Executive summary
Many business organizations now prefer outsourcing most of their operations to contractors. This is normally done through the procurement department in what is known as supplier selection process (Monczka, handfield & Guinipero, 2010 p. 163). This decision making process involves choosing a supplier or a contractor who best suits to offer the underlying process (Kleemann, 2012 p.4; Coyle, Langley & Gibson, 2008 p. 586).
This paper tries to give an insight into the supplier selection process using various examples. First, the paper uses a literature review to give an oversight on supplier selection process. The literature review discusses the importance of criteria in the supplier selection process, the client’s or project’s priorities and key performance indicators.
Various examples of critters and known key performance indicators are highlighted in the paper.
As indicated the paper gives an example of 5 projects, each with its priorities, and criteria evaluation. The examples also highlight important aspects of supplier selection such as the nature of the project, the project duration and the project value.
In conclusion, the paper summarizes important aspects of the supplier selection process in a general perspective.
Literature review
It is true that many business organizations now prefer outsourcing most of their operations to contractors. In this aspect, the procurement function in these organizations has taken a new role of outsourcing these contractors. As a new business concept, the procurement function is engaged with other major managerial functions in a tedious decision making process.
This decision making process involves choosing a supplier or a contractor who best suits to offer the underlying process. However, the overall decision lies with the procurement function. Basically, this process is formally known as the supplier selection process. The supplier selection process is a very sensitive aspect, since it entails committing organizations resources that may affect the overall performance of the organization.
In most cases, the supplier selection process is preferred for major organizations projects that require specialized expertise. By not being careful in the supplier selection, an organization can underperform in a project and therefore not achieve its project goals.
Therefore, it is important to have certain criteria under, which suppliers are evaluated before a contract is issued. A list of criteria against which suppliers are select is usually availed by the procurement function (Moser, 2007 p. 11; Mendoza, 2007 p. 22). However, these criteria must be consistent with the project’s goals. In addition, these criteria should also supplement the project’s priorities. This means that the selected supplier must be able to meet certain criteria or standards that achieve the pre-determined priorities.
It is important that during the formulation of the supplier selection criteria, due consideration must be given to the nature of the project. Some criteria cannot be applied to certain projects or industries. There are situations that make the client base the supplier selection on aspects of the industry, the objectives and the project risks.
Some of the widely known criteria used in the supplier selection include cost, quality of the service or the product and time (Feinstein & stefanelli, 2007 p.283; Monczka, 2000 p.57). Key performance indicators for cost entails the total cost of product or service delivery, the average market cost of the product or service or discounts by the supplier.
Key performance indicators for quality by the supplier will include quality standards, knowledge on product specifications and a quality continuous improvement policy (Weele, 2009 p.130; Parmenetre, 2011 p.87). The criteria on time will be determined and evaluated on the delivery time of the products and services required in the project.
However, the performance to these specifications will be exhibited by supplier’s time schedule on how to deliver the products. In other instances, criteria such as the location of the supplier and the supplier’s financial capabilities are also included in the suppliers’ selection criteria. A strategic location of the supplier is required for timely deliveries.
Key performance indicators that can be used to evaluate supplier’s financial capability include market dominance, considerable crediting from banks, profitability and financial stability. The flexibility of the supplier in meting the standards and achieving the goals of the project is also termed as criteria.
The flexibility of the supplier can be indicated by how well the supplier is able to meet the terms and conditions of the contract without bureaucracy. Another common criterion is the commitment of the supplier towards the project and past performance of the supplier on similar projects.
The supplier’s commitment towards the project can be exhibited by the desire of the supplier to offer additional services to the client such as post-service consultations to the client. Another indicator is the supplier’s performance on other clients’ projects. The technical ability or technology used to deliver products and services can also be used as criterion.
Key performance indicators for technical capability of the supplier entail research and development facilities, modern communication technology and a technical support team. In addition, the organization structure, especially the management structure of the supplier is a major criterion.
This criterion’s performance indicator may be evaluated by a well organized organization structure with the organization hierarchy well stipulated by a chart of the organization structure. The most important criteria that the client should always consider are the business relationships that exist between the client and the supplier.
This criterion’s key performance indicator is the communication channels that exist to ensure there is constant communication between the supplier and the client. In most cases, preferred communication methods include the email and the use telecommunication handsets.
The above criteria used in the supplier selection are multiple, but are universally applicable. Considering the projects that will be discussed in this paper, the above criteria and key performance indicators are applicable for the projects. Moreover, they give an insight on how supplier selection should be done.
The use of the multiple criteria and their key performance indicators is to provide the discussed projects, with at least two or three criteria that supplement the projects priorities. In most cases, projects have common or standard priorities such as cost, quality and quick delivery.
In so doing, criteria that focus on the above priorities will be unavoidable. Another factor is that most suppliers are not necessarily capable to meet all the mentioned criteria. Thus, the various mentioned criteria cushions the gap created between selection criteria and project priorities.
Below are supplier selection examples for 5 case studies.
Case 1
Client: A-Z hospital
Supplier: ABC hospital management group
Project nature: to supply medical equipment
Project value: 200 million Dirham annually.
Project priorities
- Less lifecycle cost: the project is to be done at a cost of not more than $50 million. Most of the project budget will be financed by the company.
- On time delivery: the project is to be completed within 20 days. The supplier is to ensure the equipments are delivered 20 days after the issuance of the local purchase order (LPO).
- Warranty: the medical equipments must have a warranty of not less than 1 year. This means the products must be of high quality and damages caused to equipment before the expiry of the warrant will be returned to supplier.
- Availability of spare parts: all medical equipment supplied must be accompanied by spare parts.
Supplier selection criteria
Open tendering was used to select the best supplier for the products. The open tendering was publicized in the local dailies by the A-Z hospital for a period of two weeks. The suppliers were required to send their request for proposal within one week. A total of 5 supplies sent their tender requisitions. The criteria to select the suppliers included cost, time and financial capability.
Three of the suppliers namely; Z, K & L did not meet the standards of cost and time. Z & L suppliers have a daily turnover over of transactions not exceeding 5,000, while ABC and D have a daily transactions of 10, 000 each.
ABC was selected as the best supplier, since it has the financial capability and it is able to deliver the supplies on time. Supplier D can only supply the equipments after 23 days. ABC Company also was able to meet the client’s priorities on equipment with a warranty, thus was able to pass the criteria on quality.
Fig 1.0 Comparison between criteria with suppliers’ performance during supplier selection
Criteria evaluation and gaps identification
As evidenced in the above case, most projects use at least two to three criteria in supplier selection. The criteria used are considerably effective in selecting a supplier among other four suppliers. On the other hand, the priorities of the client were met by the ABC key performance indicators on time, cost and quality.
However, the priorities were not specific. For example, the priority on warranty should have been quality products. Nevertheless, the supplier selection process is rational and meets the client and project expectations.
Case 2
Client: T Company
Supplier: XYZ trading company
Nature of the project: creating an ERP system to serve IT facilities, food business, furniture and financial aspects of a business.
Project duration: 2 months
Project priorities
The project uses the following as the priorities;
- Combine the internal systems of the business into a single system.
- Improve information transparency.
- Provision of a business intelligence solution.
Supplier selection process and criteria
The client advertised the project and invited supplier bids. A total of 20 bids were received and evaluated by the procurement department. During the supplier selection, the following criteria were used. The cost, past performance on the similar project and the level of technical capability were used as the supplier selection criteria.
The selection of the XYZ was based on the fact that the company has been in the business for a long period of time and has provided other companies with similar IT project solutions.
The company was able to provide the business with IT solution at 40 % lesser than any others supplier. The financial capability of the supplier makes it to have the best technical expertise on IT solutions. The company has employed the best IT experts, not to mention its 24 hour technical support team.
Fig 1.1 Comparison between criteria with suppliers’ performance on project
Criteria evaluation and gaps identification
Using bidding as a supplier selection method was considerable. The bidding selection give the client an opportunity to select the best supplier, considering IT industry is highly dynamic. Many organizations use IT as competitive strategy, thus a need to select the best supplier.
The selection criteria should have included other important criteria such as time, flexibility and supplier commitment other than cost, technical capability and financial stability. This is because supplying IT products and services requires dedication and commitment.
For example, the supplier must be willing to commit on offering support services and post-project services. However, there were no gaps between the supplier’s key performance indicators and the outcomes of the priorities. There is a high indication of a positive outcome, after analyzing the key performance indicators of the supplier.
Case 3
Client: ALU manufacturers
Supplier: N suppliers
Project nature: supplying safety equipment each month for 1 year.
Project duration: 1 year
Project priorities
The project as indicated by the client has the following as priorities;
- Safety
- Durability
Supplier selection process
The contract to supply the equipments was offered under the selective tendering method. The procurement department only selected the supplier that has been supplying the client with the equipments for the last 5 years.
The criteria used to select the supplier were based on the fact that supplier’s management had expertise on the supply of the mentioned equipments. Moreover, the client wanted a reliable supplier that can be trusted depending on previous client-supplier relationship.
Fig 1.2 Comparison between criteria with suppliers’ performance
Criteria evaluation and gap identification
The criteria used support the priorities of the project in a very effective manner. For example, the supplier has been a regular supplier of the safety items for the client. This means that the supplier knows the needs of the client better than any other supplier.
Moreover, there is evidence of trust between the supplier and the client, thus a sign of a good business relationship. However, there exists a gap as to how the supplier meets the durability standards. The criterion is unclear on how the supplier is to meet the priority.
Case 4
Client: EGOV
Supplier: T technology solutions
Nature of project: implementing ERP system to manage government resources.
Project duration: 3 months
Project priorities
- Ease of use.
- Cost effective.
- Reliable.
- Less maintenance and less downtime.
- Interface with less requirements.
- High speed of processing.
- Mitigating risk of system failure.
Supplier section process and criteria
The selection of the supplier was done from proposals of three prominent IT companies. A selective bidding was done to ensure that the best supplier who meets the pre-determined criteria was picked. The selection criteria involved cost, time, technical and financial capability. Supplier T was picked after being found credible on three most important criteria; cost, technical capability and timely delivery.
The supplier was able to offer its services at a lower cost than others. Its services were to be provided under a very reliable time frame and the supplier had the most technical IT capability. The financial criterion was not given much consideration, since the government was ready to offer subsidies to the contracted company.
Fig 1.3 Comparison between criteria with suppliers’ performance
Criteria evaluation and gap identification
The criteria used were to make sure that 95% of the projects priorities were met and achieved effectively. For example, the supplier technical capability was able to ensure that priorities on systems ease of use, system reliability, interface requirements, processing speed and system failure were to be catered for effectively.
On the other hand, the criteria on time ensured that the supplier was able to implement on time and ensure less system’s downtime.
Case 5
Client: JY telecommunication
Supplier: P telecommunication solutions
Project value: $ 3 million
Project duration: 11months
Nature of project: design a user-friendly and customized management information system
Project priorities
- Low price
- Adaptive system
Supplier selection process and criteria
The client used an open tendering process to select the supplier. By developing technical evaluation criteria, the supplier who had performance indicators with the highest score got the tender. This means the supplier was able to provide the client with the service at a minimal cost and with the best technical capabilities.
Fig 1.4 Comparison between criteria with suppliers’ performance
Criteria evaluation and gap identification
The supplier selection utilized the most effective criteria. However, certain parameters and performance indicators should be established as to why the supplier got the tender. The gap analysis is to detail the consequence of not meeting up the criteria parameters.
Conclusion
The above discussions are detailed examples of how important the supplier selection process is. From the examples, it is clear that there is no perfect method of supplier selection. Moreover, the paper gives insights on how the criterion is important in determining the supplier to be given the contract. It is also evident that each criterion must achieve certain goals. These goals are the client’s or the project’s priorities.
In order to ensure that the supplier achieves the project’s priorities, key performance indicators are sued to evaluate the performance of the supplier. The performance indicators are guides to ensure that the supply contract was viable and necessary. In deed, supplier selection process is a tedious one as well as sensitive. Every procurement manager would be held responsible for contracting dubious suppliers.
It is a matter of being entrusted by the client in ensuring that the organization’s interests are protected. Nevertheless, the supplier selection process requires continuous improvement to ensure that the process is flawless and engages the best suppliers.
References
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