- Comparability — To provide a common baseline for evaluating bids, all suppliers must receive the same information in the solicitation package. The buying organization must document the baseline for comparison and determine the evaluation criteria, which must be applied consistently across all bids received. If the organization provides additional information to suppliers during the solicitation process, it is important that all suppliers receive that information. Any clarifications requested by one supplier after the prebid meeting should be sent to all bidders.
- Fairness/business ethics — In a competitive bidding process, the assumption is that the business will be awarded to the supplier providing the lowest total cost or the greatest value to the organization. Supply management has the responsibility to the organization to award the business to the supplier that most closely meets the organization’s requirements. Therefore, before the bid requests are issued, it is critical to confirm that all suppliers receiving the requests are qualified. All suppliers that submit quotes should be notified whether they are the successful bidder. Information submitted by a supplier to the organization as part of a quotation response should remain confidential, except when the law requires that the responses becomes public information.
- General format of solicitation — Generally, a solicitation for bids should include the following information:
- Complete specification of the item or an SOW of the service to be quoted.
- Quantity to be quoted.
- Where and when the items are to be shipped or installed, or where and when the services are to be performed.
- Due date for the quotation.
- Due date for the product or service.
An EOI, or expression of interest, may be issued as a preliminary step to a formal solicitation. An EOI will contain sufficient information from the above list, although not at the same level of detail, to allow an organization to decide whether it wants to submit a bid.
4. General format and content requirements for responses — Solicitations should include instructions explaining how the supplier should submit responses and, if required, the format that responses are expected to use.
5. Fair response time — When stipulating the response time, the supply management professional should consider the analysis and bid preparation process required by suppliers. The organization should not make the response time so short that it eliminates potential suppliers. RFQs and IFBs normally have opening dates, while RFPs have closing dates. The supply management professional should consider the complexity of the bid, the timing constraints within the buying organization, and the number of bids concurrently issued to the same group of suppliers.
6. Solicitation timeline and milestones — The RFx should include the timeline for the solicitation, including release date, bidders conference if planned, due date, and expected time frame for contract award. In addition, key milestones for the supplier’s deliverables should be provided in the solicitation documents.
7. Evaluation criteria — The RFx should describe the criteria that will be used to evaluate the suppliers’ bids or proposals. This is important because it helps suppliers understand the types of information to include. If the criteria are weighted, the weights should be included.
8. Inclusion of potential contract and terms and conditions (Ts & Cs) — Solicitation packets should include a copy of the potential contract and Ts & Cs, giving suppliers an opportunity to review them, understand them prior to the award of the contract, and a chance to indicate whether any Ts & Cs are not acceptable. If this is the case, the supplier can provide alternate language for consideration by the buying organization.
Evaluating Competitive Offerings in Procurement and Supply Chain Management
After supplier proposals or bids have been received, they must be reviewed to ensure they meet the specifications and requirements outlined in the solicitation. If any discrepancies are found they must be communicated to all key internal stakeholders to see if the differences are acceptable. Not meeting specifications or submitting an alternate statement of work can have either a positive or negative effect on the supply management professional’s business. At best, it can result in an alternate design or service at a lower cost, which may be acceptable to the internal stakeholders. At worst, it may cause quality concerns, or it may not meet the minimum requirements defined by the buying organization. Supply management professionals have the responsibility to ensure that (1) suppliers are quoting to specification, or (2) the quoted exceptions are acceptable to the entire organization. To fairly evaluate all the quotes received, suppliers must quote based on a comparable set of specifications or a comparable statement of work. Otherwise it is extremely difficult to determine which supplier offers the most competitive package.
Buying organizations often will not consider an alternative proposal unless the supplier also has quoted the specific item or service requested. In addition, presale technical service is offered by some organizations as a part of the quotation process, particularly when technical products or services are being purchased. Supply management professionals must ensure that their organizations do not take unfair advantage of suppliers offering presale technical assistance prior to award. Acceptance of more presale service than is customary in the industry may obligate the organization to more than is anticipated.
Most solicitations include a set of contract terms and conditions (Ts & Cs) that the supply management professional has developed to match the risks and issues related to the product or service being purchased. Including Ts & Cs in the solicitation allows the supply management professional to consider contractual issues along with other aspects of the evaluation. Suppliers typically respond with alternative language in Ts & Cs to reduce their own risks. Thus, the Ts & Cs must be carefully reviewed during the supplier evaluation process.
Supply management professionals should check the supplier’s references from both past and present customers. For example, many buying organizations not only ask for references from existing customers but also from any customers that have ceased doing business with the supplier in the past year. These buying organizations prefer to speak with customers that have decided to take their business elsewhere.
For major purchases, a cross-functional team with members from key stakeholder departments collaboratively determines the appropriate supplier selection criteria and weights. The stakeholder departments differ depending upon the type of purchase. For example, for a component that is used in manufacturing a product, the internal stakeholders may include operations, process engineering, design engineering, quality, sales and operations planning, inventory management, and receiving. The team members carefully evaluate each supplier’s offer relative to the selection criteria. This helps to ensure that all stakeholders are aligned with the sourcing decision.
Categories of Selection Criteria.
Generally, with the exception of routine purchases, choosing the best supplier involves evaluation of many factors. Selection criteria range widely in scope and number. Major categories of supplier selection criteria are summarized in Figure 4-3. These can include (1) financial conditions, (2) consistency in quality and delivery performance, (3) nature of relationship, (4) operational capabilities and flexibility, (5) technological capability, (6) service, (7) continuous improvement capabilities, (8) total cost of ownership, (9) transportation and logistics, (10 ) information security, (11) supply chain risk, and (12) managerial capabilities.8 The solicitation must ask that the supplier provide information to allow key factors to be evaluated. In some cases, supplier site visits will be done to gather in-depth information about important categories.
|Financial conditions, profitability of supplier, financial records disclosure, performance awards
|Conformance quality, consistent delivery, quality philosophy, prompt response
|Long-term relationship, relationship closeness, communication openness, reputation for integrity
|Product or service volume changes, short setup time, short delivery lead time, conflict resolution
|Design capability, technical capability
|After-sales support, sales representative’s competence
|Incremental improvement, product or service reliability
|Total Cost of Ownership
|Purchase price and additional costs incurred before or after product or service delivery
|Transportation and Logistics
|Costs of shipping, packaging, customs, and risk of loss. Depends upon Incoterm® for international shipments.
|Processes and procedures used to ensure all information in paper or digital form is secure
|Supply Chain Risk
|Likelihood and impact of disruptions and other risk
|Strategic goals as well as the ability to plan, organize, and manage all aspects of their operations
Source: Adapted from T.Y. Choi and J.L. Hartley, “An Exploration of Supplier Selection Practices Across the Supply Chain,” Journal of Operations Management (14:4) 1996, 333-44.
Some additional factors that should be considered depending upon the purchase situation are:
- Past performance — The past performance of a supplier on similar jobs and implications for performance on future contracts should be carefully evaluated.
- Capacity — Determine the supplier’s capacity to take on additional business.
- Skills — Learn whether the supplier has the skills needed to provide the specific product or service in question.
- Integrity — Review the supplier’s integrity and conduct in past business dealings.
- Time in business and market — Research the length of time in business as well as the supplier’s track record and evidence of business sustainability.
- Certification and licensing — Verify that the supplier has the appropriately documented certifications and licenses. For example, these could include ISO 9000 or ISO 14000 certification or “right to use” for software or other intellectual property that is part of a proposal.
- Business continuity plans — Business continuity planning (BCP) is an ongoing and comprehensive process for ensuring the continuity or uninterrupted provision of operations and service, including risk or contingency planning, disaster planning, disaster recovery, business recovery, business resumption, and contingency plans (ISM Glossary 6th edition). The plans address how an organization will resume partially or completely interrupted critical functions within a predetermined time.
Multi-Attribute Evaluation Tools.
Typically, some of the factors that make up the set of supplier criteria will be more important than others. To support the supplier selection decision, supplier proposals may be compared using a decision matrix such as a weighted point method. To use this method, the key supplier attributes are identified and these are weighted relative to each other, usually in a percentage that adds up to 100. Then, each supplier is rated on each attribute. Supplier ratings can be relative to a baseline. For example, 0 is the baseline, +1 exceeds the baseline, and -1 is below the baseline. Another approach is to use a scale of 1 to 5 or 1 to 7, with the higher score being the better performance on the attribute. The final step for each supplier is to multiply its rating on each attribute by the weight for the attribute to get a composite score. An example of a weighted point method model is shown in Figure 4-4. Based on this method, Supplier A — which has the highest composite score — should be selected.
Figure 4-4: Example of Weighted Point Method
|RATING SUPPLIER A
|WEIGHTED SCORE A
|RATING SUPPLIER B
|WEIGHTED SCORE B
Rating: 1 worst to 5 best
Solicitation Evaluation Process in Procurement and Supply Chain Management
A standardized process should be used to manage supplier bids. The time and date that each bid is received should be recorded. The bids should be reviewed for completeness, and any areas that need clarification should be noted. The supply management professional should prepare a brief summary of the bids on a chart or spreadsheet. Each situation should be handled in the manner best suited to the circumstances at hand, but a common process framework can be applied. The extent and focus of analysis for supplier selection depends on factors such as risk and spend level. The evaluation of a supplier offer to provide office supplies is likely to be relatively simple and focus on price, breadth of product line, and delivery speed. A supplier offer for design and engineering services is likely to undergo a much more extensive evaluation process. For engineering services, technical capabilities, past experience, and reputation are likely to be very important. Five types of analysis that may be used to evaluate supplier proposals are: technical analysis, operational analysis, price analysis, cost analysis, and risk analysis.
Technical analysis involves determining if the supplier’s proposal will satisfy the specifications or statement/scope of work. Supply management professionals should actively involve the engineering, manufacturing, materials control, operations, marketing, and other internal stakeholders in the technical analysis of the bid.
Operational analysis consists of evaluating the feasibility of the product or service being purchased. Though a supplier may be technically capable of accomplishing the work, organizations often conduct an operational analysis to verify the economics, ease of use, and functioning feasibility of the product or service.
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). Prices are compared with competitive price proposals, catalog or market prices, or historical prices, or independent cost estimates are used.
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). Typically cost analysis will be done by a cross-functional team. At the outset of manufacturing a new product or delivering a new service, the supplier may use extra time or material. As time progresses or volume increases, the “learning curve” allows the supplier to reduce costs and offer more attractive pricing. For capital equipment purchases, life-cycle cost analysis determines the net present value of the purchase price and all anticipated operating and related costs over the life of the item, including maintenance, downtime, energy costs, and salvage value.
To maintain good supplier relations, it is important to provide the supplier with a reasonable profit to pursue the business in the first place, and to continuously deliver future products or services. Analysis of costs versus profits is important to assess the viability of the supplier and, subsequently, its quotation. The total costs of ownership must also be considered. In addition to purchase price, other costs associated with selecting a supplier may include acquisition expenses, transportation, duty and brokerage fees, costs of quality programs, accounting costs, late delivery, warranty, service, and customer support. Analysis of the total cost provides a clearer picture of the complete financial implications of a purchase and can help to identify immediate cost savings or cost savings from increased efficiencies over time.
Risk analysis is the process of identifying risk elements or factors and determining the probability that their occurrence could lead to injury, damage, loss, or failure (ISM Glossary 6th edition.). Assessment of risk can be measured both internally (within the organization) or externally (within the marketplace). When evaluating suppliers, the sourcing team must identify the risk, assess its likelihood of having an impact on the buying organization if the potential risk was to occur, and develop mitigating actions to avoid the risk if the supplier is selected. While some risks from the item characteristics or the supply market will likely be the same across suppliers, others are supplier-specific and should be carefully evaluated during the supplier selection process. These include:
- Capacity constraints — Suppliers may not be able to meet demand for goods and services due to their own internal constraints if buying organizations cannot forecast accurately or if demand for a good or service grows unexpectedly.
- Inability to reduce cost — Supplier’s fixed costs may prevent them from reducing costs further. Sustainable price decreases must be accompanied by efficiencies in the supplier’s operations.
- Incompatible information systems — Difficulties in communicating between the buying organization and supplier due to information systems difficulties may result in the inability to share key information, which impacts the supply chain.
- Information security — Suppliers many not have processes in place to protect information.
- Quality problems — Suppliers that cannot consistently meet quality requirements for the goods and services they sell are at risk of losing customers and may find it difficult to attract new customers, which can lead to the supplier discontinuing operations.
- Unpredictable cycle times — Volatile cycle times create forecasting errors in the supply chain and can cause a buying organization to underbuy or overbuy products and services.
- Volume and mix requirement changes — Volume and product or service mix changes place a supplier at risk for not responding to customer requirements; risk is further increased when other characteristics such as capacity constraints, limited production or service flexibility, volatile cycle times, and inaccurate forecasts are present.
- Inventory management — A supplier’s difficulty in managing raw materials, work in process, finished goods, and materials needed to provide service all contribute to supply risk.
- Financial health — A supplier with poor financial health, such as limited cash flow, may have difficulty paying invoices on a timely basis, which can impact supply and the supplier’s overall operations.
- Disasters — Acts of nature and other unplanned events can negatively impact a supplier’s ability to provide goods and services.
- Legal liabilities — Suppliers may be subject to legally enforceable restrictions, such as patent and trademark infringements, which may prevent the sale of their goods and services.