The evaluation of supplier proposals and bids to determine the best overall competitive offering for a product or service is one of the primary responsibilities of supply management. Each situation should be handled in the manner best suited to its circumstances. However, adopting an overall framework for proposal and bid evaluation, whether your suppliers are domestic or international, is crucial.
1. Decision Matrix/Multi-Attribute Evaluation Tool
To evaluate supplier proposals, you must consider multiple criteria (or attributes), which carry varying degrees of importance in the overall decision. Proposals may be scored with a decision matrix, a quantitative tool that compares multiple proposals by scoring the responses of one supplier relative to another.
A basic decision matrix consists of a set of weighted criteria against which each supplier’s responses to the questions contained in a request for proposal are analyzed and scored. The scores for all criteria are totaled to obtain an overall score for each supplier. After all suppliers’ responses are entered into the matrix, their total scores are ranked to identify the best overall competitive offering.
The first step in developing a decision matrix is to identify the appropriate criteria for comparison. It is helpful to provide a definition for each criterion or to associate each criterion to a question or questions within the request for proposal. Next, weights should be assigned to each criterion to denote the priority or importance of each, relative to the other criteria.
Following are some of the scoring methods that can be used.
Force ranking against other responses — Each response is scored against the other responses, with one response being the best, another second best, another third best, and so on. Each response receives a unique numerical score for the criterion (for example, only one response is scored “1” and one response is scored “2”).
Ranking against a baseline — Scores of +1, 0 and −1 are assigned according to how the response compares against a baseline or required response. A +1 score is given when the response exceeds the baseline, 0 if the response meets the baseline and −1 if the response does not meet the baseline. Variations on this scoring method may be used. For example:
1 = Significantly exceeds requirements.
2 = Marginally exceeds requirements.
3 = Meets requirements.
4 = Marginally meets requirements.
5 = Significantly does not meet requirements.
Depending on the level of granularity required to assess responses, the ranges can be increased (for example, a range of 1 to 7) to increase the degree of differentiation among suppliers.
Decision matrices are most effective when a cross-functional evaluation team reviews and scores supplier responses. Each member of the team should independently review the suppliers’ responses and complete a decision matrix. The members’ individual scores are then compiled into a composite score, which is used to rank the suppliers’ responses and to identify the supplier with the best overall competitive response.
2. Receiving, Controlling and Analyzing Offers
Because quotes may be received by mail, courier, fax, email or within an eRFX application, take the following steps to protect the integrity of the process:
- Record the time and date each submission was received.
- Review the submission for completeness, ensuring that all documents referenced by the supplier or requested by the organization are included.
- Retain all submitted documents from each respondent in the original bid package.
When all the responses have been received against a specific bid, or on the bid due date, review each response for clarity, and issue requests for clarification as necessary. After verifying that all submissions are complete and clarified, begin the response evaluation process. This process is typically predetermined before the RFQ or RFP is released to prospective suppliers. At a minimum, summarize the responses, noting the salient information in a comparison chart or spreadsheet. Analysis should include completion of a decision matrix and total cost evaluation.
3. Bid Offer Responsiveness
- Specifications/statements (or scope) of work — Perhaps the most critical task in evaluating suppliers’ bids is to ensure the quotation or the statement/scope of work meets the specifications and requirements as stated in the initial RFQ, RFP or RFI package. This is important for two reasons:
- The supply management professional must ensure the supplier’s response meets the specifications, requirements or statement of work (SOW) defined in the solicitation. If it does not, what are the implications of accepting the bid? Not meeting specifications or submitting an alternate SOW can have either a positive or negative effect on the buying organization’s business, and the integrity of the bid process. At best, it can alternate the design or service at a lower cost, which may be acceptable. At worst, it may cause quality concerns or it may not meet the minimum requirements defined by the buying organization. The supply management professional must ensure that: (1) suppliers are qualified to tender responses to the solicitation, (2) suppliers are responding to specifications and (3) any exceptions are acceptable to all concerned parties in the buying organization.
- To fairly evaluate all responses received, suppliers use a comparable set of specifications or a comparable statement/SOW. Otherwise, it is extremely difficult to determine which supplier offers the most competitive proposal.
- Quality requirements — As with the base specifications and SOW, suppliers must be aware of the quality requirements and all other Ts & Cs for the products or services within the initial solicitation package. In their responses, suppliers must acknowledge that they will meet these requirements. If a supplier makes exceptions, it is the supply management professional’s responsibility to ensure the buying organization fully understands the effect of each exception, and to determine whether alternative proposals are acceptable.
- Terms and conditions — Most solicitations include a set of contract Ts & Cs developed to address the risks and concerns related to the product or service being considered. Suppliers typically respond with alternative Ts & Cs to reduce their own risks. By including contract Ts & Cs in the solicitation, any contractual issues can be evaluated along with other aspects of the proposal.
- Product/service substitutions — Frequently, buying organizations will not consider an alternative proposal unless the supplier also submits a response for the specific product or service requested. The solicitation documents should clearly state whether product or service substitutions will be accepted and considered.
Analysis of Supplier’s Positions and Interests
Positions are the objectives that each organization seeks to accomplish in negotiation, and interests are the underlying motivations that drive those objectives. Analyzing the degree of the supplier’s desire for a contract, the supplier’s strategic position, the supplier’s financial condition, the supplier’s competitive position, and a cost/price analysis can help supply management professionals to better understand positions and interests.
Supplier’s Desire for a Contract. An important factor to evaluate before starting negotiations is the degree of desire the supplier has for selling to the buying organization. This depends on several factors. For example, if the supplier’s capacity is highly utilized it may not be interested in new business. Other factors such as the size of the order, the potential for additional future business, the opportunity to get into a new market, and the buying organization’s reputation as a customer all affect the supplier’s desire for the contract.
The supply management professional must investigate and ascertain if market conditions might be in the supplier’s favor, whether the supplier is in an industry with limited competition, or if the supplier has a patented feature or proprietary technology, potentially making the supplier unwilling to agree to certain requirements. The reverse of these factors can work in supply management’s favor. An adequate supply and plenty of competition may motivate the supplier to make a higher number of concessions. The supplier’s desire for a contract and its perceived certainty of getting it will affect the supplier’s willingness to make concessions.
Supplier’s Strategic Position. To understand the supplier’s strategic position relative to the supply market, it is important to know the market, the supplier, and the product or service. Is the market tight or is supply plentiful? Are supply or demand likely to go up or down in the short or long term, and is the supplier a leader within the industry or a follower? Is the supplier positioning itself for a global expansion and, if so, for what strategic reasons? For example, the supplier may be reshoring to reduce logistics costs and delivery time. Questions can be raised about the supplier’s technological status, such as whether its product or service is likely to be replaced by more innovative products or services or if new suppliers are entering the industry.
Supplier’s Financial Condition. The supplier’s financial condition such as its cash flow, debt load, and other financial indicators should be assessed. The supply management professional must be able to interpret financial statements within the context of the supplier’s industry and be able to note the changes in financial statements over time. For public companies, annual reports and 10-K reports can provide insight into financial condition. Typically, accounting and financial staffs can assist in the evaluation of a supplier’s financial condition. Suppliers in strong financial conditions may be less likely to agree to contract terms that are unfavorable to them. At the same time, these suppliers have lower financial risk and thus bring more credibility to the negotiations regarding their ability to fulfill contractual agreements. A financially weak supplier may have cash flow problems that could prevent it from paying its suppliers, which could result in a supply disruption. If volumes are forecast to increase, a financially weak supplier may not be able to obtain credit to make investments and expand. In emerging economies, a supplier’s financial condition should be closely monitored, and a mitigation and recovery plan is needed to minimize the risks of supply interruption.
Supplier’s Sources of Strength. Finally, the negotiation power of a supplier can come about in several different ways: The supplier may be the only source for a commodity or service, or it may operate in a limited competitive market where there are only one or two capable suppliers. The supplier may own a patented design or feature, or merely be the closest producer in terms of proximity from a transportation standpoint. The supplier may offer a higher quality product, possess an excellent reputation for service provision, have better engineering support, or have the best production capacity for the supply management professional’s needs. The supplier also may be the only supplier willing to deal with a small volume. Additional sources of bargaining power for the supplier are superior customer service, low reject rates, comfortable payment terms, and a record of on-time delivery performance — whether it is for services or for products.
4. Cross-Functional Analysis
Supply management should actively involve a cross-functional team comprised of representatives from appropriate functions (engineering, manufacturing, materials control, operations, and other using departments) in the analysis of the bid. This is a natural extension of involving these departments in the initial definition and design of the specifications or statement/SOW.
- Internal stakeholder alignment — For the sourcing project to be effective, internal stakeholders must agree with the evaluation and its outcomes. Working collaboratively with internal stakeholders to develop and apply the criteria and weights, increases acceptance of the sourcing decision.
5. Operational Analysis
Operational analysis consists of evaluating the feasibility of the product or service to be purchased. Even when a supplier is clearly technically capable of the work, buying organizations often conduct operational analyses to verify the economics, ease of use, and functional feasibility of the product or service.
- Site audits — In a site audit, a team of representatives from the buying organization, typically a cross-functional team, visits the potential supplier’s operation to better understand the supplier’s capabilities, and to collect additional information about the supplier that is not easily obtained through written proposals. This is important whether the supplier is domestic or international. The supply management professional should provide advance notice of the site audit to the supplier, along with a list of attendees and their titles, and a detailed list of the specific aspects of the supplier’s operation the team want to see during the site visit. Site audits typically include evaluation of the following items:
- Facility — Organization and cleanliness of the facility indicate discipline and commitment to providing a safe workplace for employees. A facility’s cleanliness may affect quality, efficiency, and employee morale.
- Safety and security — Suppliers demonstrate commitment to their employees by providing a safe and secure working environment. A safe and secure environment is indicated by employee badges that are scanned for entrance to the building and to specific areas of the building. Access to any areas that contain confidential information or processes should be restricted to authorized personnel. Emergency exits should be clearly marked and visible for easy access in the event of an emergency. Employees who are working in hazardous areas or who are working with hazardous materials should be given appropriate protective clothing.
- Employee morale — Morale is most heavily influenced by upper management’s treatment of employees. Nearly all organizations have some number of employees who are not satisfied, but most employees should exhibit good morale. Morale impacts product or service quality, the supplier’s ability to meet deadlines, and operational efficiency.
- Compliance with child labor and human rights laws — Most organizations require that suppliers comply with all employment laws including minimum working age requirements as established by domestic and international governmental agencies. Visiting a supplier’s location provides the buying organization an opportunity to raise questions and obtain documentation relevant to the supplier’s compliance with minimum age requirements, as well as other employment practices such as excessive overtime.
Evaluation of Other Suppliers in the Supply Chain
There is ongoing debate on how much a buying organization should be involved in measuring the performance of upstream suppliers. However, quality, delivery, or financial problems at second- or higher-tier suppliers can result in problems for the buying organization. In part due to the increasing focus on reducing supply chain risk, some organizations are beginning to evaluate key second-tier suppliers. Concerns such as conflict minerals and sustainability require buying organizations to be able to trace the flow and ownership of materials throughout the entire supply chain.
Honda of America evaluates upstream suppliers in a systematic way. Honda has approximately 400 “core” suppliers, not counting indirect materials suppliers. Many of these core suppliers are second-tier and third-tier suppliers that supply strategic parts to Honda. These suppliers were chosen either directly by Honda or indirectly by the top-tier supplier that was given Honda’s core supplier list. The strategic importance evolved because of various considerations such as cost per part, standardization, intellectual property, and consistent quality. These core suppliers, regardless of their position in the supply chain, all receive a monthly scorecard from Honda.12
Conducting Supplier Site Visits
Site visits are often an important part of supplier evaluations, especially when sourcing new suppliers. To be effective, there should be a clear focus and reason for conducting site visits; the benefits should outweigh the costs; the site inspection team members should be carefully selected; and the factors evaluated at the site and timing of visits must be carefully planned. The findings from site visits should be well documented.
Site visits are especially important when suppliers are in emerging economies, which have higher levels of supply chain risk. When sourcing new suppliers, it is essential to confirm that the supplier has the capabilities to successfully fulfill the requirements and manage supply chain risk. In addition, with emerging economies there may be issues with sustainability and social responsibility. A supplier site visit allows your team to obtain firsthand knowledge of the supplier’s facility, work environment, logistics expertise, and operational practices such as quality control, organizational layout, operator training and attitudes, and inventory management. During the site visit, representatives from the buying organization can gain much information on the supplier’s technological capabilities, the education and training of the workers, the general culture of the supplier’s organization, and the working relationship between the workers and management. Some factors that are typically evaluated.
|Facility Condition||The “look and feel” of the facility provides insight into discipline, culture, management, financial condition, and safety.|
|Process/Material Flow||Business and operations process flows identify bottlenecks, excess inventory, and wasted movements, as well as other inefficiencies.|
|Employee Engagement||Employee morale, turnover, and involvement in improvements and decision-making impact quality, productivity, cost, and safety.|
|Measurement of KPIs||Use of performance metrics shows if the important attributes are being measured, used for decision-making, and used to guide performance improvement efforts.|
|Health and Safety||Ensuring that appropriate health and safety procedures are in place, so that employees are free from the occurrence or risk of injury, danger, failure, error, accident, harm, or loss (ISM Glossary 6th edition), is the buying organization’s social responsibility.|
|Labor Standards||It is also the buying organization’s social responsibility to ensure that suppliers throughout the entire supply chain uphold labor standards and worker rights as stated in the ISM Principles of Sustainability and Social Responsibility.13|
|ISM Principles of Sustainability and Social Responsibility||Supply management professionals should adhere to and ensure that their suppliers follow the 11 ISM Principles of Sustainability and Social Responsibility. These principles address: 1) anti-corruption, 2) diversity & inclusion, 3) environment, 4) ethics and business conduct, 5) financial integrity, 6) global citizenship, 7) health & safety, 8) human rights, 9) labor rights, 10) supply chain sustainability, and 11) transparency.14|
|Waste Elimination/ Continuous Improvement||Continuous improvement efforts provide insight into the capabilities of the supplier to improve performance in cost, quality, and delivery.|
|Information Security||Examine how data are stored, backup systems, system monitoring for potential breaches, and training to ensure that information is protected.|
|Regulatory Compliance||Determine how the supplier is monitoring compliance with applicable regulations and laws.|
|Adherence to Quality Management Systems||Suppliers should have documented quality management systems in place and should be following processes and procedures to ensure quality.|
|Organizational Changes||The team should also examine the changes that have occurred in the supplier’s leadership team. If key leaders have been with the organization for less than six months, then changes can occur that may affect performance.|
However, supplier site visits can be costly, so it is important to make sure that the benefits are greater than the costs. Costs include the team members’ time allocation, airfare, food, and lodging, so these costs need to be weighed against potential benefits. For example, unaudited suppliers with disorganized facilities, poor inventory management, insufficient capacity, and/or untrained workers eventually would lead to performance failures and negative consequences for the buying organization, such as line downtime, disruption in service delivery, or high recovery expenses. Further, if the supplier is not following appropriate sustainability and social responsibility practices, the buying organization’s reputation can be damaged and sales can be lost. For example, in 2013 a building collapse in Bangladesh killed more than 1,000 workers at a supplier apparel factory, raising serious concerns about the sourcing and supplier evaluation practices used by major retailers.15
Given the cost of site visits, it is imperative to carefully choose the members of the site visit team. The team should have cross-functional representation consisting of individuals from supply management as well as quality assurance, operations, and engineering. During sourcing decisions, site visits should be done after the initial supplier screening but before a sourcing decision is made. For ongoing supplier relationships, the frequency of supplier site visits depends on the level of supplier certification, and in general is commensurate with the supplier’s performance. A supplier with a high level of certification and a proven track record of performance does not need to be visited as often as an uncertified supplier without a track record. Timing of the visit is also important. Generally, visits should be scheduled so that normal operations can be observed. However, the supply management professional may choose to visit the supplier during its busy period just to see how the system operates under stress.
6. Cost and Price Analysis
A comprehensive cost analysis begins with an understanding of the suppliers’ industry and supply chains. This analysis should be completed prior to the solicitation in order to provide industrywide data on which of the competitive offerings will be evaluated. The analysis includes:
- Structure of the industry (such as monopoly or open competition).
- Market structure (such as global versus domestic).
- Cost drivers and price trends.
- Technology trends, and any barriers to entry by new competitors.
Cost or price analysis is frequently the most important element of the evaluation process. The analysis is often completed by the supply management function, sometimes with the involvement of finance or a cross-funtional team, or by using an engineering estimate. Several types of cost or price analysis may be applied, but generally only one method is used to evaluate a specific quotation.
- Price analysis methods — Price analysis is the examination of a supplier’s price proposal or bid by comparison with reasonable benchmarks, without examination and evaluation of the separate elements of the cost and profit making up the price (ISM Glossary 6th edition). Some form of price analysis is required for every purchase. Price analysis may be accomplished by analysis of competitive price proposals, comparison with catalog or market prices, comparison with historical prices, or use of independent cost estimates.
- Market benchmarking — Market benchmarking uses external data provided by peer organizations (to the extent possible without violating confidentiality or law) for comparison purposes. By using these data, you can compare such items as best practices, prices, supplier capabilities, use of technology, and salaries.
- Should cost — Should-cost analysis is defined as a cost modeling technique that estimates what the product “should cost” versus what the supplier may ask the customer to pay once the product or service has been defined. See Task 1-F-2-5 for more discussion of should-cost analysis.
- Profit analysis — To maintain good supplier relations, it is important that the buying organization provide the supplier with a reasonable profit to pursue the business in the first place, and to deliver future products or services. Analysis of costs versus profits is important to allow the supply management professional to assess the viability of the supplier and subsequently its quotation.
- Savings analysis — A savings analysis is an analysis of the actual or anticipated reduction in or avoidance of costs that an organization has achieved or may expect to achieve by comparing the current state or cost to a new state or new cost. Savings may be direct, as with lower prices paid, or indirect, in the form of, for example, increased efficiencies or improved productivity.
- Total cost of ownership — Price is just one element of total cost. Total cost of ownership is the combination of the purchase price of a good or service, and additional costs incurred before or after product or service delivery. Costs are often grouped into pre-transaction, transaction and post-transaction costs, or into acquisition price and in-house costs. To use cost of ownership analysis as a cost reduction tool, it is necessary to identify and analyze the cost drivers to look for any avoidable costs (ISM Glossary 6th edition). The total cost of ownership of a product or service could include transportation, duty, brokerage fees, cost of quality, cost of accounting practices, cost of late delivery, labor, and cost of customer support. Analysis of total cost provides a clearer picture of the complete financial implications of a purchase.
- Learning curve — At the outset of manufacturing a new product or delivering a new service, it is reasonable to assume the supplier will use extra time or material while learning how to produce the product or provide the service efficiently. As time progresses or as volume increases, the knowledge gained typically increases operations efficiency reducing costs. With this “learning curve,” the supplier becomes better able to offer more attractive pricing once a product is in production or a service is delivered.
- Life-cycle costing (LCC) — A life-cycle cost analysis is a tool that incorporates not only the purchase price of a piece of equipment, but also all anticipated operating and related costs over the life of the item, including maintenance, downtime, energy costs and salvage value. Prior to calculating costs in terms of net present value, the supply management professional must define the key operating cycle for the equipment as well as all other factors that affect costs. Life-cycle costing assists the supply management professional in evaluating equipment purchases with different initial purchase prices and different Operating costs over the useful life of the equipment.
- Cost analysis — Cost analysis determines the reasonable cost of a good or service based on an evaluation of actual or anticipated cost data (material, labor, overhead, general and administrative, and profit). The application of experience, knowledge and judgment are applied to the data to project reasonable estimated contract costs. Estimated costs serve as the basis for negotiation to arrive at mutually agreeable contract prices (ISM Glossary 6th edition). The estimated costs include both direct and indirect costs, including raw materials, manufacturing costs, labor, overhead, profit margin, freight and duty, research and development, sales administration, and any other key inputs to the good or service.
7. Offeror Capability/Offeror Responsibility
The supply management professional should review the following aspects of a supplier’s ability to meet the requirements of the contract should the supplier be awarded business by the buying organization.
- Past performance — The past performance of a supplier on similar jobs and the implications for its performance on future contracts should be carefully evaluated.
- Capacity and utilization of capacity — What is the supplier’s capacity and what is the utilization rate? Can the supplier take on additional business? Will the supplier have to outsource for increased capacity? What is the capacity within the supply chain? Which lower-tier suppliers, if any, are potential bottlenecks?
- Skills — What skills does the supplier need to manage the specific product or service in question?
- Integrity — What has been the supplier’s integrity and conduct in past business dealings?
- Time in business/market — How long has the organization been in this line of business? What track record and evidence of sustainability does it have?
- Certification, licensing and compliance — It may be necessary to verify that the supplier has appropriately documented certifications and licenses, and is complying with requirements. These might include “rights to use” for software or other intellectual property that is part of a proposal, or certification that the supplier’s facility has ISO 9000 or other certifications that indicate a certain level of quality, technical competence or other criteria.
- Financial factors — A variety of financial factors may influence the final selection of a supplier. When the supply management professional will require financial information for analysis, it is prudent to ask for the information in the RFP or RFQ.
- Reference or background check — Checking a supplier’s references provides additional information about the supplier’s performance. Suppliers will naturally provide references that will give positive feedback. It is critical to create a standard list of questions to ask each reference to maximize the information gained. Typically, these questions include the following:
- How long have you used this supplier?
- How do you rate the supplier’s performance in specific areas (for example, customer service, billing accuracy, reporting capabilities)?
- How well does the supplier understand your requirements?
- How do you rate your satisfaction with the supplier?
- What is the one thing you would change about the supplier?
- Would you do business with this supplier again?
In addition to checking references, depending upon the purchase, doing a background check on the supplier, and requiring background checks on key supplier employees, is important. Supplier background checks are especially important for global sourcing, and are used to confirm that the business is legitimate and complies with laws. Background checks on individual supplier employees are needed when they will be handling sensitive information or will be working on-site at the buying organization’s facilities.
- Management capabilities — The supplier’s management capabilities will affect the supplier’s performance. If you are planning on partnering or expect to work with the supplier over the long term, managerial capabilities should be evaluated. The specific types of capabilities depend on the type of purchase and the supplier’s role. A few examples of questions are:
- What are the vision, mission, and strategic goals for the supplier, and are they consistent with your organization?
- Do managers have the capability to plan, organize, and manage day-to-day operations?
- Do they understand quality systems and continuous improvement?
- Are they able to hire, train, and retain key employees?
- What are the skills and capabilities in the supplier’s supply management department?
- If growth is expected, does the supplier’s management team have the financial knowledge and project management skills to expand?
New Supplier Qualification Process
When considering using a new supplier, the supplier’s capability to meet the buying organization’s requirements is evaluated in a supplier qualification process. Supplier qualification is the “process of analyzing and approving a supplier for specific individual or types of acquisitions” (ISM Glossary 6th edition). The depth of the assessment done during qualification depends upon the type of relationship that is needed with the supplier.
To qualify a supplier that will be important to the organization, several major categories should be evaluated as summarized in Figure 10-1. A cross-functional team should be used for the evaluation process with key experts in each of the categories. When suppliers are being qualified, these categories should be evaluated in total; one category should not dominate the others. Also, the qualifying process must focus on systems-level issues as well as on the infrastructure and the integration of various elements within the supplier’s organization.
|QUALIFYING CATEGORIES||MANAGEMENT ISSUE||IMPLICATIONS FOR THE BUYING ORGANIZATION|
|Customer Communication/ Customer Relationship Management (CRM)||How well the supplier communicates with the supply management organization; the presence of a computerized CRM system.||Critical for maintaining a close working relationship and flexibility as operational and market conditions change.|
|Supply Chain Mapping||Whether the supplier maintains an active mapping of its supply chain; how deep in the supply chain this mapping extends.||How responsive a supplier may be in terms of planning and inventory management (for example, at which point in the supply chain it keeps the necessary inventory).|
|Quality Systems||Supplier’s historical record on internal and external reject rates; the presence of statistical process control; use of Six Sigma and process-capability indexes; service delivery performance.||Direct impact on the supply management organization’s quality in terms of its product, process, and service.|
|Logistics Systems||Use of warehouses and distribution centers; presence of third-party logistics organization; source of transportation services.||How well in terms of time and accuracy a supplier delivers goods and services and keeps the cost of transportation to a minimum.|
|Financial Analysis||Supplier’s financial stability measured in terms of its balance sheet, income statement, cost control history, credit ratings, annual reports (audited), 10-K reports (if U.S. public), and other financial reports.||Good indicator for supply management professionals in terms of where the supplier organization has been and where it is going.|
|Organization and Management||How well top management leads its workers and provides stability; how many layers of management the supplier organization has.||The fundamental infrastructure that affects supplier performance and the degree of opportunity to build a long-term, mutually beneficial relationship.|
|Labor/Management Relationship t||State of unionization; if unionized, its history of relationship; how management treats its workers in terms of benefits and compensation.||Serious impact on worker turnover and job satisfaction; social responsibility for the supply management organization.|
Third-party certifications are also considered when qualifying new suppliers. The amount of effort spent by the buying organization on qualification can be reduced based on these certifications. One of the most common certifications is based on the International Organization for Standardization’s ISO 9000 series, which describes standards for a quality management system (QMS) that address the processes surrounding the design, development, and delivery of a general product or service. ISO 9000 does not guarantee the quality of end products and services; rather, it certifies that consistent business processes are being applied.4
Similar to its approach for developing standards for quality management, the International Organization for Standardization (ISO) has developed a series of standards, ISO 14000, for environmental management.5 ISO 14001:2004 and ISO 14004:2004 provide a framework for developing and implementing an environmental management system (EMS), and build on the “plan, do, check, act” approach to continuous improvement.6
Third-party certifications are also used by buying organizations to ensure that suppliers meet the requirements for small, diverse, and historically underrepresented businesses. For example, MasterCard requires minority business enterprises to be registered with the National Minority Supplier Development Council (NMSDC) or governmental agencies.7
Evaluating Supplier Performance
Using the right metrics, measuring supplier performance effectively, and managing suppliers to improve their performance are critical to an organization’s success. Suppliers whose performance falls short of contractual requirements can cause poor customer service and operational problems. Poor supplier performance also can cause product recalls, result in the inability to fulfill service delivery requirements, create safety concerns, and lead to litigation. For example, quality problems with airbags supplied by Takata to 19 auto-makers resulted in loss of life, costly recalls and replacements, and millions of dollars in lawsuit settlements.8
Supplier evaluation is “the analysis of existing or new suppliers on the basis of key performance indicators such as technical quality, production capacity, delivery, service, cost, and managerial capabilities, which are included in the specifications or statement of work” (ISM Glossary 6th edition). According to Dr. Robert Trent (2010), “supplier evaluation is a business process that includes the methods and systems used to collect and provide information in order to measure, rate, or rank suppliers on a continuous basis.”9 Because organizational resources are required to develop, implement, and maintain effective supplier performance evaluation processes, many organizations do not thoroughly evaluate all their suppliers. Organizations such as Raytheon or General Motors may have tens of thousands of suppliers, when considering all of their direct and indirect purchases. Thus, organizations often use supplier segmentation to identify which suppliers to focus on for detailed performance evaluations. Typically, suppliers targeted for evaluation are those that account for the greatest amount of spend, create the greatest amount of risk, are strategically important, or have the greatest potential for improvement.
The key steps in the supplier evaluation process are shown in Figure 10-2. The first step in the supplier evaluation process is to identify the factors to evaluate. These should be consistent with the organization’s objectives and the requirements for the specific purchases from the supplier. A cross-functional team, which may include engineering, finance, supply management, quality, and manufacturing or service operations, often is used to identify the supplier performance evaluation categories.
Key Steps in The Supplier Evaluation Process
|Identify key supplier performance evaluation categories.|
|Weight each evaluation category.|
|Identify and weight sub-items within each evaluation category.|
|Define scoring metrics.|
|Review evaluation results.|
|Continuously review performance and provide specific improvement goals.|
Below lists the key evaluation factors that are instrumental in conducting an analysis of a supplier’s ability to perform and how these factors can be assessed during the performance evaluation process. For example, Colgate-Palmolive, the global consumer packaged goods company, measures it suppliers on quality, service, cost effectiveness, and innovation.
|FACTOR||QUESTIONS TO ASK|
|Capacity/Utilization||What is the maximum production or service capacity? How much of that capacity currently is being used?|
|Delivery||Does the supplier have sufficient facilities to deliver the required products or services on time? What is its inventory policy? Are there any backorders?|
|Quality||Is there evidence of a total quality management (TQM) philosophy? What evidence does the organization show in terms of quality leadership? Does it have a quality assurance program? What are historical internal and external reject rates?|
|Supply Management||Overall, how much of the supplier’s total cost of goods sold is coming from the supplier’s suppliers? How much of what is being purchased will come from those suppliers? How is the supplier managing its suppliers? What type of supplier evaluation process is used?|
|Cycle Time/Lead Time||What is the time it takes to complete a process such as order fulfillment, production, or inventory replenishment? This affects the supplier’s flexibility and responsiveness. How would an advanced scheduling notice improve them?|
|Productivity||What is the supplier’s present productivity? Given that productivity is defined as the ratio between output and input, what is the likelihood of increasing output by keeping the same input and decreasing input by keeping the same output?|
|Flexibility||How able and willing is this supplier to make changes? How does it handle last-minute changes? Does the supplier’s leadership have an open and flexible attitude?|
|References||Which organizations does the supplier list as references? What are their positions in their respective markets? Will they be willing and able to provide information on this supplier?|
|Technical Capabilities||Does the supplier have an enterprise resource planning (ERP) system? If so, what is it? If not, how will planning and communication take place? Can the supplier handle EDI or e-commerce transactions?|
|Breadth of Product Line||Does the supplier have the ability to make multiple items? Can it provide a variety of services? Does it have a flexible manufacturing system? If so, how well is it using the technology?|
|Customer/Prime Requirements||Can the supplier meet the product or service requirements? Is the product or service a core business for the supplier?|
|Financial Stability||What has the supplier’s financial performance been over the last three years? What are the trends? How is the supplier’s cash flow?|
|Labor Stability||What is the supplier’s employee turnover rate? Why? How does this compare with the industry? What effect does turnover have on the organization’s performance?|
|Business Continuity||Does the supplier understand its supply chain risks? Does it have plans in place to mitigate the risk of a disruption and recover if a disruption occurs?|
Supplier performance categories should be consistent with and support organizational objectives. For example, for high-growth companies such as Google and Facebook, innovation and responsiveness are likely to be more important than cost containment. Thus, supplier performance evaluation categories are often weighted based on their relative importance to each other. Further, several key performance indicators (KPIs) may be identified for each category. These may also be weighted based on relative importance. For example, in the category of delivery, KPIs might include percent of on-time delivery, order fill rate, and number of labeling defects. Some organizations rate suppliers’ performance on the KPIs using a numerical scale such as 1 (poor) to 5 (excellent), or use color codes such as green (good), yellow (some concerns), and red (major concerns).
Suppliers’ performance ratings can be recorded and documented in a “supplier scorecard.” A scorecard is “a performance measurement and management document that records the ratings from a performance evaluation process” (ISM Glossary 6th edition). For instance, Bell Helicopter’s supplier scorecard reports on quality, on-time delivery, and cost performance.11 Supplier scorecards are used to compare performance across suppliers. A supplier’s scorecards and its efforts to make improvements are used to make decisions regarding future contract awards. Many companies also use the performance on a supplier scorecard to identify outstanding suppliers to recognize with supplier awards.
Today, many e-business solution providers and ERP systems offer packages to automate the process of evaluating supplier performance using scorecards. These systems keep the information in a central database and allow ready access to the data in a variety of formats. The scorecard is usually shared with each supplier, often in real time, using online supplier portals.