How do I do a supplier evaluation?
Supplier review is a process in which suppliers are assessed based on a variety of factors. These factors can include credibility, delivery time, price, quality of the goods supplied, and a set of such mixed variables. The supplier ratings are based on the supplier’s performance.
Key Criteria
When evaluating suppliers, buyers usually consider the following:
Quality: The quality of the products or goods that the supplier provides is the most important factor. The supplier can maintain good quality by improving production and having quality planning in the supply chain. The quality factor includes the following:
- The supplier must adhere to the terms and conditions stated in the purchase order.
- The supplier’s products or services must meet the specifications stated in the quotation and purchase order.
- The product failure rate must be within the appropriate limit.
- The supplier must ensure proper repair or rework.
- He must provide adequate time for replacement.
Price: A company always wants to obtain materials at a lower cost to reduce production costs and increase profits. The supplier must set a competitive price for his products. This includes the following:
- Stable price: The price of the product or service should be stable for a certain period of time.
- Accurate price: There should not be much difference between the price in the purchase order and the invoice price.
- Advance notice of price changes: He should inform about price changes in advance.
- Invoicing: He should provide easy to read and understandable invoices.
Delivery: The supplier should be able to deliver the goods on the scheduled date. This factor includes the following:
Lead time: Lead time is the time between the actual delivery date and the date of order. A short lead time creates a good impression of the supplier. The supplier must deliver the products on or before the promised date.
Quantity: The supplier must deliver the correct quantity of products as stated in the contract.
- Packaging and documentation: The packaging of the products must be suitable, sturdy and undamaged. The supplier must provide the correct documents with the delivered products.
- Emergency delivery: The supplier must be able to deliver products in case of emergency requirements.
Service: This is one of the crucial criteria for the supplier. The supplier must provide good service by providing an updated catalogue, price information and technical information as well as the following:
- Supplier should be able to handle complaints effectively.
- Supplier should provide technical support for installation, maintenance and repair.
- Emergency support: He should provide support in case of emergency in case of product failure or repair
- Problem solving: Supplier should find a solution to the problem in time.
Composite supplier evaluation
Composite supplier evaluation means to evaluate suppliers based on their product price, service, delivery performance and quality of the products or services.
Quality evaluation: Evaluate the quality of the product by considering two factors: quality acceptance and certification.
Quality acceptance means that the material purchased by the supplier should pass only the first inspection so that we can consider that the quality of the product is good.
The material should have quality certification such as ISO.
Price Evaluation: Compare the current supplier price with other suppliers and compare the current price of the material with the average price of the material for a chosen period.
Delivery Evaluation: Evaluate the delivery performance of the supplier by comparing the actual delivery date with the pre-determined delivery date.
Service Evaluation: Evaluate the service based on the support provided by the supplier during the pre- and post-purchase orders and also consider the warranty period.
Benefits of Supplier Evaluation
Supplier evaluation helps the buyer to understand the supplier in every crucial aspect and whether the supplier is suitable to work with. It does not take into account biases and word of mouth but relies more on data.
It helps buyers to make the right communication.
It ensures a consistent standard of supplier performance with updated ratings of their performance.
It helps the buyer to identify weaknesses in the supplier’s performance and enables the buyer to take corrective actions.
Disadvantages of Supplier Evaluation
Assessing your supplier helps you improve your supply chain. But one major disadvantage is the loss of trust. Yes, when you evaluate and assess your supplier, he may feel that you do not trust him. This can affect your relationship with your supplier. But a practical supplier evaluation helps the supplier to perform better.
8 techniques
- Categorical plan: Managers from different industries make a list of factors that are crucial for a supplier based on their personal experiences, and suppliers are compared based on the same factors.
- Weighted point system: Factors are categorized and weight is given to each factor based on the performance of the supplier. An example is given below for the calculation.
- Cost ratio: Supplier evaluation is done on the basis of different costs incurred for acquiring materials from different suppliers. Cost ratios are determined for various evaluation variables such as quality, price, on-time delivery. Cost ratio is calculated as a percentage based on total individual cost and total value of purchase.
- Historical Supplier Selection: Past performance of the supplier is considered while making the selection.
- Forced Decision Matrix: The evaluation attributes such as quality, service, price, supplier reliability and delivery lead time are first identified. Then these factors are compared with each other. If one is more important, it is given a weight while the other is set to zero for evaluation.
- Service Cost Ratio: Subjective measurement of other intangible aspects of a supplier’s services. Aspects to consider may include: Labor stability, financial stability, flexibility in production for rush orders, research and development (R&D).
Lot Quality Index rating.
Lot Quality Index (LQI). It rates received lots against rejected lots. LQI is given by X/L. Where, L = total number of lots received during the period, X = (L1 x 1.00) + (L2 x 2.10) + (L3 x 2.90) + (L4 x 3.10)+ (L5 x 3.90)
– L1 = Number of lots received as acceptable.
– L2 = Number of lots rejected by sample inspection but labeled.
– L3 = Number of lots rejected and processed, rework at supplier side.
– L4 = Number of lots rejected and processed, returned as unusable.
– L5 = Number of lots rejected and processed, rework at receiver side.
Download here Example [ods file] : Lot quality index
Types of supplier evaluation
Desk research: Prior to determining a partnership with a supplier. In this type, you can use documents such as financial reports, logbooks and journals to collect information about the supplier. Depending on the result of the evaluation, you can choose a suitable supplier for your company.
Evaluation after a problem has arisen: Here you have to answer questions such as what happened? How did it happen? How did it fail? This data helps you to evaluate the supplier. The 5S method can help with this. Here there is already cooperation with the suppliers
Example of supplier evaluation
The factors that are taken into consideration are quality, price, delivery. Weights for each of the above factors are:
Quality – 60%
Price – 20%
Delivery – 20%
If we multiply the values of each factor by their weights, we can derive ratings and compare which company is better.
Company A details:
Total quantity delivered: 10 units, Total quantity accepted: 8 units, Price per unit: €10, Delivery delay: 20% time delay.
Quality Rating = (8/10) x 100 = 80%
Price Rating = (10/10) x 100 = 100% [Price Rating = (Price Ratio Lowest / Supplier Price) x 100]
Delivery Rating = 100 – 20 = 80%Weighted Supplier Rating of Company A = (80 x 60 + 100 x 20 + 80 x 20) = 84
Company B details:
Total quantity delivered: 20 units, Total quantity accepted: 18 units, Unit price: €16, Delivery delay: 10% delay.
Quality rating = (18/20) x 100 = 90%
Price rating = (10/16) x 100 = 62.5% [Price rating = (Price ratio Lowest / Supplier price) x 100]
Delivery rating = 100 – 10 = 90%
Company B’s weighted supplier rating = (90 x 60 + 62.5 x 20 + 90 x 20) = 84.5
Although Company B’s unit price is higher than Company A’s, Company B still wins because of its higher overall rating.In this case it is very important to think carefully about the weighting percentage per factor.
Gartner Vendor Evaluation
Gartner Vendor Evaluation is a method that provides the best content to the customer to evaluate vendors or providers for mutual benefit:
- Product/Service offered by the vendor
- Support offered by the vendor
- The pricing structure of the product or services
- Technology
- Strategy
- Corporate viability
It rates the vendor from weak to strong.
Strong: Vendors with the best focus, quality products or services and a good market position fall under this category. The customer feels comfortable and shows interest in continuing the relationship with the vendor.
Positive: Vendors with a good focus and good quality products/services fall under the positive category. Customers can continue to work with vendors for investment planning. Variable: Average suppliers fall under this category. The client should consider the maturity of the supplier and the short-term and long-term effects during the relationship.
Cautious: Poor service providers fall under this type. The client should understand the limitations of the supplier and ultimately plan based on risk and future business effects.
Weak: Suppliers with very poor performance fall under this category. Clients should only consider this supplier for planned investments and ultimately arrange another supplier.
How to improve your supplier performance?
Here are some options to improve your supplier performance:
- Always involve senior management: This is an essential step because you can only get sufficient resources to carry out this process if you involve senior management.
- Set a performance measurement: Set KPIs (Key Performance Indicators) and ensure that they cover areas such as supplier service, supplier responsiveness, supplier management skills and sales support. Let them know that you are monitoring them and evaluating their performance.
- Communicate your expectations clearly: Communicate clearly with the supplier about what you want and what they should focus on. For example, give each supplier a unique list of requirements instead of a general list of requirements so that they can easily identify your needs.
- Conduct a realistic analysis of the supply chain management system: Examine your purchasing and supply chain management practices to discover strengths and weaknesses.
- Have a good supplier management team: Depending on the complexity of the supply chain, have team members for quality control, logistics, planning, and engineering. Additionally, have team members share supplier management plans and objectives so that this team approach helps improve the supplier’s performance.
- Train your team members: Train team members on how to approach the supplier, how to make them understand your needs, and how to help them achieve their goals. Focus during the training on what you want from your suppliers and how to approach them to get it.
- Maintain a good relationship with your supplier: Analyzing and evaluating the supplier is not enough. Instead, have a good relationship with your suppliers. Make regular company visits, support the suppliers in improvements, and ensure good social contact.
