Chapter 12

Supplier Selection

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 Key Questions Addressed in Chapter 12

How can the supply professional match the

organization’s needs to what the market can supply?
• Which supplier(s) should be selected?
• How can suppliers be identified?
• What information is required to evaluate potential
sources?
• Should we select single or multiple sources?
• Should we deal directly with manufacturers or go
through distributors?

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 Potential Sources of Information

Trade directories and online resources

Catalogs (online and hard copy)
Trade journals
Sales representatives
Supplier and commodity databases
Visits to suppliers
Samples
Colleagues, networking, professional contacts
Your own records
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Identification of Potential Sources
1. 2. Can a Current 3.
Can We Supplier No Find Potential
Make In-House? Meet? New Supplier

Yes No
No One Two or More
Yes Supplier Supplier Suppliers
Can Meet Can Meet Can Meet
Make Buy
One Two or More Can We Use
Supplier Suppliers Supplier
Can Meet Can Meet Development to
Create Supplier?
Yes
Yes No

Can We Make Can We

In-House? Redesign/Re-specify
No so that Yes
Existing or New Supplier
Can Meet?
Rethink

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 Standard Information Requests

Requests for information (RFI)

• Signals the supplier as a potential source of supply
• Does not commit either party to future business
Request for quotation (RFQ) or request for bid (RFB) or invitation
to bid
• A serious inquiry on a specific requirement or variety of
requirements
• Asks the supplier to declare price and terms
Requests for proposal (RFP)
• Allow more latitude to the supplier than RFQ
• Used with requirement is difficult to describe or the purchaser
expects innovation or creativity
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 Supplier Selection Decisions

Should we use a single source, dual sources, or more

than two?
Should we buy from a manufacturer or a distributor?
Where should the supplier be located?
Relative to our organization, should the supplier be
small, medium, or large?
If no supplier can be found, should we use supplier
development?

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 Arguments in Favor of Single Sourcing

Prior commitments
Exclusivity: Supplier may be the only available source
Outstanding quality or service  value
Order too small to split
Opportunities for discounts or lower freight costs
More important customer  more attention from supplier
Cost of duplication prohibitive (e.g., tools and dies)
Easier to schedule deliveries
JIT, stockless buying or systems contracting
Resources required for supplier relationship management
Prerequisite to partnering
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 Arguments in Favor of Multiple
Sourcing
Traditional practice
Keep suppliers “on their toes”
Assurance of supply
Capable of dealing with multiple suppliers efficiently
Avoid supplier dependence on one customer
Obtain a greater degree of volume flexibility
Back-up arrangements
Strategic considerations; e.g., military preparedness
Government regulations
Limited supplier capacity
Opportunity to test a new supplier
Supply market volatility
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Supplier Development Initiative

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 Key Supplier Evaluation Question

Is this supplier able to supply the purchaser’s

requirements satisfactorily?
• strategically and operationally
• in the short and long term

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 Three Levels of Supplier Evaluation

Level 1 – Strategic
Level 2 – Traditional: quality, quantity, delivery, price and
service
• Technical, engineering, manufacturing and logistics
strengths
• Service design, operations and delivery
• Management and financial evaluation
Level 3 – Current Additional
• financial, sustainability (environmental and social),
innovation, regulatory, and political
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 Level 1: Strategic Evaluation
Sourcing strategy directly linked to organizational
strategy, goals, and objectives drives effective sourcing
decisions
Strategic sourcing: captures the linkage between
sourcing strategy and organizational strategy
• considers suppliers and the supply base integral to
an organization’s competitive advantage

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 Define Strategic Purchases

What makes a purchase or a supplier strategically

important to the organization?
• Mission critical - may help or hinder attainment of the
organization’s mission
• First step in the strategic sourcing process
• Drives decisions in sourcing and selection process
• Drives allocation of resources to any specific buy
• Without categorizing, may overinvest resources in
tactical or operational purchases and under-invest in
strategic ones

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 Risk Assessment

Management makes decisions about the risks it is willing

to take in light of the expected returns
Takes actions to avoid, mitigate, transfer, insure against,
limit, or explicitly assume risk
Supply decisions must be made in the context of the
organization’s risk profile

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 Level 2 – Traditional (1 of 3)

Technical, Engineering and Operations

• Quality systems and performance
• Engineering and technical strengths
• Capacity and flexibility to meet demand (lead time)
• Process capabilities

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 Level 2 – Traditional (2 of 3)

Service design, operations and delivery

• Quality systems and ability to meet standards based
on statement of work (SOW)
• Capacity and flexibility of service delivery system

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 Level 2 – Traditional (3 of 3)

Management and Financial

• Mission, corporate culture, values and goals
• Organization structure and decision-making
• Management controls, information systems, policies
and procedures
• Qualifications and background of managers
• Financial analysis; e.g., profit, inventory turns,
receivables, current ratio
• Procurement systems

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 Formal Supplier Evaluations

Quality Good Performance

Quantity 
Delivery Fair Performance
Price 
Service Unsatisfactory Performance

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Supply Risks and Dollars Extended

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 Weighted Point Evaluation Systems

Identify suppliers
• Important suppliers and/or critical goods and services
Identify factors or criteria for evaluation
Determine the importance of each factor
Establish a system to rate each supplier on each factor

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 Evaluation of Potential Sources: Two
Key Questions
1. Is this supplier capable of supplying our
requirements satisfactorily in both the short- and
long-term?
2. Is this supplier motivated to supply these
requirements in the way we expect in the short- and
long-term?

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Appendix: Image Descriptions For
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 Identification of Potential Sources Text
Alternative
Yes, can either make or buy it. If No (or if Buy it), ask: Can a
current supplier meet?
If Yes, can have one supplier meet or have two or more suppliers
meet. If No, then find a potential new supplier. There are then three
options:
1. No supplier can meet. If this is the case, ask: Can we use
supplier development to create supplier? If Yes, do so. If No,
ask: Can we redesign/re-specify so that existing or new
supplier can meet? If Yes, do so. If No, ask: Can we make it in-
house? If Yes, make it; if No, rethink.
2. One supplier can meet.
3. Two or more suppliers can meet.
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 Supplier Development Initiative Text
Alternative
In the normal marketing context, the purchaser makes a
purchasing response to the supplier's marketing initiative.
In the supplier development context, the purchaser
makes a purchasing initiative to the supplier, who then
makes a sales response to the purchaser.

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 Supply Risks and Dollars Extended
Text Alternative
• Bottleneck is high risk, low value. Characteristics include: unique specification; supplier's
technology is important; production-based scarcity due to low demand and/or few sources of
supply; substitution is difficult; usage fluctuates/not routinely predictable; potential storage
risk.
• Strategic is high risk, high value. Characteristics include: continuous availability essential;
custom design or unique specifications; supplier technology important; few suppliers with
adequate technical capability or capacity; switching suppliers is difficult; substitution is difficult.
• Noncritical/Routine is low risk, low value. Characteristics include: standard specification or
commodity-type items; substitute products readily available; competitive supply market with
many suppliers.
• Leverage/Commodity is low risk, high value. Characteristics include: Unit price management
is important because of volume of usage; standard specification or commodity-type items;
substitution is possible; competitive supply market with several suppliers.

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