Supplier selection: a cross-functional endeavour

Procurement is garnering increased attention from top management due to its significant impact on profitability and supply chain performance. The procurement process comprises six key steps: specification, supplier selection, contracting, ordering, expediting, and follow-up. This article focuses on the critical aspect of supplier selection.

Once the procurement specifications are defined, the buyer initiates market exploration. The initial step involves determining the subcontracting method: turnkey or partial. Turnkey subcontracting entails entrusting the entire product, service, or works to a single supplier, while partial subcontracting involves splitting the purchase into different lots, which may be assigned to various suppliers. In some cases, related lots may necessitate conditional selection, such as awarding transportation contracts for different regions based on backload availability. Supplier-imposed conditions, like offering discounted prices for multiple lots, may further complicate selection, often requiring specialised software to navigate.

A secondary decision pertains to the contract basis: fixed-price (lump-sum) or cost-reimbursable. Fixed-price contracts incentivise prompt completion, whereas cost-reimbursable contracts involve suppliers being remunerated based on pre-determined hourly rates, contingent on the complexity of specifications and industry expertise.

In scenarios with numerous suppliers, pre-selection may be required to eliminate unsuitable options, with the actual selection phase focusing solely on identifying the best supplier(s).

When drafting requests for quotation, clarity and consistency are paramount to facilitate easy comparison of received quotations. This necessitates precision, completeness, and clarity in the requests.

Finally, a comprehensive evaluation of quotations is essential. Criteria for selection, including price, total cost of ownership, flexibility, lead times, and customer service, must be established beforehand, with the relative importance of each criterion duly weighed.

Supplier selection is a collaborative effort, ideally involving procurement, research and development, quality assurance, production, and supply chain management.

Key Takeaways:

• Neglecting analysis of the supplier market weakens the buyer’s bargaining position, often resulting in sticking with existing suppliers and minimal cost reductions.
• Overemphasis on cost in supplier selection risks overlooking other critical factors like commitment, investment, and technological advancements.
• Despite the time and cost involved, thorough market analysis is essential for effective negotiations and optimal supplier relationships.