted due to shortage of material.
- Cost: While unit price of the material is not typically the sole criterion in supplier selection, total cost of ownership is an important factor. Total cost of ownership includes the unit price of the material, payment terms, cash discount, ordering cost, carrying cost, logistics costs, maintenance costs, and other more qualitative costs that may not be easy to assess.
- Service: Suppliers must be able to back up their products by providing good services when needed. For example, when product information or warranty service is needed, suppliers must respond on a timely basis.
- Capacity: The organisation may also need to consider whether the supplier has the capacity to fill orders to meet requirements and the ability to fill large orders if needed.
- Location: Geographical location is another important factor in supplier selection, as it impacts delivery lead time, transportation, and logistics costs. Some organisations require their suppliers to be located within a certain distance from their facilities.
- Management capability: Assessing a potential supplier’s management capability is a complicated, but important step. The different aspects of management capability include management’s commitment to continuous process and quality improvement, its overall professional ability and experience, its ability to maintain positive relationships with its workforce and its willingness to develop a closer working relationship with the buyer.
- Financial condition and cost structure: An assessment of a potential partner’s financial condition usually occurs during the evaluation process. Evaluation teams will typically evaluate the different financial ratios that determine whether a supplier can invest in resources, pay its suppliers and its workforce, and continue to meet its debt and financial obligations. These elements are important in determining whether the supplier will continue to be a reliable source of supply, and that supply will not be disrupted.
- Planning and control system: Planning and control systems include those systems that release, schedule and control the flow of work within an organisation and also with outside parties. The sophistication of such systems can have a major impact on supply chain performance. For example, how easy to use is a supplier’s ordering system, and what is the normal order cycle time? Placing orders with a supplier should be easy, quick and effective. Delivery lead time should be short, so that small lot sizes can be ordered on a more frequent basis to reduce inventory holding costs.
- Environmental regulation compliance: The 1990s brought about a renewed awareness of the impact that industry has on the environment. As a result, a supplier’s ability to comply with environmental regulations is becoming an important criterion for supply chain alliances. This includes, but is not limited to, the proper disposal of hazardous waste.
- Willingness to share technologies and information: With the current trend that favours outsourcing to exploit suppliers’ capabilities and to focus on core competencies, it is vital that organisations seek suppliers that are willing to share their technologies and information. Suppliers can assist in new product design and development through early supplier involvement to ensure cost-effective design choices, develop alternative conceptual solutions, select the best components and technologies, and help in design assessment. By increasing the involvement of the supplier in the design process, the buyer is free to focus more attention on core competencies.
- Longer-term relationship potential: In some cases, an organisation may be looking to develop a long-term relationship with a potential supplier. This is particularly true if the supplier is in the ‘critical’ quadrant, and the category of spend is high volume and critical to the organisation’s business. This approach requires that the parties share their mutual goals, establish metrics to guide the relationship and develop a series of ongoing discussions on how issues and conflicts can be resolved in a mutually beneficial manner. These relationships may also involve joint cost-savings projects and new product-development efforts.
- Supplier selection scorecards: During the selection stage, sometimes organisations need a structured way to evaluate alternative suppliers. This can be particularly hard when the criteria include not just quantitative measures (such as costs and on time delivery rates) but other, more qualitative factors, such as management stability or trustworthiness. A supplier selection scorecard may be used as a decision support tool. The evaluation team will assign a weight to the different categories and develop a numerical score for each supplier in each category, thereby developing a final performance score.