SUPPLIER SELECTION AND EVALUATION

In today’s competitive sourcing environment, buying firms select suppliers based on their capabilities, and not purely on the competitive process. The current trend in sourcing is to reduce the supplier base. In order to select supplier who continually outperform the competition, suppliers must be carefully analysed and evaluated.

         

There are two main categories of supplier evaluation. There is process-based evaluations and performance-based evaluations. The process-based evaluation is an assessment of the supplier’s production or service process. Typically, the buyer will conduct an audit at the supplier’s site to assess the level of capability in the supplier’s systems. Process flow charts can be developed to identify the non-value-added activities that should be eliminated to improve the business efficiency.

          

Performance-based evaluation is an assessment of the supplier’s actual performance on a variety of criteria, such as delivery reliability, cost, and quality defect rate. It is a more tactical assessment and measures the day-to-day performance of the supplying firm. The performance-based evaluation is more common than the process-based evaluations, perhaps since objective data are readily available and easier to measure. Benefits of objective measurement schemes are that they reduce perceptual bias and provide a means of benchmarking a supplier’s performance.

       

The three general types of supplier evaluation system in use today are categorical method, the cost-ratio method, and the linear averaging method. In general, the guiding factors in determining which system is best are ease of implementation and overall reliability of the system. It must be pointed out that the interpretation of the result from any of these three systems is a matter of the buyer’s judgment.

          

The categorical method involves categorizing each supplier’s performance in specific areas as defined by a list of relevant performance variables. The buyer develops a list of performance factors for each supplier. It is also a simple and informal system in the sense that detailed performance achievement or shortcomings are not measured. Instead, it is mostly used as an evaluation tool between top managers in the buying organization and the selling organization.

            

The cost-ratio method evaluates supplier performance by using standard cost analysis. The total cost of each purchase is calculated as its selling price plus the buyer’s internal operating costs associated with the quality, delivery, and service elements of the purchase.

            

 The linear averaging method is the most commonly used evaluation method. Specific quantitative performance factors are used to evaluate supplier performance. The most commonly used factors in goods purchases are quality, service, and price.