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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.
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:
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 is 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 is 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 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.
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 is 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:
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 does not 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.
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:
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:
Download the Supplier Assessment form here.
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