Chapter 4 contd 12345

Contents
I. SUPPLIER EVALUATION & SELECTION............................................4
1. Recognize the Need for Supplier Selection...............................5
2. Identify Key Sourcing Requirements.........................................6
3. Identify Potential Supply Sources.............................................7
3.1. Current Suppliers...............................................................7
3.2. Sales Representatives........................................................7
3.3. Internet Searches and Social Media...................................7
3.4. Informational Databases....................................................8
3.5. Organizational Knowledge..................................................9
3.6. Trade Journals, Trade Directories & Trade Shows...............9
3.7. Professional Associations and Published Information.......10
3.8. Internal Sources...............................................................10
3.9. Supplier-Provided Information..........................................11
4. Determine Sourcing Strategy.................................................11
4.1. Consider Sourcing Alternatives........................................12
4.2. Categorize Suppliers for Multiple or Single or Sole Sourcing
....................................................................................................13
4.3. Evaluate Critical Selection Issues.....................................14
5. Limit Suppliers in the Selection Pool......................................17
5.1. Supplier Risk Management...............................................17
5.2. Evaluation of Supplier Performance.................................18
5.3. Third-Party Provider Information......................................19
5.4. Supplier Visits...................................................................19
6. Conduct a Detailed Review of Supplier Evaluation Criteria....20
6.1. Management Capability...................................................20
6.2. Employee Capabilities......................................................21
6.3. Cost Structure..................................................................21
6.4. Total Quality Performance, Systems, and Philosophy.......22
6.5. Process and Technological Capability...............................22
6.6. Sustainability and Environmental Compliance.................23

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6.7. Financial Stability.............................................................24
6.8. Scheduling and Control Systems......................................25
6.9. E-Commerce Capability....................................................26
6.10. Supplier’s Sourcing Strategies, Policies, and Techniques
....................................................................................................26
6.11. Longer-Term Relationship Potential................................27
7. Select Supplier and Reach Agreement...................................28
8. ER 1 – Developing a Quantitative Supplier Evaluation Survey
.......................................................................................................28
8.1. Identify Supplier Evaluation Categories...........................29
8.2. Assign a Weight to Each Evaluation Category..................30
8.3. Identify and Weigh Subcategories....................................30
8.4. Define a Scoring System for Categories and Subcategories
....................................................................................................30
8.5. Evaluate Supplier Directly................................................31
8.6. Review Evaluation Results and Make Selection Decision. 32
8.7. Review and Improve Supplier Performance Continuously 33
9. ER 2 – Reducing Supplier Evaluation and Selection Cycle Time
.......................................................................................................33
9.1. Map the Current Supplier Evaluation and Selection Process
....................................................................................................33
9.2. Integrate with Internal Customers...................................33
9.3. Data Warehouse Software with Supplier Information.......34
9.4. Third-Party Support..........................................................34
9.5. Integrating Technology into Organizational Design..........34
9.6. Supplier Categorization....................................................34
9.7. Electronic Tools.................................................................35

9.8. Predefined Contract Language and Shorter Contracts.....35
II. SUPPLIER QUALITY MANAGEMENT.............................................35
1. What Is Supplier Quality?.......................................................35
2. Why Be Concerned with Supplier Quality?.............................38
2.1. Supplier Impact on Quality...............................................38
2


2.2. Continuous-Improvement Requirements..........................38
2.3. Outsourcing of Purchase Requirements...........................38
3. Factors Affecting Supply Management’s Role in Managing
Supplier Quality.............................................................................39
III. SUPPLIER MANAGEMENT & DEVELOPMENT..............................40
1. Supplier Performance Measurement......................................40
1.1. Supplier Measurement Decisions.....................................41
1.2. Types of Supplier Measurement Techniques.....................44
2. Rationalization and Optimization: Creating a Manageable
Supply Base...................................................................................50
2.1. Advantages of a Rationalized and Optimized Supply Base
....................................................................................................50
2.2. Possible Risks of Maintaining Fewer Suppliers.................53
2.3. Formal Approaches to Supply Base Rationalization.........55
2.4. Summary of Supplier Rationalization and Optimization...57
3. Supplier Development............................................................58
3.1. Roadmap..........................................................................59
3.2. Overcoming the Barriers to Supplier Development..........62
3.3. Lessons Learned from Supplier Development..................68

3

CHAPTER

4

–

SUPPLIER

RELATIONSHIP MANAGEMENT
I. SUPPLIER EVALUATION & SELECTION
One of the most important processes that organizations perform is
the evaluation, selection, and continuous measurement of suppliers.
Traditionally, competitive bidding was the primary method for
awarding purchase contracts. In the past, it was sufficient to obtain
three bids and award the contract to the supplier offering the lowest
price. Enlightened purchasers now commit major resources to
evaluating a supplier’s performance and capability across many
different areas. The supplier selection process has become so
important that teams of cross-functional personnel are often
responsible for visiting and evaluating suppliers. A sound selection
decision can reduce or prevent a host of problems.
Another trend affecting supplier selection today is the use of fewer
suppliers. For example, when a firm has reduced its supply base and
awarded the remaining suppliers longer-term contracts, the
willingness or ability to switch suppliers diminishes. This makes
selecting the right suppliers an important business decision.

4

Most purchasing experts will agree that there is no one best way to
evaluate and select suppliers, and organizations use a variety of
different approaches. Regardless of the approach employed, the
overall objective of the evaluation process should be to reduce
purchase risk and maximize overall value of the selected supplier(s)
to the organization.
An organization must select suppliers it can do business with over
an extended period. The degree of effort associated with the
selection relates to the importance of the required good or service.
Depending on the supplier evaluation approach used, the process
can be an intensive effort requiring a major commitment of
resources (such as time and travel). This section addresses the many
issues and decisions involved in effectively and efficiently evaluating
and selecting suppliers to be part of the purchaser’s supply base.
Exhibit 7.1 highlights the seven critical stages involved in the
supplier evaluation and selection process

1. Recognize the Need for Supplier Selection
The first stage of the evaluation and selection process usually
involves recognizing that there is a requirement to evaluate and
select a supplier for an item or a service. A purchasing manager
might begin the supplier evaluation process in anticipation of a
future purchase requirement. Purchasing may have early insight into
5


new-product development plans through participation on a product
development team. In this case, engineering personnel may provide
some preliminary specifications on the type of materials, service, or

processes required but will not yet have specific details. This
preliminary information may be enough to justify beginning an initial
evaluation of potential sources of supply. Finally, the outsourcing
phenomena has created new challenges for purchasers to evaluate
providers of services that often involve many less tangible and more
perceptual views of quality such as consulting engineers.
The recognition that a need exists to evaluate suppliers can come
about in many different ways. Exhibit 7.2 identifies the origins that
result in a need to evaluate and select sources of supply. As is shown
in the exhibit, purchasers will encounter new, modified, or straight
rebuys when making sourcing decisions. Progressive purchasing
groups increasingly anticipate rather than react to supplier selection
needs. The complexity and value of a required purchase will
influence the extent to which a buyer evaluates potential supply
sources. A new and growing area for purchasers are service buys.
Evaluating service providers requires analyzing if the supplier has
the resources necessary to assure the reliable on-time delivery of
their services. This could include a one-time report from an
engineering consulting firm to a continual service such as pest
control or maintenance of cloud storage services.

2. Identify Key Sourcing Requirements
Throughout the supplier evaluation and selection process, it is
important to understand the requirements that are important to that
purchase. These requirements, often determined by internal and
6


external customers within the value chain, can differ widely from
item to item. A later section discusses the various supplier

performance areas where a purchaser should determine its critical
sourcing requirements. Although different requirements may exist for
each evaluation, certain categories—supplier quality, cost, and
delivery performance—are usually included in the evaluation. Once
the key sourcing criteria are determined, purchasers will have to
engage in an information search.
The degree to which a buyer must search for information or the
effort put forth toward the search is a function of several variables,
including how well existing suppliers can satisfy cost, quality, or
other performance variables. The strategic importance or technical
complexity of the purchase requirement also influences the intensity
of the search.
The following offers some guidelines regarding the effort and
intensity of search required during supplier evaluation:
• Minor information search = High capability of current
suppliers + Low strategic importance of requirement
• Minor to moderate information search = High capability of
current suppliers + High strategic importance of requirement
• Major information search = Low capability of current
suppliers + High strategic importance of requirement
• Minor to moderate information search = Low capability of
current suppliers + Low strategic importance of requirement

3. Identify Potential Supply Sources
As stated earlier, the extent of the search for potential sources will
vary based on the particular purchase requirement. The following
provides a discussion on the various resources that should be
considered when seeking to identify potential suppliers.

3.1. Current Suppliers

A major source of information is current or existing suppliers.
Buyers often look to existing suppliers to satisfy a new purchase
requirement. The advantage of this approach is that the purchaser
does not have to add and maintain an additional supplier. Also, the
buyer can do business with an already familiar supplier, which may
limit the time and resources required to evaluate a new supplier’s
capabilities.
On the negative side, using existing suppliers, although perhaps
easier and quicker, may not always be the best long-term approach.
7


A purchasing manager may never know if better suppliers are
available without information on other sources. For this reason, most
organizations are continuously seeking new sources of supply and
are expanding this search to include global suppliers.
Selecting an existing supplier for a new purchase requirement may
be an attractive option if a list of preferred suppliers is maintained.
Designation as a preferred supplier means that a supplier
consistently satisfies the performance and service standards defined
by the buyer and responds to unexpected changes. A preferred
supplier status conveys immediate information about the supplier’s
overall performance and competency. However, the buyer must still
determine if a preferred supplier is capable of providing the new
purchase requirement.

3.2. Sales Representatives
All purchasers receive sales and marketing information from sales
representatives. These contacts can prove to be a valuable source of
information about potential sources. Even if an immediate need does

not exist for a supplier’s services, the buyer can file the information
for future reference. Detailed information on sales representatives
and their product and service capabilities is available on the Internet.
Information about sales representatives can be easily viewed on
social media sites such as LinkedIn and Facebook.

3.3. Internet Searches and Social Media
Today, buyers routinely use the Internet to help locate potential
sources that might qualify for further evaluation. Correspondingly,
most sellers of all sizes have an Internet presence as part of their
overall marketing efforts. Buyers are able to view pictures of the
facility, find information about the management team and
oftentimes a customer list. Additionally, LinkedIn, Facebook, and
Twitter provide an additional resource to extract information on a
potential supplier and its key employees. LinkedIn is particularly
useful to locate background information about key managers at a
particular supplier. There are also various interest groups by
commodity or category. For example, the “Construction Purchasing
Agents, Subcontractors and Suppliers” group consists of over 3,000
members. The “Metal Casting Design and Purchasing” group consists
of over 2,900 members.

8


3.4. Informational Databases
Purchasers of today suffer from information overload. The use of
mobile devices and increased visual capabilities of Web 2.0 provides
immediate access to information about suppliers. Web 3.0 is now a
third generation of Internet-based services that is being called “the

intelligent Web” and will enable data mining, machine learning, and
artificial intelligence. This machine-facilitated learning will enhance
the purchasers’ understanding of information and improve their
productivity. The challenge is managing this vast array of
information. Supply organizations must decide what information
should be downloaded from the Internet and how it should be
captured and stored in internal data warehouses or enterprise
requirements
planning
(ERP)
systems.
Newer
automation
technologies such as robotics and artificial intelligence provide more
sophisticated data analysis techniques, but require adjustments in
skill requirements.
There are several companies that can assist with providing
databases where the supply organization can store information
about their suppliers. These systems are also capable of providing
inputs to assist in strategic sourcing or monitor if the organization’s
purchases are contract compliant. For example, IBM’s Business
Process Services Group provides software to assist buyers automate
their business processes through more intelligent workflows using
automation, artificial intelligence, the Internet of Things (IoT). These
technologies will support real-time supplier databases that allow the
buyer to quickly perform “what if ” scenarios to locate the best
suppliers as well as drive other efficiencies into the sourcing
process.1
Databases allow the purchaser to quickly identify suppliers
potentially qualified to support a requirement. The database may

contain information on current products, the supplier’s future
technology roadmap, process capability ratios, and past
performance. It is important to constantly review, update, and
modify these databases to insure information accuracy. If additional
suppliers are required, databases of potential supply sources are also
available for purchase from external parties.

3.5. Organizational Knowledge
Knowledge management is the process of capturing the sourcing
knowledge and experience of an organization’s purchasers in a
9


database. This knowledge can then be shared throughout the
organization.
Experienced purchasing personnel usually have strong knowledge
about potential suppliers. A buyer may have worked within an
industry over many years and may be familiar with the suppliers.
One argument against rotating buyers too frequently between
product lines or types of purchases is that a buyer may lose the
expertise built up over the years. Capturing this knowledge about
decision processes can improve the sourcing process for newer or
less experienced purchasers.

3.6. Trade Journals, Trade Directories & Trade Shows
3.6.1. Trade Journals
Most industries have a group or council that publishes a trade
journal or magazine that routinely presents articles about different
companies. These articles often focus on a company’s technical or
innovative development of a material, component, product, process,

or service. For example, Chemical Week ( />provides both market and technical information on the chemical
industry suppliers also use trade journals to advertise their products
or services. Since most trade journals are available in electronic
format, buyers can easily access and follow them.

3.6.2. Trade Directories
Almost all industries publish directories of companies that produce
items or provide services within an industry. Such directories can be
a valuable source of initial information for a buyer who is not familiar
with an industry or its suppliers. A very popular directory for
domestic buyers is the ThomasNet maintained by Thomas Publishing
Company, whose mission for over 100 years has been to disseminate
industrial product information. This directory can be located at
www.thomasnet.com.

3.6.3. Trade Shows
Trade shows may be an effective way to gain exposure to a large
number of suppliers at one time. Groups such as the Society of
Chemical Manufacturers and Affiliates (https:// www.socma.org/) and
the Precision Metalforming Association (PMA) often sponsor trade
shows. PMA offers FABTECH that is advertised as North America’s
largest metal forming, fabricating, welding, and finishing event. In
2018, more than 35,000 attendees and over 1,500 exhibiting
companies participated in the trade show.
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The International Machine Technology Show in Chicago is one of
the largest trade shows held in the United States. Buyers attending
trade shows can gather information about potential suppliers while

also evaluating the latest technological developments. Many
contacts are initiated between industrial buyers and sellers at trade
shows.

3.7.
Professional
Information

Associations

and

Published

This source of information includes a wide range of contacts not
directly part of the purchaser’s organization. A buyer can gather
information from other suppliers, such as knowledge about a
noncompetitor that might be valuable. Other buyers are another
second-party information source. Attendees at local affiliate
meetings of the Institute for Supply Management can develop
informal networks of purchasers from other organizations that can
provide information about potential supply sources. Most local ISM
affiliates such as ISM-Greater Boston, Inc. have monthly meetings
that feature presentations on current supply management practices.
Other professional groups of interest to supply managers include the
Association for Supply Chain Management (ASCM) (formerly
American Production and Inventory Control Society (APICS)), the
Council for Supply Chain Management Professionals (CSCMP), and
the American Society for Quality (ASQ).
Some purchasers publicly recognize their best suppliers.

Recognition may come in the form of a newspaper advertisement
that highlights the achievement of superior suppliers. AT&T, for
example, took out a half-page advertisement in the Wall Street
Journal (May 14, 2019) expressing appreciation and recognition to its
best suppliers. In the advertisement, AT&T recognized six
outstanding suppliers out of its total supply base of 5,000. These
suppliers went above and beyond in providing AT&T with better
products, superior services, enhanced cost structures, or best-inclass approaches that contributed to the company’s success during
the past year.2 Being aware of these supplier awards allows an
astute buyer to gain visibility to a group of blue-chip suppliers.

3.8. Internal Sources
Many larger companies divide the organization into different
business units, each with a separate purchasing operation. Sharing
information across units can occur through formal corporate
purchasing councils, informal meetings, strategy development
11


sessions, purchasing newsletters, or the development of a
comprehensive database containing information about potential
supply sources. Internal sources, even those from diverse business
units, can provide a great deal of information about potential supply
sources and their experiences in using the particular supplier.

3.9. Supplier-Provided Information
Buyers often request specific information directly from potential
suppliers. Requests for information involve sending a preliminary
survey to suppliers. The buyer uses this information to screen each
supplier and to determine if the supplier’s capabilities match the

buyer’s requirements. Buyers can request information on a supplier’s
cost structure, process technology, market share data, quality
performance, or any other area important to the purchase decision.
A major U.S. chemical producer mandates that suppliers complete
requests for information (which it calls presurvey questionnaires)
before conducting more detailed supplier surveys. Besides
ownership, financial information, and type of business, this company
attempts to determine how sophisticated the supplier’s current
practices are and how far along it is toward achieving continual
quality improvement.
Before committing time to evaluate a supplier further, suppliers
should satisfy certain entry qualifiers. Entry qualifiers are the basic
components that suppliers must possess before they proceed to the
next phase of the evaluation and selection process. Typical qualifiers
include (1) financial strength, (2) proven manufacturing or service
capability, (3) capable and supportive management, (4) adequate
facilities, and a (5) skilled professional and technical staff. The time
and cost associated with evaluating suppliers makes it necessary to
insure that suppliers meet these qualifiers before proceeding to the
next phase of the process

4. Determine Sourcing Strategy
No single sourcing strategy approach will satisfy the requirements
of all supply managers. Because of this, the purchasing strategy
adopted for a particular item or service will influence the approach
taken during the supplier evaluation and selection process. In this
chapter, we will not go into the detail on the processes used to
develop a commodity strategy.
There are many decisions that a purchaser initially makes when
developing a sourcing strategy. However, these often change due to

12


market conditions, user preferences, and corporate objectives.
During the selection process, a reevaluation of the plans developed
during the strategy phase is tested. The quality of the search for
potential suppliers also impacts strategies. For example, if only one
source is found to satisfy the requirement, then the sourcing
strategy will be quite different from a search where multiple capable
suppliers are identified.
Thus, the supplier selection and evaluation process and the
chosen strategy are very much intertwined. In developing a sourcing
strategy the purchaser must consider his/her sourcing alternatives as
well as critical sourcing issues.

4.1. Consider Sourcing Alternatives
Once the list of potential and current suppliers is developed, it is
further refined, considering the type of supplier a firm may wish to
deal with based on the initial sourcing strategy. Major sourcing
alternatives include whether to purchase from a (1) manufacturer or
distributor; (2) local or national or international source; (3) large or
small suppliers; and (4) multiple, single, or sole supplier(s) for the
item, commodity, or service.

4.1.1. Manufacturer versus Distributor
The choice of buying directly versus from a distributor is usually
based on four criteria: (1) the size of the purchase, (2) the
manufacturer’s policies regarding direct sales, (3) the storage space
available at the purchaser’s facility, and (4) the extent of services
required.

Economically speaking, if all else is equal, the lowest unit price will
be available from the OEM. The distributor buys from the OEM and
resells, therefore incurring a transaction cost, and it must make a
profit. Despite the exchange cost, recent trends have increased the
role of distributors in providing the purchaser a low-cost solution.
First, many OEMs cannot handle, or choose not to handle, the large
volume of transactions required to sell directly. Second, buyers are
requiring more services from their suppliers and distributors have
stepped in to fill this need. Supplier Managed Inventory is a program
that distributors market to manage their customer’s inventory for
them.
Several organizations are using integrated supply where a
distributor is awarded a longer-term contract. Integrated suppliers
are given access to the purchaser’s demand data and are expected
13


to maintain certain levels of inventory and customer service on the
contracted items.

4.1.2. Local or National or International Suppliers
International and national suppliers may be able to offer the best
price and superior technical service. Alternatively, local suppliers are
more responsive to the buying firm’s changing needs and can
economically make frequent smaller deliveries. The popularity of
just-in-time (JIT) and quick-replenishment systems favor using more
local suppliers. Local suppliers also allow the buying firm to build a
degree of community goodwill through enhancing local economic
activity. International suppliers provide opportunities to attain
dramatic price savings. These savings must be evaluated against the

additional inventory, communication, and logistics costs (see
Chapter 10 for a complete discussion).

4.1.3. Large or Small Suppliers
All suppliers were at one time small suppliers. Growth over time is
because of their ability to provide superior price, quality, and service
compared to their competitors. Many purchasers prefer to focus on
“capability to do the job” regardless of size. Size does become a
factor when one firm decides to leverage its purchases from one or a
few suppliers. In addition, the smaller supplier may not have the
necessary capacity to meet the buyer’s total needs. Leveraging also
means that the supplier must have wide variety in its product or
service offerings as well as the ability to service multiple geographic
locations (in some cases worldwide locations).
Often the buying firm does not want the seller to become
dependent on its business. To remedy this concern, many purchasers
would limit their total expenditures with a supplier to a certain
percentage (e.g., 35–45 percent) of the supplier’s total sales
revenue. Finally, supply departments that are building diversity into
their supply base will often deal with an increased number of small
suppliers.

4.2. Categorize Suppliers for Multiple or Single or Sole
Sourcing
Prior to deciding whether to use multiple or single sourcing the
purchaser reviews the categories of suppliers available to meet the
needed purchase requirement. Unlike purchasing for our individual
needs, professional buyers only place business with suppliers who
they have prequalified or approved (see Exhibit 7.3). A
14

prequalified/approved supplier has met the purchaser’s initial
screening and is worthy of being considered for business. Becoming
prequalified/approved may require a supplier visit from the
purchaser and will be discussed later in the chapter.

As discussed earlier, a preferred supplier is one that consistently
satisfies the performance and service standards defined by the
buyer and responds to unexpected changes. Certified suppliers have
had their quality systems extensively audited by the buying firm and
are capable of consistently meeting or exceeding the buyer’s quality
needs. Parts from certified suppliers bypass the buyer’s incoming
inspection. Partnered suppliers are limited to a select group of
suppliers who provide critical high value items to the firm.
Partnership does not imply a legal relationship, but one that requires
a close relationship between the buying and selling organizations
and is usually viewed from a longer-term perspective. Finally,
disqualified suppliers consist of suppliers who no longer meet the
buying organization’s standards and will not be considered for future
business until their problems are corrected.
A decision on the optimal number of suppliers must be made after
a review of the suppliers within a specific service or product category
is completed. For example, if the buying category is critical, then a
partnered supplier may be chosen as a single source. Alternatively, a
decision may be made to use multiple sources if the buying category
contains only prequalified/approved suppliers. In cases where a
firm’s management or technical personnel specify one and only one
supplier, the purchaser is left in a sole source situation. Sole supplier
means there are no other approved suppliers of the product or

service that the firm will accept. Sole sourcing puts the purchaser at
15


the mercy of the supplier with very little power to change the
situation.
Though there is a trend to reduce the overall number of suppliers,
risks of supply disruptions are causing buyers to review these
strategies. A single source provides numerous benefits including (1)
optimum leverage and power over the supplier; (2) the ability to
develop closer relationships; and (3) the development of valueadding programs such as supplier stocking, process improvement,
and so on. Alternatively, multiple sources provides (1) improved
assurance of supply, (2) a check against price increases, and (3)
active competition that motivates the suppliers to perform
effectively. Supply managers must assess these advantages as there
is no one right solution that fits all situations. The decision to single
or multiple source a buying category is very situation specific and
changes with the supplier composition and economic conditions.

4.3. Evaluate Critical Selection Issues
The final stage of developing the sourcing strategy is the
evaluation of critical sourcing issues. Each of the sourcing
alternatives will generate specific critical issues that must be
addressed. Though each selection decision will generate its own
specific critical issues, five important ones include (1) size
relationships, (2) risk/reward issues, (3) sustainability and diversity
objectives, (4) competitors as suppliers, and (5) offshore suppliers
and countertrade.

4.3.1. Size Relationship

A purchaser may decide to select suppliers over which it has a
relative size advantage. A buyer may simply have greater influence
when it has a relative size advantage over the supplier or represents
a larger share of the supplier’s total business. Some buyers track the
annual dollar amount of their purchases divided by the supplier’s
total sales revenue, and this is a factor in source selection. One firm
expects this ratio to be less than or equal to 40 percent.
Alternatively, when a buyer is only a small part of a supplier’s
business, he/she may get less attention. For example, Allen Edmonds
Shoe Corporation, a maker of premium shoes, tried unsuccessfully to
implement JIT methods to speed production, boost customer
satisfaction, and save money. Unfortunately, Allen Edmonds had
difficulty getting suppliers to agree to the JIT requirement of
matching delivery to production needs. Although domestic suppliers
16


of leather soles agreed to
deliveries, European tanneries
cooperate. The reason? Allen
customer to wield any leverage

make weekly instead of monthly
supplying calfskin hides refused to
Edmonds was not a large enough
with those suppliers.

4.3.2. Risk/Reward Issues
Purchasers always want to select suppliers who are profitable and
growing. However, the supplier world is not created equally. Certain

suppliers who may present the lowest price may also present greater
risks. For example, a small supplier with a very competitive price/
cost proposal may not have the ability to scale their business quickly
enough to satisfy the purchaser’s growing requirements. They may
also be dependent on a few large customers for the majority of their
business. Assessing risk is a key element of the purchaser’s job and
must be considered during the selection process. With the increase
in supply disruptions created by
1. longer supply chains (i.e., global sourcing);
2. reduced inventory (i.e., JIT);
3. increased natural disasters (e.g., 2017 Hurricane Harvey
created massive damage to the Houston area supply base);
and
4. anemic economic growth.
All these events have resulted
organizations to monitor risk.

in

a

concerted

effort

by

Several third-party providers can provide data to collaborate or
dispute the purchaser’s assumptions about the future of the supplier.
Traditionally, purchasing has been risk averse; progressive

purchasers understand the risk/reward tradeoff and are prepared to
manage it better to attain overall lower costs. The sourcing snapshot
discusses how to begin develop a critical supplier list monitoring
manage risk in the supply base.

4.3.3. Sustainability and Diversity Objectives
Most purchasers are attempting to diversify their supply base by
increasing purchases from traditionally disadvantaged suppliers.
These include minority, female, veteran, handicapped, or LGBT
(lesbian, gay, bisexual, or transgender) owned businesses. Several
organizations are available to assist the buyer in finding and
certifying diverse sources. These include the Small Business
Administration (SBA) National Minority Supplier
Development Council (NMSDC) and
17


the Women’s Business Enterprise National Council (WBNEC)
or the National LGBT Chamber of Commerce
/>Buyers may also want to conduct business with suppliers that
commit to improving corporate citizenship and sustainable practices
(e.g., see Sourcing Snapshot: P&G Develops a “Citizenship
Scorecard” broadening the “Supplier Environmental Sustainability
Scorecard”). Many buyers now require suppliers to be ISO 14000
certified to insure they have implemented sustainable practices
versus only talking about them

4.3.4. Competitors as Suppliers
Another important issue is the degree to which a buyer is willing to
purchase directly from a competitor. This practice is particularly

prevalent in the defense and high technology industries and often
termed coopetition. Coopetition is the act of cooperation between
competing companies; businesses that engage in both competition
and cooperation are said to be in coopetition.3 For example in the
defense industry Lockheed Martin may compete with L3Harris
Technologies for an award from the Air Force on one contract. On
another contract they may cooperate on a joint bid for a different
weapons system.
Traditionally, purchasing from competitors would limit information
sharing between the parties. The purchase transaction is usually
straightforward, and the buyer and seller may not develop a working
relationship characterized by mutual commitment and confidential
information sharing. Therefore, it is important for the purchaser to
understand the extent of how much information will be shared and
secured when entering into any arrangement with competitors.

4.3.5. International Suppliers and Countertrade
The decision to select an international supplier can have important
implications during the supplier evaluation and selection process. For
one, international sourcing is generally more complex than domestic
buying. As a result, the evaluation and selection process can take on
added complexity. It may be difficult to implement JIT with
international suppliers, as lead times are frequently twice or even
three times as long as lead times for domestic suppliers. Generally,
higher levels of inventories will be required when selecting an
offshore supplier.

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Countertrade requirements appear in many international sales
contracts. Countertrade requires the purchaser to source goods in
the overseas country as a condition for selling in that country.
Boeing, a producer of commercial aircraft, purchases a portion of its
production requirements in markets where it hopes to do business.
An organization involved in extensive worldwide marketing may have
to contend with countertrade requirements before it can sell to
international customers, which can have a direct impact on the
supplier evaluation and selection process.

5. Limit Suppliers in the Selection Pool
Once the information has been gathered and the sourcing
alternatives and critical issues assessed, the purchaser may have
many potential sources from which to choose. Unfortunately, the
performance capabilities of suppliers vary widely. Limited resources
also preclude an in-depth evaluation of all potential supply sources.
Purchasers often perform a first cut or preliminary evaluation of
potential suppliers to narrow the list before conducting an in-depth
formal evaluation. Several criteria may support the narrowing of the
supplier list. The following discuss ways to reduce the list and
include risk assessment, previous performance, third-party
providers, and supplier visits.

5.1. Supplier Risk Management
Anytime a purchase order is placed or contract awarded there will
be a degree of risk to the purchaser. Risk management is the process
of (1) identifying potential negative events, (2) assessing the
likelihood of their occurrence, (3) heading off these events before
they occur or reducing the probability they will occur, and (4) making
contingency plans to mitigate the consequences if they do occur.4

Though risk can emanate from many places at the selection stage
we will focus on two major risks financial and operational.

5.1.1. Financial risk management
Financial risk management is defined as the continual monitoring
of the strength of suppliers’ financial condition to insure their ability
to meet the purchaser’s performance requirements for products or
services. Most purchasers perform at least a cursory financial
analysis of prospective suppliers. Although financial condition is not
the sole criterion to evaluate a supplier, poor financial condition can
indicate serious problems. A financial analysis performed during this
phase of the process is much less comprehensive than the one
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performed during final supplier evaluation. During this phase, a
purchaser is trying to get an indication of the overall financial health
of the supplier. Buyers often consult external sources of information
such as annual reports, 10K reports (available at www.sec.gov), and
Dun & Bradstreet (D&B) reports to support the evaluation. Once a
supplier is selected, several third-party providers can keep the buyer
apprised of any problematic financial changes that would pose a
disruption to supply.

5.1.2. Operational risk management
Operational risk management focuses on the continued ability of
the supplier’s human, intellectual, and physical capital to meet the
buying firm’s requirements with respect to quality and delivery. In
the long term, it involves meeting demand fluctuations, meeting
new-product needs, and providing continually improved products and

services. For example, one firm in the high-tech industry requires it
suppliers to ramp-up volume for new-product introductions as well as
meeting seasonal demands. The firm expects its suppliers to have
the necessary operational capability and flexibility.
In one example, the supply manager noticed that supplier delivery
promises were being missed from a previously excellent mid-sized
supplier. When the sourcing team visited the supplier facility they
noticed a sizable drop in the number of employees from their
previous visit a year ago. Discussions with the key managers
revealed this supplier lost a major contract with a key customer. As a
result, the firm offered early retirements to senior employees and
then laid off many younger employees. The result was a significant
“brain drain” and reduced capacity, leading to longer lead times and
reduced flexibility in operations.

5.2. Evaluation of Supplier Performance
A prospective supplier may have an established performance
record with a purchaser. A purchaser may have used a supplier for a
previous purchase requirement, or a supplier may currently provide
material to another part of the organization. A supplier may also
have provided other types of commodities or services to the
purchaser than those under consideration. Based on prior
experience, a purchasing manager may consider that supplier for a
different type of commodity or service.

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