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Choosing a Supplier/Contractor Exemplification Essay


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

  1. 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.
  2. 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).
  3. 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.
  4. 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 Description Supplier ABC Supplier Z Supplier D
Cost The lifecycle cost of the project and the total cost or the products. Less lifecycle cost on both project and equipments. High lifecycle cost on equipments. High lifecycle cost on project and les lifecycle cost on equipments.
Quality Quality and durable products with spare parts and with a warranty of not less than 1 year. Offered 1 year warranty on both equipments and spare parts. Durable equipments and no warranty. Durable products without spare parts.
Time Timely delivery within 20 days of ordering. Delivery within 20 days of ordering. Delivery within 20 days. Ordering within 23 days.

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;

  1. Combine the internal systems of the business into a single system.
  2. Improve information transparency.
  3. 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 Description Supplier XYZ Supplier Y Supplier Z
Cost Provide project at affordable cost. Project cost at 40% less. Project cost at 30% less. No cost or price discounts.
Past performance More than a clientele base of more than 20 clients and experience on similar project. Has a clientele base of 40 clients and had done10 similar projects. Have a clientele base of 10 clients and no past experience on similar project. Clientele base of 20 clients and underperformed in 3 of the past 10 similar projects.
Technical capability Technical expertise and qualified personnel. Best technology, qualified team and 24 hour support team. Best technology, average qualified team. Average technology and average qualified team.

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;

  1. Safety
  2. 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 Description N suppliers M suppliers K suppliers
Managerial structure Well organized management structure with experience Well organized and experienced management. Management not well structured. Well organized and experienced management.
Client-supplier relationship Past client-supplier relationship Good relationship for the last 5 years No past relationship No past relationship

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

  1. Ease of use.
  2. Cost effective.
  3. Reliable.
  4. Less maintenance and less downtime.
  5. Interface with less requirements.
  6. High speed of processing.
  7. 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 Description T suppliers U suppliers V suppliers
Cost Project cost to be lower than projected Considerable cost Considerable cost Low cost
Time Reliable time frame Can do project within 3 months. Can do project within 3 months. Can do project within 3 months and 1 week.
Technical capability Ease of system usability, reliability and processing speed. Reliable system, user friendly and reliable speed of the system. Reliable system, system complexity and average processing speed. Reliable system, but very complex and not user friendly.
Financial stability Subsidies offered Government to offer subsidies Government to offers subsidies Financially stable.

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

  1. Low price
  2. 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 Description JY suppliers H suppliers L suppliers
Cost Project to be done at affordable cost Low project cost Low project cost High project cost
Technical capabilities Advanced technology to be used in the project. Use advanced technology. Not advanced technology used. Use advanced technology.

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.

Appendix

Fig 1.5 General evaluation criteria

Criteria Description
1. Tendered Price/Cost The net price (including discounts and freight charges) offered by the supplier.
2. Quality This includes supplier’s
  • Commitment to Quality.
  • Commitment to continuous improvement.
  • Ability to meet the product specifications.
3. Post purchase Service This includes supplier’s
  • Repair services.
  • Maintenance service.
  • Guarantees and warrantees.
4. Delivery The ability of supplier to meet specified delivery schedules.
5. Geographic Location Geographical location of the supplier.
6. Financial Position This includes supplier’s;
  • Staying power in the business.
  • Credit rating.
  • Bank arrangements.
  • Financial stability.
7. Production Capability The production facilities (type and condition of equipment, availability of proper production procedures, etc) and volume of production that can be handled by the supplier.
8. Technical Capability The technical capability includes supplier’s technical expertise (including research and development facilities) and infrastructure required for the technology.
9. Management and Organization The management systems in place within the supplier’s organization.
10. Position in the Industry Product leadership and the reputation of the supplier in the industry.
11. Client-Supplier Relationship The business relations with the supplier and the ease of communication between the client and the supplier.
12. Performance History The performance of the supplier on previous projects.
13. Client-Supplier Strategic Congruence Match between the goals and objectives and the cultural match.
14. Strategic Commitment and Attitude The willingness of the supplier to develop strategic relationship with the client and the desire of the clients business shown by the supplier.
15. Flexibility Flexible contract terms and conditions offered by the supplier.

Fig 1.6 Primary evaluation criteria

Criteria Description Other details
Financial evaluation
Price of the tender The price provision by the supplier or the contractor to accomplish the project.
Financial stability or capability The supplier cash flow, bank credits given to the supplier and loans.
Technical Evaluation
Management team The team structure of the project from the project manager to other team members.
Personnel The number of staff involved. The team or personnel skills ore experience. Is the team dedicated?
Proposed work structure Work breakdown structure.
Time schedule Project or work piece deadlines.
Work control:
  • Safety
  • Risk management
  • Environmental practices
Most projects such as constructions and IT projects, environmental and factors of safety must be considered. In addition, risk management must be determined in the safety of such projects.
In IT projects, safety is considered along with security management, especially in developing software’s and hardware’s.
Quality assurance The whole project process must maintain quality standards. These standards must be evidenced in deliverables and in documentation.
Documentation content Documents to show details of project levels. The documents must be precise and comprehensive.
Communication levels Communication evaluation required. The evaluation of communication focuses on skills of the supplier, understanding of the contract requirements and supplier selection participation process.
Commercial evaluation
Contractual and commercial terms Evaluation of the project period in terms of warranty period and insurance.

Fig 1.7 Secondary evaluation criteria

Criteria Description Other details
Current workload The number or list of projects to be done by the supplier.
Geographical area of operation Evaluation of whether the location affects client-supplier interaction, communication and work performance.
Performance in similar and past projects Evaluation of the supplier past performance in similar projects. Evaluation to use references from other clients.
Area of specialization Evaluation whether the project is the supplier’s area of specialization.
Management expertise Evaluation on supplier’s experience and expertise on project management.
Interview Importance to enhance supplier-client relationship. The criteria essential if the supplier and client are meeting for the first time.
Sub-supplier reliability If there is a sub-supplier, reliability should be confirmed.
Flexibility Evaluation of the supplier’s agility and re-activeness to changes in the project.
Safety Safety and risk management policy by the supplier. Safety procedure to be determined by the nature of the project.
Respect for other people Does the supplier accommodate diversity at the place of work does the supplier respect the client and vice versa.

References

Coyle, J, J, Langley, C, J, Gibson B, J, Novack R, A & Bardi, E, J 2008, Supply chain management: A logistics perspective, Cengage Learning, Connecticut.

Feinstein, A, H & Stefanelli, J, M 2007, Purchasing: selection and procurement for the hospitality industry, volume 1, John Wiley & Sons, New Jersey.

Kleemann, F, C, An evaluation of supplier selection methods in strategic procurement, GRIN Verlag, Berlin.

Mendoza, A 2007, Effective methodologies for supplier selection and order quantity allocation, ProQuest, New York.

Monczaka, R, M, handfield, R., B, Guinipero, L., C Patterson, J., L 2010, Purchasing and supply chain management, Cengage Learning EMEA, Connecticut.

Monczka, R, M 2000, New product development: strategies for supplier integration, ASQ Quality Press, New York.

Moser, R, 2007, strategic purchasing and supply management: a strategic-based selection of suppliers, Springer, New York.

Parmenetr, D 2011, Key performance indicators: Developing, implementing and using wining KPIs, John Wiley and Sons, New York.

Sollish, F & Semanik, J 2012, The procurement and supply manager’s desk reference, John Wiley and Sons, New Jersey.

Weele, A, J 2009, Purchasing and supply chain management: analysis, strategy, planning and practice, Cengage learning EMEA, Connecticut.

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