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

The Sales Context

Sales Initiative

Supply Response
Supplier Purchaser

The Supplier Development Context

Sales Response
Supplier Purchaser

Supply 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

• 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
(cont’d)

• 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
(cont’d)

• 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
Bottleneck Strategic
• Unique specification • Continuous availability essential
High • Supplier technology • Custom design or unique
important specifications
• Production-based scarcity • Supplier technology important
• Substitution difficult • Few adequate suppliers
• Usage fluctuates • Changing source of supply difficult
• Potential storage risk • Substitution difficult
Risk

Non-Critical Leverage
• Standard or commodity type • Unique cost management important
• Substitute products available • Substitution possible
• Competitive supply market • Competitive supply market

Low
Low Value High

Source: Peter Kraljic, Purchasing Must Become Supply Management,” Harvard Business Review, September-October, 1983

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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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