For this blog post, we spoke with Doug Keeley, senior product marketing manager at Ivalua, to get his insights on supplier evaluation. Read on for answers to six common questions about evaluating suppliers.
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At its most basic level, supplier evaluation is a formal assessment to measure and monitor your relationship with a supplier, or to pre-qualify a potential supplier. Buyers commonly request information to initiate the process of assessing whether a supplier is a good fit for their business.
The criteria for supplier evaluation and selection generally cover technical, financial, commercial and other requirements, because competition on price is not the only criteria. For example, manufacturers often also want to understand the following about their suppliers:
&#;Companies also look at what kind of risks the supplier may present to the supply chain,&#; said Keeley. He adds that corporations customize their supplier evaluation process and requirements based on the needs of their industry, region, standards or logistics, among others. It&#;s important to note that it&#;s unlikely that a single supplier evaluation survey covers all possible facets for all products across all industries and markets.
Most enterprises use a formal supplier evaluation and qualification process when selecting suppliers, as well as for maintaining long-term partnerships. &#;If you don&#;t know how to evaluate your suppliers, it is very hard to understand who you are working with nor what potential risks they may introduce to your supply chain,&#; said Keeley.
Once you&#;ve completed your supplier assessment, you want to be able to use the data you&#;ve collected to make better and more timely decisions that maximize value across the supply chain. You also need to update the evaluation frequently enough so that your supplier strategy includes any changes in their business.
And the true value of supplier selection and evaluation shows up in supplier development, in other words, when supporting them to develop new capability or competency.
&#;Every company, every manufacturer should be investing in supplier development processes and strategies to build supply chain resilience,&#; Keeley emphasized. &#;This is especially true today, when enterprises are dealing with very significant crises that are incredibly disruptive.&#; So, supplier evaluation and development help develop mutually beneficial relationships with your suppliers.
Specifically, what factors should be considered when choosing a supplier? Again, your supplier selection criteria depend on what is relevant to your products, markets, industry and more. &#;Many of our customers evaluate a blend of risk elements,&#; said Keeley. &#;In addition to financial data, they might want to incorporate supplier performance data, for example, which is clearly an important factor. So, they devise an aggregate evaluation.&#; This can also include risk aspects such as compliance or cybersecurity.
Other factors, including strategic considerations, come into play during the supplier selection process. Your supplier selection strategy may be at least partially based on potential. Here are some examples:
Any supplier evaluation and selection process typically includes several stages. There could be questions on a supplier evaluation form and multiple surveys, which could be completed by both the supplier and stakeholders at the buying company. So, what are supplier evaluation questions about? These tend to cover specific criteria relevant to the buyer&#;s scope of business and ensure that the buyer thoroughly understands the supplier&#;s scope of business.
Businesses can then rank potential (and current) suppliers by using a type of supplier evaluation scorecard. Many companies also include a supplier evaluation risk rating (SER) as part of their evaluation. Developed by Dun & Bradstreet, this form of supplier risk assessment enlists predictive data attributes to rate companies on a numerical scale of one (low) to nine (high) of how likely they are to fail within the following 12 months.
Companies typically tailor their supplier evaluation rating according to the scope of the business. In certain industries, stringent regulations and standards apply, so supplier selection and evaluation depend on whether the company&#;s processes and products meet specific industry standards. In this context, for example, ISO / , which focuses on manufacturing quality management systems.
Supplier qualification is not quite the same as supplier evaluation. When you qualify suppliers, you assess and validate that they meet industry-defined certification requirements and quality standards. Highly regulated industries such as healthcare, automotive, aerospace and defense demand perfection, explained Keeley.
In both supplier evaluation and qualification, stakeholder feedback is also often captured and evaluated alongside supplier responses. This ensures a 360-degree view of a supplier from areas including engineering, operations, procurement and more. Factors reviewed by stakeholders are often related to their area of expertise. For example, an engineer may ask to review a supplier&#;s technical capabilities and innovation.
For suppliers that have been through the evaluation or qualification process, many enterprises maintain an approved supplier list (ASL). Such ASLs are meant to provide clear guidance on a supplier&#;s status. Some common examples include fully Approved (meets all requirements) to Debarred (no business allowed) or New (approved but untested).
In summary, evaluating supplier performance involves more than an assessment for onboarding. Keeley offered the following steps:
&#;In truth, this process is not a series of steps,&#; Keeley added. &#;It is a cycle. It never stops. Your goal is to have informed buyers. Evaluating your suppliers regularly will help you, and them.&#; So, keep checking that your suppliers are performing well and meeting your expectations. You don&#;t want to gamble with your business, or your reputation.
riskmethods was acquired by Sphera in October . This content originally appeared on the riskmethods website in July and was slightly modified for sphera.com.
4
Finding, Evaluating and Selecting Suppliers
Note. From geralt, n.d. Licensed for reuse under the Pixabay license.
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Supplier identification and evaluation is the process of searching for potential suppliers who will be able to deliver products, materials, or services required by companies. The outcome of this process is to compile a list of potential suppliers. Procurement then takes the lead to evaluate each prospective supplier against specific criteria like cost, quality, consistency, and other performance metrics.
Approved suppliers for a product or service may already exist, which could be the case for repetitive purchases. For items that do not currently have approved suppliers or situations in which organizations want to re-evaluate the existing supply base, evaluations involve identifying possible new suppliers that might be able to satisfy the user requirements.
It is important at this stage to include, where appropriate, possible suppliers that have not previously been used. Identifying possible suppliers, especially in the global business and supply environment, can be a challenge and often requires extensive research.
Among the most important responsibilities of the procurement function are supplier identification, evaluation, and eventual selection. Having fewer suppliers with long-term contracts exposes the form to the risks and costs of making incorrect decisions that can have long-lasting consequences. As suppliers often command a significant proportion of firms&#; total spending, the logic behind creating a world-class identification and evaluation process becomes increasingly important. Suppliers also can impact a broad range of end-customer requirements in terms of quality, reliability, and availability of products.
Not all supplier identification and selection decisions warrant the comparable effort. This means the amount of time and effort involved in searching for and evaluating suppliers that provide generic, low-cost items such as motor oil or bandages would be different from the time and effort involved in searching for and evaluating suppliers that provide high-cost, specially engineered items like motor car engines or surgical equipment.
A major request made of supply management tends to be where to find suitable suppliers. The issue of obtaining credible market intelligence confronts supply managers in their efforts to find, qualify, and approve appropriate sources of supply. However, the answer to this seemingly simple request for information (RFI) has many aspects.
First, supply departments must identify which potential suppliers exist for a particular commodity and where they are located. Next, they must determine which suppliers are capable of providing the required goods and at what total cost. Organizations must then narrow the supplier pool through a structured evaluation process to arrive at a smaller set of supplier candidates. Lastly, a rigorous evaluation must occur to evaluate suppliers&#; past performance and capabilities.
These factors, however, become more challenging when suppliers are located in distant areas. Gathering supply market intelligence (SMI) requires supply managers to obtain and analyze the available intelligence, which is generally more complex and more difficult when suppliers are located in distant areas requiring extensive, and often costly, travel. According to Trent and Roberts (), supply market intelligence exists in many forms and places, so no single source of this intelligence is available.
Supply market intelligence is the result of obtaining and analyzing information relevant to companies&#; current and potential supply markets with the objective of supporting effective decision-making. According to Dominick (), supply market intelligence includes six important elements:
Supply managers obtain and use intelligence to identify suppliers who can provide the necessary products and services that will enable the procuring company to enhance its competitive standing. The intelligence gathered under these categories allows supply managers to make informed decisions about the various supply issues. When collected on a regular basis, this information also allows supply managers to keep abreast of developments, such as shifts and changes in demand and supply markets, the introduction of new products and technologies, the entrance of new competitors, and changes to manufacturing processes. Insights gained from this intelligence help supply departments adjust their sourcing strategies in a timely manner. Market intelligence can be gathered at the following levels:
After potential suppliers have been identified, it is necessary to evaluate suppliers. An important step is to pre-screen possible sources of supply to identify the suppliers who meet a minimum set of criteria. Pre-screening reduces the number of potential suppliers to those who can satisfy users&#; demands. In some instances, and for some goods or services, pre-screening can be a relatively simple task. In other instances that involve complex items (e.g., jet engines and medical testing equipment), more time and effort are required.
With the potential pool of suppliers reduced to those who can meet users&#; requirements, the next step is to determine which suppliers can best meet those requirements. This could be accomplished through competitive bidding if the procurement items are fairly simple or standard (e.g., stationery items, such as pens and paper or consumable maintenance items, such as grease, nuts, and bolts) and if there is a sufficient number of potential vendors. If these conditions do not exist, a more elaborate evaluation, such as engineering tests, may be necessary, and a site visit to the supplier&#;s facility could be warranted.
A key objective in the supplier evaluation process is to identify the suppliers who can become a source of competitive advantage for the procuring company. Another objective should be to reduce risk and maximize value. Risk includes the potential risk of a supplier failure, such as the risk of suppliers not being able to deliver products or services at a consistent level of quality, quantity, and cost over time. With regard to maximizing value, the evaluation process should be able to determine suppliers that are willing to, and capable of, working with the buying company to co-design engineered items, collaborate to reduce total costs, and work together on ongoing quality improvement projects.
The time involved in evaluating suppliers should be related to the importance of items purchased. For example, the effort involved in evaluating suppliers should be different for jet engines than it is for commercial stationery. For the most important goods and services with high engineering complexity or significant cost, organizations should employ cross-functional teams to evaluate suppliers&#; financial conditions, capacities, global capabilities, logistical networks, cost structures, supply management practices, process capabilities, technology innovations, quality, and design and engineering capabilities. The time and cost of making supplier visits can be high, but the cost of making a poor selection decision can be devastating.
According to Monczka et al. (), the following broad criteria are examples of what supply managers should consider during the evaluation process. This list is not exhaustive, but does include some of the more common criteria used in organizations:
Each of these criteria should also include a set of detailed questions designed to evaluate suppliers&#; capabilities with a predetermined scale such as a weighted scorecard shown below, which is then used to rate suppliers&#; capabilities against each of the previously explained criteria. A summary supplier evaluation matrix or scorecard is a weighted scoring framework that may be used to compare the merits of different potential suppliers. Specific criteria are listed and weighted according to their perceived relative merits. Companies are then evaluated on each of the criteria, and weighted scores are tallied across all criteria to determine the best potential supplier.
Sometimes, companies evaluate their current suppliers when they need to source products or services, especially new products or services. These companies will typically identify which of their current suppliers may be capable of providing these products or services and look for other potential suppliers where necessary. Investigating new suppliers can provide a basis of comparison for costs, quality, delivery capabilities, and other supply essentials. Current suppliers&#; capabilities will then be evaluated against prospective suppliers&#; capabilities to determine how well they fit with particular companies&#; needs. For existing suppliers, sourcing professionals have a wealth of information about historical performance that can be used in the evaluation process. This information is helpful, but good performances on contracts in the past do not guarantee good performances on future contracts and different products or services.
The search for new sources of competitive advantage is a relentless challenge that organizations face, and it is crucial that supply groups showcase annual progress. Organizations must show constant improvements, particularly cost reductions, which result in a search for low-cost sources of supply that have become a central part of most supply strategies. This has resulted in procurement groups in many companies seeking overseas sources of supply to achieve lower costs.
Most companies are under constant pressure to contain and reduce their costs, which largely explains the motivation behind global sourcing; the primary reason that companies source from around the world is to obtain lower prices. For example, as a cost-cutting measure, Dell moved its European manufacturing plant from Ireland to Poland (Fottrell & Scheck, ). This was no small undertaking and affected almost 2,000 employees; however, the move was part of a $3 billion company-wide cost reduction initiative. Other reasons that companies use global suppliers include gaining access to new sources of technology, obtaining a higher quality, or introducing competitive organizations to the domestic supply base.
Global purchasing can result in cost savings, but the global supply process also requires supply managers to address a wider range of issues of cost, time, and complexity. At least a quarter of the unit cost savings from global purchasing disappears, on average, when estimating the total cost of purchase ownership. This is due to hidden costs associated with lengthened supply chains, including increased lead times, increased inventory and increased risks.
LONG ZHUO supply professional and honest service.
Many supply managers use a classification scheme to segment suppliers by their geographic capabilities. This designation helps when searching databases for potential suppliers. In fact, internal supply groups can benefit from this classification in their examination of potential suppliers, whether they are involved with global supply management or not. This approach helps strategy development teams understand the location of suppliers and supplier capabilities more accurately. The classification scheme is as follows:
After suppliers have been selected, evaluated, and approved, procurement departments may choose to utilize those suppliers to provide products and services. This can occur in several ways, depending on the system in place in procurement: awarding a specific purchase order (PO) or a blanket PO, material purchase release, or contract. Developing and awarding POs is an important step because almost all POs include standard legal conditions to which the orders are subject, including the following:
Purchasing will typically issue a PO for each required item. Depending on the nature of the item and the relative price of the item, negotiations may or may not be required before awarding the PO.
A weighted scorecard is a tool often used by procurement to perform an objective evaluation of multiple supplier responses for the same item. It also serves as a permanent record to justify a contractual commitment in the form of a purchase order to the highest scoring supplier. Procurement routinely uses a weighted scorecard process to document key criteria, such as industry experience or financial strength for an item to be purchased and assigns a proportionate value for each criterion.
For example, a company wants to procure an item that will be used in its manufacturing process to assemble an end product. The criteria that are important for this item might be price, delivery, and quality. Percentage values are then assigned for each of the three criteria and several supplier responses are evaluated and compared by populating the weighted scorecard, which defines the comparative value of the criteria.
In developing the weighted scorecard for this example, the criteria (what is important to the company) are defined and listed in the far left column, followed by the weight for each of the criteria. As suppliers&#; responses are received, they are scored by entering data into the appropriate columns. These scores are then mathematically calculated into points for each supplier; the points are totaled to determine the award. Supplier B scored the higher value compared to supplier A. The purchase order would be awarded to supplier B.
Figure 3.1
Weighted Scorecard Comparing Supplier A vs B
Note. From Snage. [Image Description]
Blanket purchase orders (BPOs) are typically used when the same materials or services are ordered on a regular basis, whether on a consistent, periodic schedule like cleaning services or on an as-needed basis when quantities fall below desired levels, such as when materials for a manufacturing process run low. When using this type of purchasing arrangement, buyers and suppliers work together to evaluate the anticipated demand for specific items required for a defined period of time and agree on the terms of the agreement. Buyers also reserve the right to cancel BPOs in the case of poor supplier performance or changes in demand.
The BPO is established as a master agreement; buyers subsequently use material release documents at periodic intervals, as necessary and based on usage, to order items covered by the BPO. This material release typically specifies the required part number, quantity required, unit and quantity price, required receipt date, ship-to address, and method of shipment.
In this step, POs are awarded and released to the supplier, and deliveries are subsequently received by the ordering organization. Many organizations transmit orders electronically through electronic data interchange (EDI); orders can also be transmitted over the Internet. After the award, procurement is also responsible for monitoring the status of open POs, expediting orders, and providing ongoing administration for other tasks.
The goods receiving process involves several processes and documents, including a material packing slip, bill of lading, and discrepancy report, each of which is explained further below.
When products and services have been delivered, supplier performance must be evaluated to determine if they have actually met the requirements of the procuring organization. Firms should determine whether suppliers have performed according to requirements by using a system for measuring performance. When supplier performance does not satisfy the requirements of the procuring organization, the discrepancies must be identified and recorded, and corrective actions must be undertaken by working with the supplier. The precise nature of feedback to suppliers varies among companies, but feedback must occur at a prescribed frequency. This enables procuring organizations to work with suppliers to identify defect trends, implement corrective actions to fix those defects and take preventive actions to eliminate recurrences. Some examples of feedback are:
A variety of tools and techniques are available to procurement professionals; they can be used to enable and support the sourcing process. This section outlines these tools and techniques, and provides examples of best practices, including the following:
E-procurement is an Internet process used to make the procurement of goods and services easier, faster, and less expensive for businesses. The overall goal is to streamline the purchasing process so that businesses can focus more management time on earning revenue and serving customers. According to EPIQ (), e-procurement does not work for all items purchased by firms. For instance, items of strategic importance to firms, such as custom-designed engines for a package transportation vehicle, are typically not purchased using e-procurement. However, many noncritical items like stationery are well-suited to be purchased using these types of systems.
Procurement cards are essentially credit cards provided for internal users to purchase low-cost items without having to go through procurement&#;s administrative process. Procurement cards work well for low-cost items that are required on an as-needed basis; they are especially helpful when approved suppliers for low-cost items do not exist and where suppliers are not approved by other purchasing systems.
Authorized procurement cardholders make the buying decisions, up to the value allowed on the procurement card and within the prescribed budget of the department that is making the purchase. The monetary value of items purchased and covered by procurement cards is typically low and might consist of brochures for a trade show or conference. In these cases, the cost of involving procurement groups in a supplier search, evaluation, and approval process would typically outweigh the cost of items purchased (Monczka et al., ).
Firms enter into long-term agreements with suppliers they plan to work with over an extended period of time. Long-term agreements involve base contracts that are generally in place for a year or more. These types of agreements are similar to a BPO process but are established to cover the purchase of higher-value items over a long period of time, such as special packaging supplies, machine maintenance parts, and high-value raw materials. Long-term purchase agreements can reduce transaction costs by eliminating the need for time-consuming renewals of purchases.
In addition, when buyers and suppliers agree on contract terms, material-releasing responsibility can shift to users in many cases. This means that end-users arrange directly with suppliers for products required to be delivered without involving procurement at all. Ideally, material releasing is accomplished electronically instead of manually, which saves time and money (Monczka et al., ).
EDI involves a computer-to-computer exchange of information. It can be used to support transactions between buyers and sellers, allowing for greater efficiencies and streamlined communication. This, in turn, can lead to less time and money dedicated to the procurement process.
Electronic catalogues provide a user-friendly way of accessing information about a supplier&#;s products and services. The chief benefit of using electronic catalogues is their low-cost search capability; if users order directly from these catalogues, cycle times and ordering costs can also be reduced. Pricing is often included as part of the catalogue and is referred to as a published price list. Procuring organizations with higher buying volumes may be offered a percentage discount on the rates from the published price list.
At many firms, entire bid processes have been automated. Bid packages and specifications are made available online from which bidders submit their bids and proposals, and the bid openings and awards are communicated electronically. Cycle-time reductions and other cost savings can be significant if the automated process is efficient.
In online auction situations, potential sources are also prequalified and invited to take part in the online bidding. The auction, or event, is set for a specific date and time period, much like the deadline and bid opening deadlines of offline processes. An auction&#;s success depends, in large part, on the quality of bid specifications and the ability of procurement professionals and processes to prequalify suppliers. In an online environment, bidders can see the actual bid amounts but not who is involved in the bidding.
Procurement departments utilize and maintain certain documents for purchases. The types of documentation kept will depend on the organizational requirements and will differ for each organization. A number of procurement documents are used to obtain information and proposals from prospective suppliers. These include the following:
The terminology may vary among industries, and in some organizations, the preparation and use of the previously mentioned documents is a specialized field assigned to certain individuals. Procurement groups typically use standard documents to obtain the necessary information from prospective suppliers.
According to Muckstadt, Murray, Rappold, and Collins (), a number of documents are commonly used in procurement. These include the following:
Discovering potential suppliers is the process of searching for suppliers who will be able to deliver the products, materials, or services required by a company. The outcome of this process is the list of potential suppliers, after which procurement evaluates each prospective supplier against specific criteria like cost, quality, consistency, and other performance metrics. Obtaining suitable market intelligence is an issue that confronts procurement managers daily in their efforts to find, qualify, and use appropriate sources of supply. Additionally, supply departments must identify which potential suppliers exist for a particular commodity and where they are located.
Supply market intelligence is the outcome of the process of obtaining and analyzing information relevant to a company&#;s current and potential supply markets with the objective of supporting effective decision-making. Supply market intelligence includes five elements: commodity profile information, cost structure, supply base information, market information, and competitive analysis. Supply market intelligence also has varied uses. Supply managers obtain and use intelligence to identify suppliers that can provide the necessary products and services at consistent levels of cost, quality, and quantity. The evaluation of potential suppliers attempts to answer two main questions: Is this supplier capable of supplying the purchaser&#;s requirements satisfactorily over both the short and long terms? Is this supplier motivated to supply these requirements in the way that the purchaser expects over the short and long terms?
The main objective of the evaluation process is to reduce purchase risk and maximize overall value, and the time that goes into evaluating suppliers should be a function of the importance of items purchased. Suppliers are generally rated across multiple categories using weighting evaluation criteria, according to the relative importance of each criterion. Most firms engage in global sourcing at some level, and the primary reason to source on a worldwide basis is to obtain lower prices. Many firms source globally and have realized savings as a result. Supply managers from leading companies have developed a classification scheme to segment suppliers by their geographic capabilities.
Tactical aspects of the procurement process to enable the placement and approval of POs with suppliers, the information needed for a comprehensive purchase requirement, the necessary forms and documents, and the necessary elements in the post-award process that must be managed. Additionally, alternate forms of procurement were reviewed, including procurement cards for non-procurement personnel, electronic catalogues for requisitions, and EDI and bidding automation, both of which used to streamline procurement processes.
Dominick, C. (). Buyers ask: What is market intelligence? Next Level Purchasing Association. http://www.nextlevelpurchasing.com/articles/what-is-marketintelligence.html
EPIQ. (). Electronic procurement. https://www.epiqtech.com/E-Procurement-Systems.htm
Fottrell, Q., & Scheck, J. (, January 8). Dell moving Irish operations to Poland. The Wall Street Journal.
http://www.wsj.com/articles/SB
geralt. (n.d.). Business establishing a business [Computer graphic]. Pixabay. https://pixabay.com/illustrations/business-establishing-a-business-/
Monczka, D., Trent, R., & Handfield, R. (). Purchasing and supply chain management (3rd ed.). New York, NY: McGraw-Hill.
Muckstadt, J. A., Murray, D. H., Rappold, J. A., & Collins, D. E. (). The five principles of supply chain management: An innovative approach to managing uncertainty. https://www.semanticscholar.org/paper/The-Five-Principles-of-Supply-Chain-Management-An-Muckstadt-Murray/cbffa14cd52b65e232b3b33b.
Trent, R. J., & Roberts, L. R. (). Managing global supply and risk: Best practices, concepts, and strategies. Plantation, FL: J. Ross.
This chapter contains material adapted from Supply Management and Procurement Certification Track. LINCS in Supply Chain Management Consortium. March . Version: v2.26. www.LINCSeducation.org.
Figure 3.1: This figure is a weighted scorecard, and it is a tool often used by procurement to perform an objective evaluation of multiple supplier responses for the same item. It also serves as a permanent record to justify a contractual commitment in the form of a purchase order to the highest scoring supplier. On the right side of this figure, there are four criteria that each supplier gets weighted for integrity, industry expertise, experience and qualification and financial and managerial strength. Supplier A scored a total of 1.90 and Supplier B scored a total of 2.75. Supplier A scored a higher weight than Supplier B in financial and managerial strength whereas Supplier B scored a higher weight than Supplier A in both industry expertise and experience and qualification leading Supplier B to be chosen. [Back to Image]
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