A Quick Guide to Supplier Evaluation

The COVID-19 pandemic has exposed the fragility of global supply chains. However, not all the challenges triggered by the current crisis are entirely new. In some cases, it has only revealed previously unseen vulnerabilities and amplified existing problems in the supply chain.

The current supply chain disruption may not be just another random one-off event, either. According to one study, supply chain disruptions that last a month or longer are showing a cyclical pattern that repeats every 3.7 years on average, with shorter disruptions occurring even more frequently.

With just 3% of companies not experiencing any COVID-related business impact, there is a large-scale re-evaluation of supply chain strategies currently underway. A vast majority of businesses are planning seismic shifts in their post-pandemic SCM strategies, including expanding the supply base, rationalising supply chain globalisation, and increasing inventory levels.

Part of this process of re-evaluation is the search for new ways to qualify, assess, and manage suppliers. For business enterprises, a structured approach to supplier evaluation has always been key to ensuring business continuity, quality, safety, and sustainability. In a post-pandemic world, the supplier evaluation process has just become more mission critical.

Supplier evaluation is the quantitative and qualitative assessment of potential and existing suppliers that allows businesses to build a best-in-class portfolio of suppliers that can help reduce procurement costs, mitigate supplier risks, and drive continuous improvement.

Over the years, supplier evaluation has evolved from a process predominated by pricing concerns to a more comprehensive focus on supplier relationship management. As a result, the approach to the frequency, as well as the parameters of evaluation, have also evolved significantly.

Most companies evaluate their suppliers once a year, though the frequency can even be monthly or quarterly based on the intensity of the purchasing process. In this digital age, however, supplier evaluation and management can become a continuous process by using sophisticated ERP system modules or even specialised software to automate the process.

For instance, the metasfresh ERP enables businesses to continuously monitor that suppliers are always meeting the necessary requirements, thereby ensuring that only suppliers with appropriate certifications qualify for orders. The metasfresh system ensures that supplier ratings are always up to date and alerts procurement managers to all changes in supplier evaluation and approval that require action.

Before we get to some of the key parameters for supplier evaluation, let’s first look at some of the benefits of this strategic process.

The core objective of any supplier evaluation program is to build strong, sustainable, and mutually beneficial relationships with a company’s supplier base. And the process itself is founded on the simple axiom that defining and measuring KPIs regularly opens up more opportunities to optimise the partnership between a company and its suppliers.

Here are some of the ways that a proactive and structured approach to evaluation can add value to the partnership.

Continuous performance improvements: Defining performance indicators and monitoring them on a regular basis enables supply chain leaders to measure actual performance, identify strategic gaps and take corrective steps to address any inefficiencies.

Proactive risk management: Gaining insights into the practices, processes, and performance of suppliers allows management to assess risk, be it financial, operational, reputational, or quality-related, and institute procedures and controls to actively manage and reduce risk.

Managing hidden costs: A better understanding of suppliers’ processes and practices help businesses eliminate hidden costs associated with waste and inefficiency, reduce bottom-line costs, and enhance the quality of the supplier base.

Aligning processes, practices and priorities: Continuous supplier assessment provides the insights required to ensure that a supplier’s business strategy, processes, standards, and culture are aligned with that of the customer’s.

Identifying opportunities for mutual growth: A better understanding of a supplier’s capabilities allows companies to partner with them on new growth opportunities that could provide top-line growth for both.

Supplier evaluation is about defining and managing expectations on both sides. Choosing the right evaluation parameters allows businesses to streamline collaboration, enhance agility and resilience, and increase responsiveness to customer needs.

Since September 2015, supplier evaluation has come under the guidance of the ISO 9001 standard, especially for businesses that have implemented quality management systems. The overarching guidance, as per this standard, is that purchasing organisations must determine and apply criteria for the evaluation, selection, monitoring of performance, and re-evaluation of external providers.

Apart from controlling and monitoring supplier performance, companies are also expected to provide regular updates on requirements and expectations to their supplier base. In the latest amendment, the standard emphasises the need for continuous improvement and risk management, as well as the need for suppliers to perform routine risk analyses of their processes.

For some sectors, like automotive and aviation, for instance, the supplier evaluation requirements and criteria can extend beyond that defined in ISO 9001. Similarly, the key elements of a supplier assessment program can differ across companies based on the unique needs of the business and the specific capabilities they are looking for in potential suppliers.

One model for supplier evaluation that can be adapted to different organisations is Dr Roy Carter’s 10 Cs of Supplier Evaluation, first published in 1995 and since developed and expanded by other industry experts.

This model defines 10 criteria that can be used in the assessment of potential suppliers. These include:

1. Competency: To establish that a supplier’s value, capabilities, and performance track record is aligned with your organisational requirements.
2. Capacity: To ensure they have the bandwidth in terms of infrastructure, resources, and manpower to handle requirements.
3. Commitment: They have the requisite capabilities and frameworks to meet expected quality and compliance standards.
4. Control: They have complete control over their own policies, processes, procedures, and supply chain in order to ensure consistent and reliable delivery.
5. Cash: There are adequate cash flows and reserves to demonstrate financial strength and the ability to weather economic ups and downs.
6. Cost: The capacity to provide the required quality at a competitive cost.
7. Consistency: They have the processes and procedures in place to ensure consistently meeting key delivery metrics.
8. Culture: They have an emphasis on business culture and workplace values that are aligned with that of the customer’s.
9. Clean: They are committed to sustainability and environmental mandates and best practices.
10. Communication: They have a clearly defined hierarchy and framework to keep communication flowing for day-to-day interactions, strategic discussions, and disruption events.

Supplier evaluation criteria can differ slightly from one business to the other, but most ratings involve some combination of the 10Cs.

Over and above this template, some companies also include the Supplier Evaluation Risk (SER) model, a proprietary scoring system from Dun & Bradstreet, to assess the probability of a business seeking relief from creditors or ceasing operations over the next year.

Irrespective of the criteria that may be used to score suppliers, a typical supplier evaluation process has three key phases:

1. The collection and analysis of data pertaining to the technological, operational, and quality capabilities of the supplier.
2. An on-site assessment and audit of quality and compliance systems.
3. Signing a contract.

A company’s supplier base is key to improving performance and creating a competitive advantage. It can also help lower costs by 5-10%, and mitigate exposure to key risks by as much as 50%.

As more and more companies shift parts of their value chain to suppliers in order to focus on their core competencies, supplier evaluation and management is becoming a mission-critical process. At metasfresh, our digital total ERP solution facilitates the comprehensive and continuous evaluation of suppliers against ISO 9001 procurement standards as well as individual business expectations.

Talk to us here at metasfresh to learn how you can customise metasfresh ERP to your specific standards and requirements and automate supplier evaluation.

Since 2006, we have been developing our metasfresh ERP software non-stop with open source components and under the open source licences GPLv2 and GPLv3. Our mission is to enable each and every company to access a powerful ERP system with the aim of fuelling corporate growth. Get in touch today for more information and insights.