This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
As the cost of raw materials purchased for production usually constitute a higher percentage of the total cost of finished products, it has become increasingly necessary for organizations to get the best value for money from suppliers. So, supplier evaluation and selection process has become a strategic decision for a firm. Evaluation in particular has become important for developing vendor scorecards which have become an intrinsic part of the organizations to measure and improve upon supplier performance. Proper use of scorecards helps companies to reduce vendor lead times, improve inventory management, maximize sell-through and reduce costs, and ultimately result in an improved bottom line and cash flow. Thus, there is a need to understand the importance of some criteria often weighed differently by firms to develop the scorecard. The paper identifies the critical parameters used by firms in their measurement metrics. Some of these factors include cost, quality, delivery, systems, processes, flexibility and other parameters such as production facility and capacity, financial status, innovation and R&D, repair services and follow up, information technology and communication systems etc. For this purpose 28 already published papers were scrutinized for the criteria they employed in their research work. It was found out that quality, on-time delivery and cost constitute the most important factors in the evaluation process. However, of late, suppliers' environmental performance has gained more prominence due to green initiatives. This trend is proven by a spike in number of researches including it as an essential criterion. These criteria become an essential part of a vendor scorecard.
Keywords: Supplier evaluation, vendor scorecard, environmental performance, on-time delivery
Supplier selection and evaluation has become a critical aspect in today's highly competitive environment. With spiralling cost of raw materials, procurement costs constitute a higher percentage of the total cost of finished products. Thus, organizations need to get the best deal from their suppliers. Suppliers play a critical role in achieving supply management objectives. Thus, it is pretty much clear that the aspect of supply evaluation cannot be easily overlooked.
Being one of the essential aspects in purchasing or procurement process, the process should be rigorous and fool proof. Generally, the evaluation process consists of four stages. These include defining the objective, formulating and enlisting the selection criteria, qualifying most suitable alternatives, and final selection of supplier. To ensure only the prospective suppliers qualify, effective definition of the entire selection criteria is absolutely necessary. This holds significance not only on the product costs and relationships with partners; it also has considerable impacts on the corporate competencies of the buyer.
There are several benefits associated with employment of an effective supplier evaluation system .These include mitigation against poor supplier performance aka performance failures, sourcing from those suppliers who provide high standards of product/service levels in their offering, have sufficient capacity and business stability. Supplier evaluation helps both customers and suppliers to identify and remove the hidden cost drivers existing in the supply chain. The mere presence of an evaluation process can motivate suppliers to improve their overall performance.
The main challenge with supplier evaluation includes resource and cost commitments involved in creating and maintaining an effective and a robust system. Another major challenge is to ensure that evaluation of existing suppliers encompasses measurement to actual performance improvement through provisions of feedback to suppliers.
One of the major application areas of supplier evaluation process is in development of vendor scorecards. Number of companies including Walmart, Proctor and Gamble, Crysler, BASF etc employ vendor score card in their evaluation purposes. Properly constructed scorecards measure customer satisfaction and performance with individual independent suppliers, as well as comparison across categories.
The most critical step is to identify the right criteria to measure. For example, on-time delivery is usually more important for suppliers delivering products. Price may be applicable to all the suppliers, as is customer satisfaction. Actual performance against targeted service levels is only applicable only when it is specified in the contract. Since the performance levels may influence the final price paid for goods/services, some products/services may have varying standards. If one is running a JIT inventory operation, it is necessary to have on-time stock arrival when it is needed. Too-soon arrival would lead to storage and too less might lead to plant shutdown. So, in this case the acceptable tolerance range in the scorecard might be leaner. However, when the supplies ain't critical to core operations, the range might be broader.
The initial step is to determine the performance indicators for supplier relationship category. Next step involves determining the target ratings. These would vary depending on the type of performance indicator. Certain performance indicators would pertain to objective type measures (example: 95% of the time, 92% of the service levels). Others would be more subjective, for example "Is the supplier providing good customer support?" The ¬nal step involves determining how important is each performance indicator; in comparison to the others. This can be done by ascertaining and assigning weights to each indicator. Thereafter, ratings are converted to score using a formula. This allows comparisons to be made across suppliers and categories of products, even when a multitude of performance indicators are used. A sample scorecard is shown in Exhibit 1.
Various researchers over the years have widely researched for solutions pertaining over the supplier selection problem. However, the prima facie for such an extended research has been the increasing significance of the process for the firm. It has been widely recognized that the supplier selection decision has become a strategic decision. Such decisions determine the viability of the company in the long run (Thompson, 1990). These decisions have a major impact in coordination of various services as well as enhance the firm's competitive position. Thus the supplier selection decisions must be in conformity with the company strategies.
The importance of such decisions was well illustrated in the paper "Investigating the decision criteria used in electronics components procurement" published by Bharadwaj N. He had used a novel approach to evaluate criteria over procurement of component parts rather than entire gamut of products and services. The research was focussed mainly on electronic components. However, what he found out was that the business customers who track supplier performance over the critical evaluation criteria, gain competitive advantage by better management of their inbound supply chain
Supplier selection process involves establishing a rigorous set of criteria which provides a framework or a base for supplier comparisons to be conducted. Entire supply chain can be made more competitive if accurate measures are used as a vehicle for supplier selection process. Supplier selection process involves two areas of decision making, one involves the methods that can be used to compare suppliers and the other determines the criteria for selection.
Different supplier selection methods have been used by different firms suiting to their needs. Selection methods have been well detailed by Lyes Benyoucef in his paper on Supplier Selection problem (2003). In his paper, he classifies the majority of selection methods into primarily three categories: elimination methods, optimisation methods and probabilistic methods. In elimination methods, the suppliers are eliminated who don't satisfy the selection rule. In the optimisation methods, an objective function is optimised which can consist of a set of criteria or even a single criteria. These methods can be with or without methods. Analytical Hierarchical Process (AHP) is one of the most widely used methods by the firms and it is a type of optimisation method involving multiple criteria without constraints. The main advantage of this method is its consistency under uncertainty. The final classification involved methods involving probability in its measurements.
Amindoust et al(2010) used DEA model as a tactical decision making tool for supplier selections. He had presented his paper in the 11th Asia pacific industrial engineering and management systems conference. The objective of the paper was to identify efficient and inefficient suppliers and benchmarking them. Model was able to differentiate between efficient and inefficient vendors and also enabled them to be ranked according to their efficiency based on various parameters considered. They had considered six different evaluating factors relating to supplier capability and performance i.e. technical capability, capacity, production facilities, price, quality and delivery.
Supplier selection criteria, which is also the primary focus of this research paper has been an ever evolving area since long. Earliest research which serves the basis for other researchers who followed was done by Dickson (1966) in which he had identified 23 key criteria as viewed by purchasing agents and managers. Based on this paper, many other researchers started working on this front.
Basic criteria of cost and quality have been part of almost every research. Kirytopolos et al (2008) studied the discipline in pharmaceutical industry where the primary objective of the study was selection and evaluation of suppliers' offering in para-pharmaceutical industry. The research used Analytical Network processes in its methodology for selection. Various criteria were studied which included cost, service, supplier profile, quality and risk. However for the circumstances and the company they studied, it was found out that quality was the most determent criteria among those considered. It was concluded that nature of industry dictated quality to be dominant among others. This study could be, however, extended to cover other industries and other different conditions.
Similar work was done by M.N. Kasirian, R M Yusuff (2009) for the Automobile industry. The main objective of their paper was to identify the existence of interdependencies amongst multiple criteria which influence suppliers' overall ranking. Thus the methodology they adopted was Multi criteria decision making. They had identified various sub criteria. Weights were allotted to these sub criterion and based on them final priority of each vendor was identified. The paper was especially suited to automobile industry to reduce the risks of undesirable selections. To sum it up in one statement, they had identified a network of selection model comprising of price, quality, delivery, reliability, flexibility, responsiveness, professionalism and long term relationships
Elram et al (1990) used the literature available in the databases to give some meaningful insights. His paper was titled "Supplier Selection Decisions in Strategic Partnerships". Objective of his research was to identify key factors in supplier selection processes for each firm which ultimately would lead to strategic advantage for the firm. The method incorporated in his research combines literature review and case study methodologies to review buyer supplier relationships in detail. He had found out additional qualitative factors which could complement the existing quantitative factors proposed by Dickson earlier. The paper basically proposes three additional broad criteria for evaluating suppliers. These include the suppliers' financial position, suppliers' strategy and organizational culture, and technological ability of vendor. These proposed criteria hold much more significance now due to ever changing economic and political conditions globally.
There were several other researches which went beyond these basic criteria of cost, quality, delivery etc. One such research was done by Enyinda et al(2010). In his paper regulatory compliance was found out to be a critical factor for decision making. He had presented his paper at ASBBS Annual Conference: Las Vegas. The paper titled "An analysis of strategic supplier selection and evaluation in a generic pharmaceutical firm supply chain" dealt with developing a model to aid them in selection and evaluation of important criteria to identify the best supplier for a pharmaceutical manufacturing firm. Analytical hierarchical process was used for this approach. Criteria which were considered apart from regulatory compliance include quality, risk, cost, supplier profile and service levels of the supplier.
C Muralidharan, A Anantharaman, S.G. Deshmukh (2002) published a paper on "A Multi criteria group decision making model for supplier rating". The objective of the paper was to analyze multiple criteria for supplier rating procedures. He had used an aggregation based technique for combining group member's preferences into one consensus ranking. In the paper, quality, cost and on-time delivery were considered as most important. They had envisaged that purchasing the right quantity of material at the right quality from the right source at a reasonable price at the right time is key objective of the purchasing department.
Research in this area have also focussed on different contexts like global supplies, supplier selection in developing countries or specific to small, medium and large scale industries. Work on global supplies was done by F.T.S Chan and N. Kumar(2007) in their paper on "Global Supplier development" which focussed on various risk factors in the global supply chain. The method used in their research was Fuzzy extended AHP based approach. They had identified supplier selection criteria in global context which provided difference in both the criteria and their priorities. The basic criteria identified were cost, quality, delivery, systems, processes, flexibility and service. Other risk factors specific to global supply chains include country risks like political and economic risks, risks of piracy and terrorism.
Another interesting work was done by Motwani et al (1999) in which they dealt with supplier selection in developing countries. The basic objective of the paper was to identify how supplier selection criteria varied in developing countries in comparison to developed countries. Analytical network process was used for the purpose. They found out that product reliability and supplier capacity in both technical and production gains should be given more importance in developing country scenario. Basic evaluating factors did apply. However due to heightened risks, reliability and supplier capability become a differentiating factor in this context.
Interdisciplinary Journal of Contemporary Research in Business in 2010 published a paper developed by Kabir Golam, Sumi R.S. The topic of the paper was "Vendor Selection for Small Scale, Medium Scale and Large Scale Industries of Bangladesh". The motive of the paper was to evaluate multiple criteria and multiple constraints associated with the supplier selection process for large, medium and small scale industries. They had used a questionnaire based study and an AHP process for the same. Expert views were found out through questionnaire and quantified using AHP to derive findings with respect to large scale industries. It was found out that for large scale industries, vendor reliability, product quality and vendor experience are most crucial.
All the papers discussed above evaluate various factors according to their various contexts. However there seems to be a common thread(s) which seems to exist in most of the situations. This research paper would attempt to identify that common thread and how it/they fare against the others.
In this paper, key success factors or criteria as used by various researchers were considered through secondary research. The objectives of the study were to identify the various factors influencing the selection and evaluation procedure and thereby identify which factors are commonly considered higher by the companies under their priorities and circumstances. Identification of these factors would then enable firms to employ them in their vendor scorecards.
Null Hypothesis H0: There is no apparent criterion which is often preferred in a firm's supplier performance decision making process irrespective of its circumstances and priorities
Alternate Hypothesis Ha: Some criterion is always preferred in supplier performance for developing vendor scorecard irrespective of its circumstances.
For the purpose of the study, 28 international peer-reviewed journals were studied and information about criteria considered in their evaluation process was extracted.
RESULTS AND DISCUSSION
Some of the key criteria for supplier evaluation that came up in this secondary research as employed in various researches include pricing items like competitive pricing, cost reduction efforts; physical distribution of items like on-time delivery, accurate delivery; management issues involving credit standing, commitment to improvement and quality, service items such as quick response and technical assistance, quality related items such as quality control documentation, outgoing and in-process quality control, overall quality etc. and relationship items including responsiveness, cooperation, ethical values, reliability and timely communications.
Other criteria include production facility and capacity, technical capacity and support, repair services and follow-up, flexibility and reciprocal arrangement, innovation and R&D, financial status, information technology and communication systems, operating control management and organization, warranties and claim policies, personnel training and development, packaging and handling ability, product reliability, geological location, performance history, amount of past business ,customer relationship, procedural compliance, labour relations record, customer satisfaction and impression, attitude and strategic fit and desire for business.
Another important aspect of supplier evaluation has been the suppliers' assessment of their environmental performance.
Some of the commonly used criteria/sub criteria are enlisted in table 1.
Quality management system
Certificate of GMP
Raw material quality
Cost of goods
Technology development for supplier
Waste management for suppliers
Other green practices
Labour relations record
Amount of past business
Flexibility in product variety
Flexibility in delivering
TABLE 1: Criteria for Evaluation and Selection of suppliers
These criteria were enlisted and the frequency of their consideration was calculated as a percentage of papers. This described how often a particular criterion was taken up as a part of supplier evaluation process in prior studies. Significant criteria i.e. with frequency more than 10% are displayed in table 2. Among them, on time delivery was considered the most important factor appearing in 82% of papers. Among other factors, cost and quality measures also appeared quite frequently. Table 3 describes how the ranking of various criteria fared since 2008. Total number of journal consulted since 2008 were 12. Firms are also now increasingly focussed on suppliers' meeting quality specifications and are ready to have a trade-off with price.
Another important aspect coming out of this research is that there has been a major shift in frequency of appearance of environmental performance where we can see an increased focus since 2008. One of the reasons for such an observable trend may be because of increased focus of companies towards inclusion of green practices in their entire value chain. Firms are engaging more and more into strategic exclusive alliances with their suppliers and customers view both the firm's and their suppliers environmental performance to create an imagery of the firm which is unlike earlier times when the firm's contribution individually was assessed. Firms are now focussing on creating green supplier scorecards where a supplier is assessed on his contribution to environment.
Number of papers
% of papers
Production Facility and capacity
Innovation & R&D
TABLE 2: Ranking criteria in terms of frequency
Number of papers(Since 2008)
% of papers
TABLE 3: Ranking criteria based on research since 2008
Supplier evaluation has become one of the critical components in maintaining and developing a firm's business. Increasingly companies are evaluating their suppliers by creating a scorecard of their overall performance. This performance assessment is based on several essential criteria. It was found through this research paper that on-time delivery followed by price and quality are most commonly considered. Latest researches have included suppliers' environmental performance as a key criterion whereas price has become comparatively less important than meeting quality specifications.
EXHIBIT 1: A sample vendor scorecard