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Organizations conduct supplier evaluations both to qualify the potential suppliers and to assess relationships with the existing ones. Supplier evaluation represents one of the most important decisions in a company to remain competitive, especially in times like now when markets are changing very fast.What is Supplier Evaluation?
In procurement, supplier evaluation means a formal assessment of suppliers to measure their performance against various criteria and determine if they meet the organizational needs. The objective is to create a best-in-class and low-risk portfolio of available suppliers for use.
Supplier evaluation is a continuous process for procurement departments and is also a pre-qualification step in the process of purchasing.
According to Hald and Ellegaard (2011), supplier evaluation is "the process of quantifying the efficiency and effectiveness of supplier action."
Thus, in simple terms, supplier evaluation means assessing whether a supplier is a good fit for your business or not. At the same time, also takes into account your current supplier base to measure their performance and uncover opportunities for cost reduction, risk mitigation and continuous improvement. Thus, effective supplier assessment is a holistic process that starts with aligning objectives, data, and analysis with suppliers in a transparent and fair manner.
Importance of Supplier Evaluation
The goal of every procurement organization is to utilize limited resources most efficiently. This makes evaluating suppliers necessary to ensure the best contracts in terms of quality, costs, flexibility, and reliability.
The supplier assessment process might be challenging, but the benefits of finding low-risk sources of high-quality goods and services plus mutually beneficial, long-term business relationships outweigh the efforts needed.
Some of the other benefits of supplier evaluation include:
- Risk mitigation: By carefully examining suppliers, you can lower the regulatory, contract, and security risk factors associated with working with systems outside your company.
- Enhanced supplier performance: Enhanced supplier performance directly correlates with the overall performance of the procurement process. 57.1% of the performance of the procurement process is directly determined by the supplier evaluation and appraisal criteria (Murigi 2014). This is because supplier evaluation motivates suppliers to continuously improve their operations by raising efficiency and being more innovative. That said, companies witness stunning outcomes when they make decisions based on supplier performance goals.
- Cost reduction: Supplier evaluation is a significant process for any organization because it directly influences the quality and cost of purchased products. Also, a slight gain in cost and quality due to supplier selection has significant benefits for organizations.
- Leveraged supply base: Evaluating supplier performance helps organizations set a standard, and this, in turn, leads to superior results. Additionally, it lets companies plan their goals and actions as per their suppliers' capabilities and performance levels.
A quality criterion is a helpful tool in supplier evaluation as it motivates suppliers to continuously improve their operations by raising efficiency and being more innovative. The success of a purchasing organization is highly dependent on how well its suppliers perform. It's also important that the supplier and the buyer have the same idea of their satisfactory quality.
- Strengthened supplier relationships: Efficient supplier management encourages communication, collaboration, and loyalty, which lays the foundation of mutually beneficial working relationships that benefits everyone in the long run.
- Improved business outcomes: Engaging top suppliers will enable you to provide higher-quality and more competitively priced goods or services. Thus, you will be able to serve your customers better and grow your customer loyalty and sales.
Supplier Evaluation Process
The supplier evaluation process starts with evaluating your company's needs and developing the list of requirements to contact or discuss with the right suppliers. After this, a selection criterion is designed to evaluate the suppliers, including deciding a way to score the suppliers on these criteria.
When evaluating potential suppliers, a market survey is carried out to identify a set number of suppliers which will participate in the request for a quotation or RFQ process. A variation of the second step is to gather a limited group of suppliers and make an initial bidders' list. This list comprises suppliers who satisfy the requirements. Then a request for information or RFI is sent to suppliers in the list to get more information about them. The RFI aims to know if the company is interested and gather enough information to make a rough evaluation.
Once the bids or RFIs are received, the suppliers are evaluated, involving all of the company's stakeholders. In the end, companies are awarded as suppliers based on the results and negotiations.
Most procurement professionals will agree that there is no one best way to assess suppliers. That's why companies use different approaches to see what works and whatnot. Irrespective of the approach, the final goal of the assessment process is to reduce risks and maximize overall value to the procurement organization.
It's important to mention here that the need for supplier evaluation does not end with supplier selection. In fact, after an association is established, it becomes necessary to track the supplier's performance over time. Ranking suppliers on various metrics helps companies figure out which of them are performing the best and where there is room for improvement.
Supplier Evaluation Criteria
Supplier assessment is a multi-criterion problem that includes both qualitative and quantitative factors. That is why developing standard selection criteria and applying them indiscriminately to any situation does not suffice.
That said, supplier evaluation criteria should align with your company's mission, vision, and business goals. Additionally, it should also include factors like quality, cost and financial integrity, corporate social responsibility, communication, and cultural commitments.
Assessing vendors and suppliers also requires reviewing the criteria that matter most to your organization. For example, for a healthcare company, data security is of utmost importance, and they also have to consider several compliance guidelines; hence, these criteria override other factors.
But more than often, companies come across conflicting tangible and intangible factors where it becomes hard to make a decision.
For this reason, all relevant company stakeholders like procurement, engineering, logistics, production, etc., must be involved in the supplier selection process. Criteria for selection must be agreed upon among the stakeholders. Doing so ensures the right weight is allocated to each based on the overall importance, business priorities, and strategy.
12 Criteria to Evaluate Suppliers
The ability to create appropriate supplier evaluation criteria is linked to an organization's procurement performance.
According to Murigi (2014), 57.1% of the performance of the procurement process is directly determined by the supplier evaluation and appraisal criteria.
Usually, criteria like materials delivery, quality, cost, financial position, communication, and technology are the commonly used ones. However, there can be many other criteria, more important than those mentioned above, depending on the process. Hence, it's not easy to come up with one exclusive list.
Below we have briefly discussed some of the various criteria that an organization may use to evaluate potential suppliers:
- Quality: The concept of quality isn't easy to define. The definition that fits best to the supplier assessment process is the one IBM provided: "Quality is the degree to which customer requirements are met.
We speak of a quality product or quality service when both supplier and customer agree on requirements and these requirements are met." Quality management requires thorough consultation between various departments, suppliers, and customers. After establishing the desired quality levels, the complete production process must be organized in such a way that this level of Quality is reached and maintained in a controllable manner.
Quality management relies on four interdependent functions: setting standards, assessment, control, and assurance to achieve this. An external assessment establishes the degree to which the procedures are used to satisfy the conditions recorded in national and international standards. An example of such a standard is the ISO-9000/9001 standards.
- Price/Cost: Here, not the unit price of material, but the expectations include: current and future cost requirements, cost reduction, continuous improvement, and total cost (including any acquisition, inventory, or disposal costs).
- Performance Delivery: The certainty of the right product delivered at the right time in the right quantity. It involves evaluating the processes of receiving orders from clients, scheduling the production of the goods or services necessary to fulfill those orders, and finally, the time required to deliver the goods or services as per the client's expectations.
- Service: It considers things like following instructions, handling complaints, ease of doing business, and quick response. All these variables make service criteria an extremely hard one to define.
Evaluation of a supplier's service is usually done on subjective judgments. For this, opinions on the Quality of assistance, supplier attitude, response time to requests for assistance, support staff qualifications, etc., must be collected.
Most companies have a relatively simple rating scale for evaluating supplier service performance, such as outstanding, acceptable, and poor, plus explanations regarding the ratings.
- Financial Strength: It means evaluating a potential supplier's financial condition. In simple terms, it means assessing whether a supplier can invest in resources, pay its suppliers and workers, and continue to meet its debt and financial obligations. These factors are essential in determining if the supply will be disrupted or not.
- Lead-Time: This is a reliability issue and means the elapsed time from the order being placed to delivery.
- Technical Ability: This criterion determines how technically advanced a supplier is and whether they will be able to follow the development based on that ability.
- Flexibility: It's an adaptability criterion that defines the ability of a supplier to adjust volumes and delivery times as per the client's needs.
- Development: It takes into account factors like innovation and improvement that are needed to improve products and reduce costs.
- Management Approach: This criterion is particularly important for a company looking for long-term relationships with its suppliers. Such relationships are mostly established with suppliers in the critical quadrant, i.e., the ones that supply critically important materials in high volumes. To initiate the foundation of such a relationship, parties must discuss and align on their goals and metrics. Such relationships, if developed accurately, might pave the way to joint cost-savings and product-development efforts.
- Geographic Location: The criteria of geographical proximity is important since increased geographical distance can sometimes bring other transport-, logistics-, and currency-related fluctuations, thereby posing a setback to flexibility.
- Environmental Regulation Compliance: This criterion considers a supplier's ability to comply with sustainability requirements and is becoming an essential criterion for supply chain alliances.
Identifying the Key Supplier Evaluation Criteria
When determining which supplier to select, it suggested that organizations categorize criteria as follows:
Mandatory - As the name suggests, these criteria are mandatory, and a supplier must meet them to be on the bid list.
Preferred - If a supplier cannot meet these, it doesn't necessarily stop them from bidding. However, these criteria will form the basis of supplier selection.
Leading - Limit these to as few issues as possible. These issues will really differentiate suppliers and will separate the exceptional suppliers from the ordinary. These issues should have the highest weighting within the supplier selection process.
5 Tips for Successful Supplier Evaluation
- To carry out their task effectively, procurement managers must come up with scoring criteria to help them evaluate and identify the suppliers to do business with and maintain them in the approved vendors' list.
Different criteria can be used to select a supplier. However, at times, these criteria are contradictory. For example, many times, cost and quality do not come together. Hence, it becomes necessary to allocate weights to criteria to determine which supplier can provide the best trade-off of all criteria selected. It's advised to use fewer key criteria rather than a long list, each of which will carry little individual weight compared to the total score.
- Evaluating certain criteria is difficult since they can only be measured in a qualitative way (and not quantitative). These criteria are more subjective and people-dependent. For example, the cost can be measured quantitatively, but the product or service quality is a qualitative criterion. It cannot be measured directly. In that case, criteria like cost of rejection of the product, the cost of the services after sale and so on should be taken into account.
- Managing hundreds and thousands of suppliers across various functions is a big challenge for companies. One assured way to overcome it's by creating and managing a centralized database of all the suppliers. Here, a supplier management solution like Ignite Procurement helps you auto-populate and centralize your supplier data and insights in one place.
- Decide who will be responsible for the evaluation. Generally, an employee in the procurement department fills this spot, but for high-cost or complex scenarios, it's advisable to hire an analyst. Alternatively, a consultant can help with some of the time-consuming aspects of the process like research, writing the request for proposal or RFP, and performing a financial analysis - some of which might not be available inside the organization.
- It's also crucial to set up a timeframe, without which getting to the final selection and hiring process can be difficult.
A Quick Supplier Evaluation Checklist
Supplier evaluation is a continuous process and ensures you keep your customers and your priorities on top. Following are the steps you can tick as you walk through the process to make sure you follow the best practices while assessing your suppliers:
- Conduct regular evaluations of your supplier's performance.
- Establish supplier evaluation criteria as well as standards, processes, and procedures around it.
- Create a supplier assessment form to standardize your evaluation and make your decisions better, faster, and more strategic.
- Select and classify your suppliers based on your supplier assessment goals.
- Make use of your data and bring facts to your supplier discussions. Also, keep the communication going at all times, especially with your strategic suppliers.
- Use technology to make the best use of the information you have.
- Organize regular conversations with your suppliers to plan and improve on sub-optimal areas.
- Re-evaluate supplier performance based on your established criteria.
- Repeat the process.
Supplier Performance Evaluation and Assessment Template
Do you wish to bestow your team with a supplier assessment template that can help your organization measure suppliers' reliability, suitability, and compatibility?
Every business requires insightful supplier evaluation to deliver the best value for procurement and undertake effective supplier risk management.
Most companies use a formal supplier evaluation and qualification process to select suppliers and maintain long-term partnerships. But the entire process might seem difficult if you don't know how to assess your suppliers or lack the skills needed to conduct it.
To help you overcome this barrier, we have created a supplier assessment template that you can use to conduct meaningful evaluations. This template equips procurers with a harmonized approach to assess, manage, and communicate with their suppliers which in turn helps them identify efficiencies, realize cost savings and productivity benefits, and set the stage for innovation.
Hit the link below and download Ignite Procurement Supplier Assessment template to:
- Follow a systematic approach to supplier assessment
- Be transparent and communicative with your suppliers
- Ask the questions that can drive performance
- Get a clear picture of supplier compliance
- Systemically gather supplier data
Download the Supplier Assessment form here.