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Supplier evaluation

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Supplier evaluation and supplier appraisal are terms used in business and refer to the process of evaluating and approving potential suppliers by quantitative assessment. The aim of the process is to ensure a portfolio of best-in-class suppliers is available for use. Supplier evaluation can also be applied to current suppliers in order to measure and monitor their performance for the purposes of ensuring contract compliance, reducing costs, mitigating risk and driving continuous improvement.

Process

Supplier evaluation and take-on is a continual process within purchasing departments, and forms part of the pre-qualification step within the purchasing process, although in many organizations, it includes the participation and input of other departments and stakeholders. Most experts or firms experienced in collecting supplier evaluation information prefer doing so using five-step processes for determining which to approve. Their processes often take the form of either a questionnaire or interview, sometimes even a site visit, and includes appraisals of various aspects of the supplier's business including capacity, financials, quality assurance, organizational structure and processes and performance. Performance generally includes quality and delivery: research by Valerie Stueland published in 2004 found that in her study of supplier evaluation, every example she reviewed used both quality and delivery as evaluation factors. Based on the information obtained via the evaluation, a supplier is scored and either approved or not approved as one from whom to procure materials or services. In many organizations, there is an "approved supplier list" (ASL) to which a qualified supplier is then added. If rejected, the supplier is generally not made available to the assessing company's procurement team. Once approved, a supplier may be reevaluated on a periodic, often annual, basis. The ongoing process is defined as supplier performance management.

Benefits and drawbacks

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There are various benefits associated with an effective supplier evaluation process such as mitigation against poor supplier performance or performance failures. The benefits typically include sourcing from suppliers that provide high standards of product and service levels whilst offering sufficient capacity and business stability. Supplier evaluation can help customers and suppliers identify and remove hidden cost drivers in the supply chain. The process of evaluating performance can motivate suppliers to improve their performance.

There are several other challenges according to the supplier evaluation.

To mitigate this, large corporations typically have a dedicated department (Procurement Department) that performs cost-benefit analysis to evaluate if the company should engage the vendor or perform the task in-house. Such a department can take a considerable amount of resources, thus management's commitment and support of a supplier evaluation process is essential.

Tools

See also: Procurement software

Some of the challenges associated with supplier evaluation may be mitigated by the use of appropriate tools. For simple projects a spreadsheet can be used. But as evaluations become more complex or more frequent data management and data integrity issues become significant. Web Electronic RFP / Tendering systems are often used for initial selection projects. Some products provide functionality for combining both initial selection and ongoing evaluation and benchmarking.

Within established procurement teaching, the Carter 10Cs model is one model in use. This model looks at ten aspects which can be evaluated before contracting with a business, to reduce the risks associated with supplier selection and as part of ongoing supplier performance appraisal. The ten Cs listed by Ray Carter are:

  • Capacity (does the organization have the capacity to deliver the order?)
  • Competency (are the organization, its people and its process competent?)
  • Consistency
  • Control of process (can the organization control its process and offer flexibility?)
  • Commitment to Quality (does the organization effectively monitor and manage quality?)
  • Cash (does the organization have a strong enough financial base?)
  • Cost (is the product or service offered at a competitive price?)
  • Culture (are the supplier and buyer cultures compatible?)
  • Clean (is the organization ethical, funded legitimately, does not engage child labor, etc.?)
  • Communication efficiency (does the organization have support technology of information integration to support collaboration and co-ordination in the supply chain?).

Financial Services

In the UK financial services sector, the Financial Services Supplier Qualification System (FSQS) is a collaborative due diligence system currently used for supplier evaluation by 29 major UK banks, building societies and insurance companies: Aldermore Bank, Allied Irish Bank, Arbuthnot Latham, Bank of England, Bank of Ireland, BNP Paribas Clydesdale Bank (including Virgin Money), Hastings Group, Lloyds Banking Group, LV=, Masthaven Bank, Metro Bank, Nationwide Building Society, NFU Mutual PCF Bank Royal and Sun Alliance, Rugby and Hinckley Building Society, Santander, Shawbrook Bank, Tokio Marine Kiln, TSB and Weatherbys Bank. The system is operated by Oxford-based company Hellios Information Ltd.

References

  1. Mahmoudi, Amin; Javed, Saad Ahmed (2022). "Probabilistic Approach to Multi-Stage Supplier Evaluation: Confidence Level Measurement in Ordinal Priority Approach". Group Decision and Negotiation. 31 (5): 1051–1096. doi:10.1007/s10726-022-09790-1. ISSN 1572-9907. PMC 9409630. PMID 36042813.
  2. Roylance, D. (2006), Purchasing Performance: Measuring, Marketing, and Selling the Purchasing Function, Gower Publishing
  3. Sherry R. Gordon (2008). Supplier evaluation and performance excellence: a guide to meaningful metrics and successful results. J. Ross Publishing. p. 232. ISBN 978-1-932159-80-6.
  4. Baily, P., Farmer, D., Jessop, D. and Jones, D. (1998), Purchasing Principles and Management, London: Pitman Publishing
  5. Robert M. Monczka, Robert B. Handfield, Larry Giunipero (2008). Purchasing and Supply Chain Management. Cengage Learning. p. 810. ISBN 978-0-324-38134-4.{{cite book}}: CS1 maint: multiple names: authors list (link)
  6. "An Investigation on the relationship for supplier performance metrics and supply chain strategies" (PDF). Singapore Institute of Manufacturing Technology. Retrieved 2011-03-21.
  7. Juhnyoung Lee (2006). Data engineering issues in e-commerce and services. Springer. p. 290. ISBN 978-3-540-35440-6.
  8. "Using effective supplier appraisal techniques to improve the supply chain. - Strategy squared". Archived from the original on 2019-03-28. Retrieved 2007-09-17.
  9. Stueland, V. J., Supplier Evaluations: Best Practices and Creating or or Improving Your Own Evaluation, 89th Annual International Supply Management Conference, April 2004, accessed 5 July 2023
  10. Varley, M., Retail Product Management: Buying and Merchandising
  11. Ray Carter MA MCIPS MCMI Cert Ed – Author of “Practical Procurement” “Practical Contract Management” and “Stores and Distribution Management” and creator of the 10 (c) model, accessed 18 March 2021
  12. Carter, R. The 10c Model, DPSS Ltd., accessed 18 March 2021
  13. Hellios Information Ltd., FSQS for Buyers, accessed 5 July 2023
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