Supplier evaluation is a term used in business and refers to the process of evaluating and approving potential suppliers by quantitative assessment. The purpose of supplier evaluation is to ensure a portfolio of best in class suppliers is available for use. Supplier evaluation is also a process applied to current suppliers in order to measure and monitor their performance for the purposes of reducing costs, mitigating risk and driving continuous improvement.
Supplier evaluation is a continual process within purchasing departments and forms part of the pre-qualification step within the purchasing process, although in many organizations it includes the participation and input of other departments and stakeholders. Most experts or firms experienced in collecting supplier evaluation information prefer doing so using five-step processes for determining which to approve. Their processes often take the form of either a questionnaire or interview, sometimes even a site visit, and includes appraisals of various aspects of the supplier's business including capacity, financials, quality assurance, organizational structure and processes and performance. Based on the information obtained via the evaluation, a supplier is scored and either approved or not approved as one from whom to procure materials or services. In many organizations, there is an approved supplier list (ASL) to which a qualified supplier is then added. If rejected the supplier is generally not made available to the assessing company's procurement team. Once approved, a supplier may be reevaluated on a periodic, often annual, basis. The ongoing process is defined as supplier performance management.
Benefits and Drawbacks
There are various benefits associated with an effective supplier evaluation process such as mitigation against poor supplier performance or performance failures. The benefits typically include sourcing from suppliers that provide high standards of product and service levels whilst offering sufficient capacity and business stability. Supplier evaluation can help customers and suppliers identify and remove hidden cost drivers in the supply chain. The process of evaluating performance can motivate suppliers to improve their performance.
Associated challenges with supplier evaluation include resource and cost commitments in establishing and maintaining a robust and effective system, challenges with specifying and gathering meaningful and relevant information, data integrity, scorecards that do not get at the root causes of supplier problems, and subjective or inconsistent scoring which may result in inaccurate assessment. Another challenge is making sure that evaluation of current suppliers goes beyond measurement to actual performance improvement by providing feedback to suppliers on their performance and working on continuous improvement opportunities. Thus, management commitment to and support of a supplier evaluation process is essential.
Some of the challenges associated with supplier evaluation may be mitigated by the use of appropriate tools. For simple projects a spreadsheet can be used. But as evaluations become more complex or more frequent data management and data integrity issues become significant. Web Electronic RFP / Tendering systems are often used for initial selection projects. Some products provide functionality for combining both initial selection and ongoing evaluation and benchmarking.
Wider, within established procurement teaching, the Carter 10C's model is an internationally recognised approach. This model looks at aspects which should be evaluated before contracting and as part of the ongoing supplier performance appraisal. The C's are:
- Capacity (Does the organization have the capacity to deliver the order) - Competency (Is the organization, its people or its process competent) - Consistency (Does the organization produce a consistent output) - Control of process (Can the organization control its process and offer flexibility) - Commitment to Quality (Does the organization effectively monitor and manage quality) - Cash (Has the organization got a strong enough financial base) - Cost (Is the product or service offered at a competitive price) - Culture (Are the supplier and buyer cultures compatible) - Clean (is the organization ethical, funded legitimately, doesn't engage Child labor, etc) - Communication efficiency (Does the organisation have support technology of information integration)to support collaboration and co-ordination in the supply chain.
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