Good supplier evaluation is not a game of chance. You need to have the right processes in place. Using a formal assessment can help you better understand your suppliers, their scope of business and their performance.
For this blog post, we spoke with Doug Keeley, senior product marketing manager at Ivalua, to get his insights on supplier evaluation. Read on for answers to six common questions about evaluating suppliers.
What Is Supplier Evaluation?
At its most basic level, supplier evaluation is a formal assessment to measure and monitor your relationship with a supplier, or to pre-qualify a potential supplier. Buyers commonly request information to initiate the process of assessing whether a supplier is a good fit for their business.
The criteria for supplier evaluation and selection generally cover technical, financial, commercial and other requirements, because competition on price is not the only criteria. For example, manufacturers often also want to understand the following about their suppliers:
- Capacity: manufacturing capacity, ability to fulfill un-forecasted increases/decreases
- Cost control: minimized controllable indirect costs (freight, inventory, handling and tariffs)
- Quality: goods and services, defect rate and incident repeat rate
- Performance: certifications and documentation, responsiveness and participation
“Companies also look at what kind of risks the supplier may present to the supply chain,” said Keeley. He adds that corporations customize their supplier evaluation process and requirements based on the needs of their industry, region, standards or logistics, among others. It’s important to note that it’s unlikely that a single supplier evaluation survey covers all possible facets for all products across all industries and markets.
Why Is Supplier Evaluation Important?
Most enterprises use a formal supplier evaluation and qualification process when selecting suppliers, as well as for maintaining long-term partnerships. “If you don’t know how to evaluate your suppliers, it is very hard to understand who you are working with nor what potential risks they may introduce to your supply chain,” said Keeley.
Once you’ve completed your supplier assessment, you want to be able to use the data you’ve collected to make better and more timely decisions that maximize value across the supply chain. You also need to update the evaluation frequently enough so that your supplier strategy includes any changes in their business.
And the true value of supplier selection and evaluation shows up in supplier development, in other words, when supporting them to develop new capability or competency.
“Every company, every manufacturer should be investing in supplier development processes and strategies to build supply chain resilience,” Keeley emphasized. “This is especially true today, when enterprises are dealing with very significant crises that are incredibly disruptive.” So, supplier evaluation and development help develop mutually beneficial relationships with your suppliers.
How Do You Select a Supplier?
Specifically, what factors should be considered when choosing a supplier? Again, your supplier selection criteria depend on what is relevant to your products, markets, industry and more. “Many of our customers evaluate a blend of risk elements,” said Keeley. “In addition to financial data, they might want to incorporate supplier performance data, for example, which is clearly an important factor. So, they devise an aggregate evaluation.” This can also include risk aspects such as compliance or cybersecurity.
Other factors, including strategic considerations, come into play during the supplier selection process. Your supplier selection strategy may be at least partially based on potential. Here are some examples:
- You might want to develop a specific supplier because you have a strategic need.
- You may decide to award contracts to multiple suppliers to reduce your dependence on one supplier, and you want to give a new partner some of the business so that you can develop the relationship.
- Other supplier evaluation criteria can impact strategic decisions regarding how and when to phase in certain suppliers as you phase out others. Logistics strategy, tariffs regulations and more can also play a role, explained Keeley.
How Do You Evaluate a Supplier?
Any supplier evaluation and selection process typically includes several stages. There could be questions on a supplier evaluation form and multiple surveys, which could be completed by both the supplier and stakeholders at the buying company. So, what are supplier evaluation questions about? These tend to cover specific criteria relevant to the buyer’s scope of business and ensure that the buyer thoroughly understands the supplier’s scope of business.
Businesses can then rank potential (and current) suppliers by using a type of supplier evaluation scorecard. Many companies also include a supplier evaluation risk rating (SER) as part of their evaluation. Developed by Dun & Bradstreet, this form of supplier risk assessment enlists predictive data attributes to rate companies on a numerical scale of one (low) to nine (high) of how likely they are to fail within the following 12 months.
Companies typically tailor their supplier evaluation rating according to the scope of the business. In certain industries, stringent regulations and standards apply, so supplier selection and evaluation depend on whether the company’s processes and products meet specific industry standards. In this context, for example, ISO 9000 / 9001, which focuses on manufacturing quality management systems.
What Is Supplier Qualification?
Supplier qualification is not quite the same as supplier evaluation. When you qualify suppliers, you assess and validate that they meet industry-defined certification requirements and quality standards. Highly regulated industries such as healthcare, automotive, aerospace and defense demand perfection, explained Keeley.
In both supplier evaluation and qualification, stakeholder feedback is also often captured and evaluated alongside supplier responses. This ensures a 360-degree view of a supplier from areas including engineering, operations, procurement and more. Factors reviewed by stakeholders are often related to their area of expertise. For example, an engineer may ask to review a supplier’s technical capabilities and innovation.
For suppliers that have been through the evaluation or qualification process, many enterprises maintain an approved supplier list (ASL). Such ASLs are meant to provide clear guidance on a supplier’s status. Some common examples include fully Approved (meets all requirements) to Debarred (no business allowed) or New (approved but untested).
What Are the Steps for Evaluating Supplier Performance?
In summary, evaluating supplier performance involves more than an assessment for onboarding. Keeley offered the following steps:
- Start evaluating supplier performance regularly using formal and sophisticated assessment. “It’s never too late to start,” Keeley said.
- Establish supplier performance evaluation criteria and take steps to install standards, policies, processes and procedures.
- Develop a supplier performance evaluation form. This will standardize your assessment and make your decisions better, faster and more strategic.
- Establish, qualify and classify your suppliers based on your supplier development aims.
- Review your data and reach out to suppliers again. Usually, the more critical the supplier is to your business, the more often you need to touch base.
- Use digital technology to connect the data and make best use of the information you have.
- Hold conversations with suppliers to develop plans on how to improve any areas that are suboptimal.
- Put actions into place that will correct these areas.
- Follow through strategically. Step back and re-evaluate supplier performance based on your criteria.
- Repeat the process.
Evaluating Your Suppliers – Protecting Your Reputation and Business
“In truth, this process is not a series of steps,” Keeley added. “It is a cycle. It never stops. Your goal is to have informed buyers. Evaluating your suppliers regularly will help you, and them.” So, keep checking that your suppliers are performing well and meeting your expectations. You don’t want to gamble with your business, or your reputation.
riskmethods was acquired by Sphera in October 2022. This content originally appeared on the riskmethods website in July 2020 and was slightly modified for sphera.com.