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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7PL - Gen-next concept, hard to evolve

The emerging global economy and the resulting increased competition are driving more manufacturing and retail companies to outsource their logistics functions. Obviously logistics has not been their core function due to the expensive assets involved like vehicles, warehouses, IT infrastructure and time, cost and efforts required to build the platforms, resources and infrastructure that in turn contributing to many risks with no advantages at all. Yet it is very critical to sustain their business. This has made viable option for any company to outsource the logistics to a 3rd party service provider and leverage on their assets and capabilities to efficiently manage these requirements by getting fixed and working capital down. Any goods that comes and goes of the company needs expensive planning, supervision, movement, customs clearance, storage etc which made companies spend most of their time into them.

3PL: The desperate need for an outside logistics provider triggered the evolution of 3PL services which is been the most dominant and arguably the largest market in the world. 3PLs offered great advantages to the companies in terms of

• Economies of scale (merits from large truck fleets, warehouses, etc.)
• Access to world class processes and technologies
• Access to the resources not available in-house
• Risk sharing
• Adaptability to business changes

With all these advantages companies had better focus on their core competencies. However competition further intensified when they had all the time to focus on better competing.

4PL: When competition intensified, globalization reached the peak and world looked so flat the services provided by 3PLs seemed just not enough. This created an opportunity for the rise of 4PLs, a non asset based service provider assists companies by integrating resources, capabilities and technology of its own and coordinate with various 3PLs (Transportation, warehousing, air freight, shipping, customs clearing etc) along with load planning, tracking, shipment consolidating, carrier performance management, billing and payments etc. 4PL provides a comprehensive supply chain solution in package that in turn helps companies manage complexity and time as well.

While companies thrive for better results in the bottom line and more value and better impact on the entire supply chain, a new concept is taking birth & it’s called 7PL!

So what is 7PL?

Its 3PL+4PL=7PL. Yes it is the combination of 3PLs with 4PL i.e. one service provider can provide a client with both 3PL and the services of 4PL. 7PL overseas the entire logistics system, where all the services are provided under one roof. This gives customers an easy way to deal with 7PL under one contract, one bill and single point of contact to manage entire logistics.

Many industry experts think this is going to be the next evolution where large players play a role of logistics services and service providers with the large offer. Top players in the market will lead the race and rest will drop out. This concept provides lots of excitement to all the manufacturers.

Though 7PL offer so much of excitement, for me it looks like a same old formulae of 3PL. When 3PLs came into the market they looked like same with a promise of providing free up from resources, all types of benefits in terms of technology, visibility, control when it come to managing logistics. But somewhere down the line the gaps created by 3PLs with in this led to the concept of an asset independent 4PL. The concept of the 4PL makes more logical being a consulting firm generally BPOs and software consulting firms have the ability to build their own platforms that suits client business, co-ordinate with various carriers and do all the back office and operations that exactly caters to the customer needs. But I really doubt whether 7PLs can ever do this?? It is a kind of hoopla created by 3PLs that they are well placed to build virtual supply chain networks and offer complete package for the clients. They had all the opportunities to do this in the past but they didn’t. I still have doubts; can 3PLs address the idea of a 4PL? Does it ever going to be the model it is proposed? I would encourage your thoughts and ideas on this!

7 points to prepare for better negotiation

My first topic of this blog! I choose to write on negotiation since I consider negotiation as very critical aspect for any procurement professional. An important tool any human use through out his/her life to achieve their goals. Many won, many lost, Many relationships flourished, many broken, some were very successful, some were completely destroyed. Every case makes this whole game so exciting.

Negotiation brings lots of surprises to the table. You can deal with them and emerge as successful only if you have a better preparedness. Here are the 7 point tips on how you can better prepare for a negotiation and avoid many pitfalls.

1) Identify the top supplier for the negotiation and have a next best option in case you cannot reach an agreement with your best supplier

You arrive here after analyzing RFx responses, Technical reviewing and assessing supplier on various parameters designed for the package. It is recommended that you communicate and present the case with your higher authorities (depending on the cost of the package or approval limits involved) and User department who are directly impacted by the decision. This exercise will ensure that every one internally are aligned to the decision (both commercially and technically). There are cases where buyers are forced to retain the incumbent supplier or a specific supplier due to internal resistance. This will help identify the right supplier for negotiation.

2) Be very clear about the objectives of the negotiation, your expectations and results you would want to see after the deal. Do a market benchmarking, costing and analyze total cost of ownership involved

List down the points you would negotiate ex: Pricing, Quantities, Timelines, Payment terms, Delivery terms, Freight costs, Warranty and maintenance, Service levels etc. and what are the expectations you have for each point. Know your business objective, do a market study to understand about the state and trends in the market. Research the true market value. Back-up your case with evidence and uncover defects in their argument.

3) Ensure that you are negotiating with the decision making authority at the suppliers end. Create an agenda for negotiation, practice and start confidently

After all the preparations, practice and hard negotiations if the supplier representative says he cannot take decision himself and need approval from his management then it’s a waste of time for you and you may have to start all over again while supplier is well prepared to counter your tactics this time. So communicate well in advance and say upfront if necessary that you appreciate to negotiate with the decision maker. Many buyers mess up things by not being able to have high level representative of supplier organization in the negotiation.

4) Identify the negotiation strategy (ex: tough, collaborative, leveraging etc). Identify the points you are negotiating and set least acceptable tolerance for each point

There are instances where supplier provides concession on pricing and ask for concessions on other areas. You may come to agreement at that point of time but realize the mistake committed once they are penned down later. Ex; a) A logistics buyer while negotiating with a freight forwarder for performing transportation of goods from a certain location to across the region proposes $7/ CBF against quoted amount of $10/CBF for shipping goods from A to B. The supplier agrees to that but asks for waybill charge of $20 for each shipment or relaxation in terms of TAT.

b) A OEM supplier proposes to provide concession on the cost of machinery you are buying while proposing an increase on the spare parts pricing, or same supplier proposes increase in the equipment cost while providing the discount on spares, warranty and maintainance etc.

There could be small shipments of less than 5 kgs at a higher frequency. Annual spend for spare parts, maintenance, service could contribute to a large amount. There is a potential pitfall if buyer comes to an agreement with out properly analyzing the scenarios, Product characterstics, their spend, usage details/ volumes, cost of machine breakdown and its implications on business etc

5) Don’t get emotionally involved threaten or demand to work things at your way. It may back fire, often breaks down. Don’t be aggressive be cool. Highlight the benifits of doing business with you, Justify that the budget you are specifying is valid with proper data or say you are forced to award the contract to another supplier if you cannot conclude in the specified budget limits or TOC etc. Get something in return every time you give up something ensure that you are conceding in small increments.


Though negotiation happens between 2 organisations in reality its 2 negotiating inividuals accountable for their relationships. Assume you are a sales guy for a moment. The buyer on the other side threatens you for taking other business from you or make things works his way by dictating terms with you. Though you agree to his terms and conditions, you may not like him at the personal level and that makes you give him next or less priority later on. Now switch back to your buying role and see, you are not in a pleasant situation now. There are companies who beat the suppliers for YOY reduction. A supplier who has extended 3% reduction on your pressure during the market down turn, with no volumes at all hesitates to came back to you with the saving when they have done some process improvements at his end that improves the production cycle time and cost of production or reduction is cost of the product with some alternate material and technology. Encouraging for cost reduction and collaborating for that is a good thing dictating is not.

History suggests that collaborative and leveraging approach has given better results to that of tough game approach.

Leverage your BATNA (Best Alternative to the negotiated agreement). Trade off concession encourages the supplier to concede first for you. Your supplier will have more appreciation for final outcome and respect for you

6) Do an assessment after each negotiation session with the supplier and change your strategies and tactics if necessary. Prepare notes for each point you are going to negotiate, review the notes from previous negotiations for tips. Anticipate and analyze supplier’s reaction to each tactic

Supplier can easily anticipate your strategy in the next negotiations when you stick to the same dialogue every time. Use various tactics unconventional ways of negotiations to work things at your way. Know their strengths, their weeknesses, their competitors, your strengths, internal & external atmosphere every thing that factors. Negotiate like a king. Dont use all your weapons for defending one point or proposing one point. They will have more power and other tactics to defend for other points. Ask more questions like why they want the price increase. Ex: If the increase is for labor rate hike dont jump in to decrease in the raw material costs, fuel, increase in your volumes or other reasons that justifies the price reduction immediately. Try to defend with a reason like job market situation, consumer index and any market forces affecting the labor which are more relevant to his reason. You can use the other weapons for next points or even stress for reduction with them.

7) Document whatever has been concluded in the negotiation. After the negotiation make supplier feel good about the contract awarded if he is unhappy for loosing the negotiation

There are many instances where suppliers agree to certain things but in practice they will not be followed accordingly. After reaching any agreement with the supplier document them and email to all the concerned parties to ensure that you both are in same page. This avoids any misunderstanding or disagreement after invested so much of time. Use that as a base during any conflicts and non compliance.

Supplier leaves the room with a dissatisfaction of losing the margin, or not being able to get what they wanted etc after a hard fought successful negotiation you had. You need to make supplier feel happy for what they have achieved, long-term benefits they gain by associating with you. Explain them how it could affect them if they had lost the deal. And how this deal is directly linked with their personal performance etc