Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

2.2.4 Strategic Selection of Suppliers

Intended learning outcomes: Describe possible supplier-evaluation criteria for each target area. Explain the score and the gap method for supplier evaluation, using an example with two suppliers. Disclose possible supply chain risks entailed using these methods.

After establishing the procurement strategy, the task is to find appropriate suppliers. The process involved is called procurement market research.

Procurement market research is the systematic gathering of information for an object to be procured. It entails supply market analysis, identification of potential suppliers, and request for quotations.

Procurement market research leads to transaction costs. These are search and initiation costs, as mentioned in Section 2.1.1. They are incurred:

  • either ongoing, for example, costs for updating or enlarging the existing market information,
  • or due to a special occurrence such as a shortage of raw materials, bankruptcy of a previous supplier, the introduction of a new product, new regulations, or cost-savings measures.

Next, there are supplier evaluation and supplier selection. The supplier’s quotations have to be analyzed and compared. Then it is time to conduct negotiations — and if necessary renegotiations — and to make decisions. The costs incurred here belong to negotiation costs.

Supplier evaluation is a method for evaluating the performance of a supplier generally and relative to the required object.

In practice, there are various methods for evaluating suppliers. See here also [WaJo04] or [DoBu03]. One possibility is to measure the performance of a supplier in the same way that the company’s own performance is measu­red, that is, by assessing performance in achieving targets in the areas of quality, costs, delivery, and flexibility (here see Figure As a cate­gory in its own right, general working cooperation with the potential supp­lier is evaluated. Figure shows possible evaluation criteria for each target area.

Fig.        Evaluation criteria for supplier evaluation.

Supplier selection includes preselection of the supplier (or possibly a number of suppliers) and possibly postselection negotiations.

The best suppliers are generally preselected using a factor rating. First, the criteria are weighted. The potential suppliers are then rated as to the degree to which they fulfill the individual criteria. This fulfillment rating can be an absolute value (scoring method) or a relative value compared to a maximum possible value (gap method). Triple bottom-line arguments (see Section 3.3) are usually evaluated separately, as framework conditions.

In many cases, postselection negotiations are conducted with the best-rated suppliers to establish definitive prices or other conditions. This can change the degree of fulfillment of some of the criteria. Finally, the supplier with the highest total score (or possibly, several suppliers with the highest scores) is awarded the contract.

Procurement market research, supplier evaluation, and supplier selection can be supported today in many cases by information technology. Here the transaction costs can be decisively lowered, especially in the case of global sourcing (on this, see the next section below).

Figure shows as an example the score and gap method with two potential suppliers and a limited number of criteria.

Fig.        Supplier evaluation: score and gap method with two suppliers.

Evaluation according to criteria as shown in Figure is not a guarantee but rather an aid. There will still be risks entailed in the selection of suppliers. Some of the possible risks are the following:

  • The factor rating does not yield an unambiguous decision. Sensitivity analysis can provide clarification here. On this, see also Figure and the explanation in the text.
  • The evaluation may be based upon the wrong criteria. Teamwork can help here (second-set-of-eyes principle). It also makes sense to evaluate fewer criteria if the importance of the supplier is low for the buyer than if the importance of the supplier is high (keyword: one-factor comparison versus multifactor comparison).
  • Conditions can change at the supplier company, particularly when key persons leave the company.
  • If a supplier-dominated relationship is foreseeable or if this is a case of sole sourcing, supplier selection will already involve high costs. Here, personal relationships will be important from the start.

Course section 2.2: Subsections and their intended learning outcomes

  • 2.2 Strategic Procurement

    Intended learning outcomes: Produce an overview on strategic procurement. Differentiate between traditional market-oriented relationship and Customer-Supplier Partnership. Describe strategic procurement portfolios. Explain strategic selection of suppliers. Present basics of supplier relationship management and e-procurement solutions.

  • 2.2.1 Overview on Strategic Procurement

    Intended learning outcomes: Disclose the supplier structure follows the product structure. Differentiate between direct material, indirect material, commodities, and various demand patterns. Describe various traditional procurement strategies.

  • 2.2.2 Traditional Market-Oriented Relationship

    Intended learning outcomes: Present target area strategies for the traditional market-oriented relationship, and disclose possible supply chain risks entailed.

  • 2.2.2b Customer-Supplier Partnership

    Intended learning outcomes: Identify the concept of customer-supplier partnership and disclose adequate target area strategies, and disclose possible supply chain risks entailed.