Supplier selection is the first and arguably the most important step in building a sustainable global supply chain. This paper examines how the supplier selection criteria have evolved compared to the classic era of global business. The research goal is achieved through the examination of traditional selection criteria under Dickson’s model and their subsequent comparison to the modern-day standards developed by Toyota Motor Corporation.
Overall, it was found that traditional selection criteria, such as product quality, delivery, and price, are being put into a secondary role by sustainability, ethical, and reputational factors. The traditional factors alone are insufficient for becoming a supplier of a global company. Consequently, procurement professionals should evaluate the potential supplier’s sustainability and reputational profiles via one of the available decision-making frameworks in order to prevent damage to the corporate image. Likewise, managers of potential suppliers should consider prioritizing sustainability and reputational factors to attract the attention of global firms.
Introduction
Supplier selection is the first and most important step in building a reliable global supply chain. This multifaceted process includes several stages: potential supplier identification, screening, evaluation, analysis, and contracting (Chai and Ngai, 2020). Consequently, a global company should consider various criteria in order to solve a complex decision-making problem. The correct supplier selection lowers procurement costs, increases customer satisfaction, and improves competitiveness (Ersoy, 2017).
In contrast, a failure in supplier selection may lead to significant negative consequences, including but not limited to product quality deterioration, customer dissatisfaction, supply chain disruptions, and legal problems. The list of criteria for supplier selection has evolved over the last few decades. Previously, businesses prioritized pragmatic, practical criteria for supplier selection and evaluation. Gary W. Dickson conducted one of the first comprehensive professional surveys on vendor selection criteria in 1966 and found that purchasing managers consider product quality the most important factor in vendor selection (Ersoy, 2017).
The delivery factor closely followed the leading criterion in terms of importance; additionally, the purchasing managers valued the potential partner’s performance history and warranty policies (Ersoy, 2017). However, the focus shifted significantly throughout the 1990s-2010s as sustainability awareness increased (Schramm, Cabral and Schramm, 2020).
The growing importance of sustainability and corporate responsibility factors prompted corporations to consider social, environmental, ethical, and human rights concerns in the supplier selection process (Guarnieri and Trojan, 2019). This essay aims to confirm that sustainability, reputation, and corporate social responsibility have become the future top criteria for supplier selection.
The research goal mentioned above is achieved through four key objectives. Firstly, the classic supplier selection criteria outlined in Dickson’s survey are examined in detail. Secondly, the change in supplier selection standards is traced by examining Toyota Motor Corporation supplier guidelines. Being one of the modern automotive industry leaders, Toyota serves as a fine example of changes in the supplier selection process implemented by global companies. Thirdly, the essay discusses the sustainability and reputation factors in detail and describes various models and frameworks developed specifically for their evaluation.
Lastly, the findings on the top criteria for the supplier selection process are summarized in the conclusion section. The essay design and scope are not free from limitations — the analysis is mostly relevant for supplier selection in the automotive industry. However, this limitation does not undermine the primary goal of demonstrating the growing importance of sustainability and corporate reputation as factors for supplier selection in the future.
Discussion
The discussion section is primarily based on a comparison of the traditional and modern supplier selection criteria. The 1966 Dickson survey provides a baseline understanding of criteria valued by purchasing managers in the 1960s. Each of the extremely and considerably important criteria of Dickson’s model is defined in detail to develop a picture of priorities in the earlier era of global business.
Subsequently, the evolution is traced through the Toyota Motor Corporation Supplier Sustainability Guidelines analysis, which offers concrete examples of the fundamental paradigm shift in the supplier selection process. Finally, the growing importance of sustainability and corporate reputation is illustrated by describing models and frameworks designed specifically for their evaluation. The combination of these four parts allows to position sustainability and corporate reputation as the top priorities in the supplier selection process of the future.
Traditional Supplier Selection Criteria
The 1966 Dickson’s selection criteria survey revealed one extremely and seven considerably important characteristics of a reliable supplier. Product quality was considered the primary factor in the supplier selection process, followed by delivery, performance history, warranties and claims policies, production capacity, price, technical capability, and financial position (Ersoy, 2017). Taherdoost and Brard (2019) provided detailed definitions of these essential criteria. This information offers a solid understanding of how purchasing managers imagined a decent supplier during the earlier era of global business.
Quality
Quality, commonly defined as a supplier’s ability to meet quality requirements consistently, was a factor of extreme importance in the 1960s. The quality factor covers various features, including materials, durability, design, production quality, quality control system, and continuous improvement (Taherdoost and Brard, 2019). Since the quality of supplier’s products directly affects the quality of purchaser products, the emphasis on this selection criteria can be considered logical and justified.
Delivery
The delivery criterion covers all aspects related to production schedules. According to Taherdoost and Brard (2019), the list of production schedules includes lead-time, on-time performance, fill rate, returns management, location, transportation, and incoterms. The delivery schedule failures committed by the supplier can lead to disruptions of the purchaser’s supply chains and subsequent purchaser’s inability to fulfill its obligations to the other parties. In this regard, the importance of the delivery factor seems self-explanatory.
Performance History
The performance history criterion is quite broad since it is associated with various aspects of corporate activity. In particular, performance history covers the financial, economic, social, organizational, and social areas (Taherdoost and Brard, 2019). By considering the potential supplier’s performance history, a company can avoid potential financial and reputational losses, making it a valuable precautionary criterion in the selection process.
Warranties and Claims Policies
Even the suppliers with good quality standards are not entirely safe from manufacturing defects. Therefore, the purchasing managers paid special attention to warranties and claim policies. The former is related to the supplier’s guarantee to repair or replace the product within the specified period, while the latter covers compensations for losses sustained due to quality issues (Taherdoost and Brard, 2019). In this regard, the warranties and claims policies serve as desirable insurance for the purchaser.
Production Capacity
A supplier might ensure excellent product quality, meet all the delivery schedules, perform admirably in various areas, and offer lucrative warranties and claims policies. However, the supplier must also have a sufficient production capacity or be able to produce the necessary volume of products (Taherdoost and Brard, 2019). Otherwise, the supplier’s inability to meet the purchaser’s demand can completely negate the positive factors.
Price
The price criterion is simple to understand — the lower the price offered by the supplier, the better the competitiveness of the purchaser’s product. According to Taherdoost and Brard (2019), the price criterion includes unit price, pricing terms, exchange rates, taxes, and discounts. Whereas the importance of price is obvious, the purchasing managers did not place it higher in the list of priorities since the low price cannot compensate for poor product quality or long delivery time.
Technical Capability
The overall market competitiveness of the end product may depend on the suppliers’ technical capability. The technical capability factor covers the potential supplier’s ability to acquire new technologies and implement research and development practices (Taherdoost and Brard, 2019). Consequently, this criterion can be vital for the technological development, production cost efficiency, and subsequent price of the purchaser’s end products, especially in the high-tech industries.
Financial Position
Finally, the financial position criterion reflects the potential supplier’s reliability and status in the industry. This criterion covers such factors as sales volume relative to competitors, financial profile, and potential risks (Taherdoost and Brard, 2019). Overall, one can see that the traditional supplier selection criteria leaned heavily toward the economic aspects. Until the modern era, a good supplier was primarily supposed to meet the purchaser’s expectations on product quality, delivery schedules, price, and technical capabilities. Little attention was paid to sustainability and reputational criteria; however, the situation changed drastically in the last few decades.
Supplier Selection Criteria Evolution: The Case of Toyota Motor Corporation
The evolution of supplier selection criteria was related to significant changes in the global business landscape between the end of the 20th and the beginning of the 21st century. In particular, globalization, increasing customer awareness, environmental policies tightening, and the spread of eco-friendly technologies forced the companies to supplement traditional supplier selection criteria with sustainability aspects (Gupta, Soni and Kumar, 2019).
Additionally, the cases of human rights abuse and environmental damage stemming from production outsourcing to suppliers in developing countries have received increasing media coverage (Guarnieri and Trojan, 2019). As a result, global-scale firms had to include sustainability and reputation criteria in the supplier selection process in order to prevent potential damage to corporate image.
Toyota serves as a fine example of a global organization that redefined supplier selection procedure in accordance with the demands of the modern era. The traditional factors of the past have not been abandoned, as quality, delivery, cost, and technological capabilities remained among the company’s top expectations from its suppliers (Toyota Motor Corporation, 2021). However, the purely economic factors have been supplemented with a detailed set of sustainability and ethical requirements.
Regarding environmental sustainability, Toyota expresses a wide scope of demands for its potential suppliers. In particular, a candidate company must have an environmental management system, contribute to greenhouse gas emissions reduction, implement waste recycling practices, and lower its impact on the water environment (Toyota Motor Corporation, 2021). All these requirements serve the goal of establishing a global society in harmony with nature (Toyota Motor Corporation, 2021). This level of dedication to environmental sustainability was unthinkable in the previous era of business.
In addition, Toyota does not neglect the social aspect of sustainability, as it expects its suppliers to procure materials responsibly and contribute to local and global communities (Toyota Motor Corporation, 2021). This attitude sharply contrasts with traditional supplier selection criteria that barely cover the social contribution aspects.
In terms of ethical criteria, Toyota also holds its potential suppliers accountable to high standards. A specific part is dedicated to the expectations related to labor and human rights. In particular, the company states explicitly that its suppliers must not tolerate discrimination, child labor, forced labor, and harassment in any kind or form (Toyota Motor Corporation, 2021).
Furthermore, Toyota expects strict compliance with the competition, intellectual property protection, and anti-corruption laws (Toyota Motor Corporation, 2021). Overall, in Toyota’s example, one can see that sustainability and reputation have become essential in the modern-day supplier selection process, as the traditional criteria alone are not satisfactory from the global corporate image standpoint.
Sustainability as the Top Criterion for Supplier Selection in the Future
The growing importance of sustainability as an essential feature of potential suppliers found a reflection in academic studies aimed at developing models for sustainable supplier selection. For instance, Kannan et al. (2014) created a supplier criterion system for the Brazilian electronics industry by using a fuzzy multi-criteria decision analysis (MCDA) TOPSIS approach (as cited in Chai and Ngai, 2020, p. 11).
Guarnieri and Trojan (2019) developed a multi-criteria decision-making model (MCDM) for the textile industry, which considers social and environmental criteria. This model made it possible to group potential suppliers into sustainability commitment classes. According to Guarnieri and Trojan (2019), their model can be used by companies working with outsourced suppliers. This feature is especially beneficial for supplier selection in countries with common unsustainable or unethical business practices.
Social sustainability frequently requires contracting potential suppliers from countries with unfavorable labor conditions or unsustainable environmental practices. In this regard, using various MCDM and MCDA methods allows a global company to select more sustainable or ethical partners among the available options.
In addition, sustainability-related selection criteria can be combined with traditional criteria in order to achieve the optimal balance. For example, Gupta, Soni and Kumar (2019) developed an MCDM-based framework for green supplier selection in the Indian automotive industry, which incorporated traditional criteria such as price, quality, and service level. With the introduction of such frameworks in recent years, procurement professionals received an instrument that makes it possible to uphold sustainability values without neglecting the conventional features of a robust supply chain.
In this regard, one can see how sustainability gradually becomes a prioritized aspect of supplier selection procedure since decision-making models and frameworks become more oriented toward social and environmental sustainability criteria evaluation. Considering the evolution of supplier selection criteria and the direction of decision-making instruments development, one can claim that the impact of sustainability in the supplier selection process will only increase in the future.
The Growing Role of Reputation as a Criterion for Supplier Selection
In addition to social and environmental sustainability criteria, it is necessary to acknowledge the increasing impact of corporate reputation in the supplier selection process. The supplier’s reputation can be perceived as a two-dimensional concept. Firstly, reputation is related to the organization’s compliance with ethical guidelines and legislation. Global corporations have been increasingly adopting this measurement of corporate reputation, which one can see in the case of Toyota.
A significant portion of Toyota’s official sustainability guidelines for suppliers is dedicated to the company’s expectations in regard to labor, human rights, and anti-corruption legislation (Toyota Motor Corporation, 2021). Therefore, a candidate for a global firm’s supplier position must fulfill these reputational expectations. Otherwise, withstanding the competition against more well-reputed companies might become impossible.
Secondly, the supplier’s reputation depends on certain market behaviors, which make global companies more inclined to cooperate. Manello and Calabrese (2019) studied the factors influencing supplier selection in the European automotive industry and found that a diversified customer portfolio improves the chances of getting additional orders from manufacturers. In addition, suppliers that managed to get contracts from premium brands received additional orders from non-premium customers (Manello and Calabrese, 2019).
In this regard, reputation serves as a valuable asset since it underscores the supplier’s technological superiority and high professional standards (Manello and Calabrese, 2019). Therefore, an ethical and professional reputation should be considered a decisive competitive advantage and selection criterion both from the supplier’s and purchaser’s perspectives.
Conclusion
In summary, one can claim that the top criteria for supplier selection have evolved drastically since the earlier era of global business. In the 1960s, procurement professionals prioritized the economic aspects of supplier selection. Product quality used to have an extreme significance in decision-making. In addition, purchasing managers paid greater attention to such criteria as delivery, performance history, warranties and claim policies, production capacity, price, technical capacity, and financial position of the potential supplier. Therefore, one can claim that sustainability and ethical considerations were largely ignored in the classic era.
However, the priorities changed over the last three decades as globalization increased customer awareness about sustainability. In addition, the environmental legislation has become tighter, which forced global companies to incorporate sustainability and ethical criteria in the supplier selection process. The supplier’s inability to comply with environmental, labor or anti-corruption legislation could outweigh the benefits of lower prices and short delivery time.
As a result, global companies started paying significantly more attention to their potential suppliers’ sustainability, legal behavior, and business ethics. One can see the manifestation of a paradigm shift in Toyota’s supplier sustainability standards. The Japanese automotive giant dedicated a large part of supplier guidelines to environmental, social, and ethical criteria. The essential economic criteria alone have become insufficient for becoming a global firm’s supplier. Consequently, necessary sustainable practices and ethical conduct have become a staple requirement for the candidates.
Given this drastic change, one can conclude that corporate sustainability and reputation will become even more important criteria for supplier selection in the future. Recent years saw the development of various MCDM and MCDA decision-making frameworks dedicated to sustainability and ethical factors evaluation.
Nowadays, procurement managers are expected to contract suppliers with a good history of sustainable and ethical conduct. Therefore, international business managers should regard the potential supplier’s commitment to social and environmental sustainability as the primary factor during the selection process. A procurement manager should understand that brand image and reputation are the most valuable assets in modern global business.
Whereas price, delivery, and quality are still important, the potential reputational losses stemming from a partnership with an unsustainable or unethical supplier can lead to long-term damages that outweigh the short-term profits. Therefore, the modern-day procurement professional should prioritize evaluating sustainability and reputational profiles during supplier selection. Finally, similar recommendations apply to managers of supplier companies who want to increase their organization’s attractiveness to global firms.
Reference List
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