4. Finding, Evaluating and Selecting Suppliers

4. Finding, Evaluating and Selecting Suppliers

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Learning Objectives

1. Identify various sources of market intelligence.
2. Understand the use of market intelligence in finding potential suppliers.
3. Grasp key supplier evaluation practices.
4. Recognize the importance of identifying and evaluating global suppliers.
5. Understand critical aspects of executing procurement contracts.
6. Implement various procurement enablers.
7. Analyze key forms of procurement documentation.
8. Manage the procurement process and internal processes for procuring goods and services.

Introduction to Supplier Identification and Evaluation

Supplier identification and evaluation entail searching for potential suppliers capable of delivering the required products, materials, or services. This leads to creating a list of potential suppliers that procurement departments evaluate based on criteria like cost, quality, consistency, and performance metrics.

Inclusion and Exclusion of Suppliers

Organizations may have approved suppliers for repetitive purchases. For new items or when re-evaluating the supply base, it is essential to identify possible new suppliers. Including potential suppliers, especially in the global environment, often involves extensive research.

Importance of Supplier Evaluation

One of the procurement function's crucial responsibilities is the identification, evaluation, and selection of suppliers. Selecting fewer suppliers with long-term contracts comes with risks and costs if poor decisions are made. Effective identification and evaluation processes are vital, as suppliers significantly impact firms' spending as well as end-customer requirements in terms of quality, reliability, and availability.

Market Intelligence for Supplier Identification

Obtaining credible market intelligence is essential for supply managers to find, qualify, and approve appropriate sources of supply. The process involves identifying potential suppliers for a particular commodity, assessing their capability, and evaluating their past performance and capabilities.

Obtaining Supply Market Intelligence

Supply departments start by identifying which suppliers exist and their locations. They then assess suppliers' capability to provide the required goods at the total cost. The supplier pool is narrowed down through structured evaluation processes. Gathering supply market intelligence, especially for distant suppliers, involves extensive and costly research.

Key Elements of Supply Market Intelligence

• Commodity profile information: Identifies product or service types, manufacturing processes, and quality standards.
• Cost structure: Covers costs associated with investment, raw materials, manufacturing, and other factors.
• Supply base information: Details current and potential suppliers, their characteristics, and locations.
• Market information: Includes supply and demand drivers, capacity utilization, pricing, and market size.
• Competitive analysis information: Analyzes buyers' and suppliers' sizes, buying power, substitute products, and more.
• Quality: Evaluates suppliers' past performance and quality programs.

Uses and Levels of Market Intelligence

Market intelligence helps supply managers identify suppliers who can provide essential products and services, allowing for informed decision-making about supply issues. Regularly collecting this information keeps supply managers updated on market developments.

• Macro environmental level: Encompasses market dynamics, world trade, demographics, political and economic climate, environment, and technology.
• Country level: Includes cultural issues, crime levels, logistics infrastructure, IP safety, political stability, and more.
• Industry and commodity level: Related to industry types, sizes, strengths, worldwide users, and commodity suppliers.
• Supplier level: Involves information about potential suppliers, their locations, sizes, and capabilities.

Supplier Evaluation

After identifying potential suppliers, evaluating them becomes crucial. Pre-screening identifies suppliers meeting minimum criteria, with more elaborate evaluations for complex items. The objective is to find suppliers that provide a competitive advantage while reducing risks and maximizing value.

Supplier Evaluation Criteria

According to Monczka et al. (2005), supply managers should consider several broad criteria during the evaluation process:

• Location: Proximity to the purchasing firm and related advantages or disadvantages.
• Employee capabilities: Quality commitment, workforce skills, turnover, and overall morale.
• Cultural and language differences: Type of cultures and communication challenges due to language differences.
• Cost structure: Total costs including production, administrative, material, supply chain, and marketing costs.
• Infrastructure and assets: Quality and maintenance of buildings and equipment.
• Citations and awards: Review of any awards or citations from other customers and relevant agencies.
• Working conditions: Attention to safety practices, first aid capabilities, and child labor.
• Process and technological capability: Includes future capabilities in design, methods, equipment, processes, and R&D investments.
• Management capability: Management qualifications, experience, commitment to quality, customer focus, history of labor-management relations, and strategic sourcing programs.
• Environmental regulation compliance: Commitment to environmental protection and infractions history, toxic waste management capabilities, and use of environmentally friendly materials.
• Financial stability: Financial history, capital levels, credit history, level of debt, and current stability.
• IT capability: Ability to link and communicate electronically with technology used by the buying firm or other partners, and willingness to invest in new technologies.
• Suppliers' own supplier network: Nature and extent of the suppliers' network and related risk exposure.
• Employee turnover: Workforce stability, tenure, and critical skills.
• Quality capabilities: Quality assurance systems, worker involvement, quality records, and ability to maintain consistent quality.
• Evaluation of customer base: Dependence on other customers and potential effects on focusing on new requirements.

The company's comprehensive evaluation ensures that they identify the best suppliers for their needs, leading to reduced procurement risks and optimized value.

Further reading: Apatosaurus Pictures & Facts

Global Supply Management

The challenge of seeking new sources of competitive advantage means procurement groups often look for overseas sources to achieve lower costs. Globally sourcing suppliers bring cost savings, but also entails addressing more complex issues of cost, time, and logistics.

Sourcing Globally

Many companies source globally primarily to lower prices, though access to new technology, higher quality, and competitive pressure also motivate this practice. However, increased lead times, inventory, and risks are some of the hidden costs associated with global purchasing.

Classifying Suppliers

Classifying suppliers by their geographic capabilities involves:

• Local supplier: Serves a limited number of sites or locations within a country.
• Domestic supplier: Serves any location within a country.
• Regional supplier: Serves many countries within a region.
• Multi-regional supplier: Serves two or more regions.
• Global supplier: Serves most, if not all, countries worldwide.

Purchasing Approval

Once suppliers are selected, evaluated, and approved, procurement departments issue purchase orders (POs) or contracts. Almost all POs include standard legal conditions and require details like item description, specifications, quantity, price, delivery date, and more.

Weighted Scorecard

The weighted scorecard is a tool to objectively evaluate multiple supplier responses for the same item, serving as a record to justify purchase commitment to the highest scoring supplier.

Blanket Purchase Orders (BPOs)

BPOs are used for regular orders of the same materials or services. Buyers and suppliers evaluate anticipated demand and agree on terms. Material releases are issued periodically based on usage.

Award Purchase Orders

POs are awarded and released to suppliers, and deliveries are monitored. Electronic data interchange (EDI) or Internet transmissions are often used for orders. Procurement also monitors open POs and expedites orders if necessary.

Goods Receipt

Involves several documents:

• Material Packing Slip: Details weights, dimensions, and quantities.
• Bill of Lading: Issued by carriers, records goods delivered, and protects against wrongful allegations.
• Discrepancy Report: Records differences between goods received and ordered, facilitating follow-up with suppliers.

Evaluate Supplier Post-Purchase Performance

After delivery, supplier performance is evaluated to ensure requirements are met. Performance discrepancies are identified, recorded, and corrective actions taken. Feedback may include weekly reports, quarterly review meetings, and annual executive meetings.

Procurement Enablers

Various tools and techniques support the sourcing process:

• E-procurement and electronic purchasing
• Procurement cards
• Long-term purchasing agreements
• Electronic data interchange (EDI)
• Electronic catalogs

E-Procurement and Electronic Purchasing

E-procurement streamlines the purchasing process, making it faster and cheaper. While not suitable for all items, it is ideal for non-critical items like stationery.

Procurement Cards

Procurement cards allow internal users to purchase low-cost items without administrative processes, suitable for items required on an as-needed basis when no approved suppliers exist.

Key Takeaways

The process of identifying, evaluating, and selecting suppliers involves thorough research and evaluation against specific criteria. Market intelligence plays a vital role in identifying suitable suppliers. Evaluating suppliers reduces purchase risks and maximizes value. Procuring from global suppliers can lower costs but comes with additional complexities. Various procurement tools and documents streamline the purchasing process and ensure effective supplier management.

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