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.
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.
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.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.
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.
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.
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.
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. 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.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. 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?
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 .
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