Supplier evaluation technique for effective sourcing

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Supplier evaluation has become a major strategic decision for OEMs (Original Equipment Manufacturers) as firms are increasingly getting into outsourcing. The main objective of any supplier evaluation is to reduce risks while improve the overall value of business. It also provides a base line for identify, monitor and measure supplier performance initiatives.

Buyers must be having many questions like, how I can do the supplier evaluation. What parameter should I consider? How big should be my questionnaire? How do I measure them? How do I rate them etc. While many organizations have developed decision making support tools to evaluate suppliers based on performance metrics specified by corporate managers. These metrics have being derived based on 1) Product characteristics 2) Business/ supply chain strategies 3) Level of risks involved etc.

Every individual does an evaluation; it’s there in every ones subconscious mind that they try analyzing risks, opportunities, strengths and weaknesses (depending on their intellectuals!) on every decision they take throughout their lives. Ex: 1) You are buying a house, you tend to assess the property based on pricing, location, clear documents, and access distance to hospitals, schools, markets and rail/bus stations etc you make a buying decision if you are satisfied with the most of the questions you had in the mind. 2) Generally men buy one good quality expensive branded shoes which lasts longer, whereas woman prefers less expensive footwear but as many as they can. There is an obvious tradeoff between price and quality according to their needs/ objectives. So they evaluate the buying decision accordingly.

You can correlate to any of the decision you have made on buying, education, marriage, kids and on and on you did it for everything. But when it comes to business, an evaluation should be well measured and documented approach where everything comes with a value tag. If a man goes to his wife saying we can buy the house since price is very good though accessibility it not, she might agree but your management doesn’t. You need to demonstrate why the decision is justified. You will be able to demonstrate better if you have proper information and reasoning to that.

Supplier Evaluation Technique:

Assume you are on job now and need to do a complete evaluation of the supplier before awarding a valuable business to him. As I said your evaluation is based on the 3 points, in laymen terms 1) product characteristics 2) your objective 3) impact you will have incase of any failure.
The subsequent processes to complete the Evaluation process consist of 5 steps: 1) Identify the criteria 2) Assign weigtage to each criteria 3) Identifying KPIs 4) Rating the performance of each KPI 5) Qualify the best supplier

1) Criteria: From the research it is found that Quality, delivery, cost are most considered supplier evaluation criteria with over 90%. Quality, delivery, cost, production infrastructure capability, technical capability, service and financial are very important criteria used since last 40 years. Many companies also adopt various evaluation criteria with respect to customer, internal business, future growth and CSR perspective.
Ex: Ours is a volume driven business, which requires a certain level of infrastructure and capacities to meet those volumes, where quality plays a major role otherwise customer won’t buy it or the component failure badly impacts the overall performance of the product etc. I need to supply these at a very good pricing and also required to provide on time to customers, else they will switch to our competitors or I cannot produce these products economically at higher rate of the component and poor deliveries. I am very concerned about the environment, employees and communities where I am doing business, hence my supplier should have a fair trade policy and good EHS practices at their end. My whole business will be at stake if there is any disruption in the supply and impact to my business is very huge.

So in a layman terms I have described the supplier qualification criteria based on the 3 point definition. So in technical terms, my supplier is evaluated on quality, service, Production/ technology, Price, Environment (QSTCE) and Financial.

2) Weightage: This is a very important point for a successful outcome for any evaluation. Unbalanced weightage simply results in a failure of the evaluation process. Weight age indicates the importance of the criteria. The overall weight age of all criteria should be 100%.
As suggested earlier your product characteristics, objective, and impact of failure defines this.

3) Identifying Key Performance Indicators (KPIs) for each criterion: KPIs are those few components that can easily influence success or failure of the function. Such performance measures are commonly used to help an organization define and evaluate how successful it is.
Ex: KPIs that drives the quality could be established quality programs, quality manuals made available to employees, Desk procedures/ Work instructions, quality staff capability, rejection rate & established procedures for corrective action, quality procedures and traceability, are internal audit and surveillance function ensure compliance to customer specs etc.

4) Set a framework for evaluating each condition: Evaluate each KPI with your target objective or benchmarking with the industry standards or best practices. Rate each KPI based on its impact on each criteria, say 1 being least positive impact and 5 being highest positive impact.

5) Select the best supplier: Set green, yellow and red zones for overall scores and choose the best supplier who fits the bill

Supplier evaluation pitfalls: While supplier evaluation offers various advantages in terms of sourcing from suppliers that provide high standards of product and service levels whilst offering sufficient capacity and business stability. It also poses various challenges in terms of resource commitments, identifying and gathering meaningful and accurate information, lack of coordination with internal stakeholders, inconsistency of identifying metrics and scoring results in inaccurate assessment, failure to provide proper feedback to suppliers and lacking focus on improvement opportunities post evaluation and poor management commitment and support

Key Recommendations: Supplier evaluation results in long-term and sustainable results to the organization and long standing relationships with the suppliers if it is blended with the company values and goals than just limiting it for a specific project or mere documenting purpose

These are some of the key points to focus while doing as evaluation in order to have a better outcome

a) Collaborate with the key stakeholders/ user and any other departments who may be impacted by the decision. They will have a better understanding about the need, supplier requirements. They can better help to measure them.

b) Develop an evaluation process plan

c) Identify information gathering methods (Direct or indirect)

d) Acquire data with extensive scanning of the sources

e) Provide proper feedback to the supplier

f) Identify areas of improvement and develop a training plan for need improvement areas

e) Periodically review to ensure compliance and uncover the risks involved

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