The importance of choosing the right suppliers
It is vital for any organisation to select the right suppliers as getting it wrong can lead to the organisation:
- Receiving poor value for money
- Receiving goods or services of poor quality
- Being unable to rely on the supply of goods or services
- Having its operations disrupted
- Losing its supply
- Incurring damage to its reputation
In order to reduce the risk of selecting the wrong supplier, an organisation will decisions regarding which suppliers to use according to a selection criteria. This will force the organisation to consider a wide range of factors. Carter’s 10Cs of Supply Evaluation provides 10 criteria that may be used (a summary of these criteria can be downloaded below).
Organisations will use different criteria but most will include the following:
- The technical and systems capabilities of the supplier
- The quality of the supplier’s goods or services
- The cost of the supplier’s goods or services
- The supplier’s commitment to the environment and sustainability
- The supplier’s labour standards
- The supplier’s financial stability
We shall address the above criteria in turn.
The supplier’s ability to meet the organisation’s specifications and requirements must be considered. If these cannot be met, then the supplier’s performance with regard to other criteria become largely irrelevant. The technical capabilities can be considered with regard to the product or service itself, as well as the production and distribution capacity.
The supplier must be able to provide the required products or services to the organisation. It must be capable of providing these in the right quantities and at the right times and places.
Judging a supplier’s technical capabilities
If the organisation has experience of using the supplier. if for example, the supplier provides other products or services to the organisation, then information from these supplies can help the judging process. Other ways that can help organisation judge a potential supplier’s technical capabilities, include:
- Considering the supplier’s reputation
- Obtaining sample products for testing
- Visits to, or enquiries regarding, the supplier’s premises, equipment and distribution systems
- Investigations into the supplier’s systems in order to gauge their compatibility with those of the organisation (for example, would they be able to fit in with, say, a Just-in-Time production process)
It is important for the organisation to identify whether the supplier is able to meet the organisation’s specifications for the goods or services it requires, and that these can be provided reliably over the term of the contract/relationship.
Depending on circumstances, these specifications could be in respect of the inputs (or conformance specifications) or outputs (performance specifications) to be provided by the supplier. For example, an organisation seeking a business to fulfil a cleaning contract for its facilities might specify the number of cleaners and the hours to be supplied (i.e. the inputs) or it could specify the work to be done under the contract, e.g. the tasks to be carried out (i.e. the outputs).
As mentioned with regard to technical capability, a supplier’s reputation for quality (or otherwise) should be taken into account. Supplier’s are however able to signify their attitude to quality assurance by being involved in a quality assurance programme such as:
- ISO 9001 (a recognised quality award focussing on the processes used by an organisation)
- Six Sigma (i.e. a series of management tools focussed on improving the reliability of outputs from operations)
- Total Quality Management, or TQM (i.e. a programme to ensure that a business completes tasks correctly the first time)
- Kaizen (i.e. a programme of continuous improvement in operations and products)
- Statistical Process Control, or SPC (i.e. the use of monitoring and statistics to improve production processes and the quality and reliability of products)
To judge an organisation that uses any of the above could review the supplier’s awards (e.g. ISO 9001 certification) or could review some of the large quantity of production data that would be generated by the supplier’s quality assurance programmes.
Whilst the pricing policies of the supplier are important, it is much more important to consider whether the supplier’s goods or services offer value for money. Low pricing can be indicators that:
- The products or services may be of poor quality
- The service associated with the products or services may be poor
- The supplier may seek to make profits from ancillary products or services
Comparison’s of the prices charged by the supplier and its competitors will help assess the supplier’s pricing policy. Care should be taken to check the prices of associated goods and services that may be required during the period of the contract/relationship.
Environment and sustainability
The importance attached to the environment and to sustainability has increased significantly over past decade and as a consequence, most organisations now take these matters into consideration when choosing a new supplier. It is important that an organisation does not choose a supplier whose culture and attitudes with regard to the environment and sustainability are similar to their own. If this is not the case, the organisation’s reputation may be damaged by association with an unethical supplier.
This topic is often referred to as Corporate Social Responsibility, or CSR. CSR looks at an organisation’s impact on the environment, as well as the organisation’s stakeholders such as employees and its local community. It is sometimes put it terms of the 3Ps, planet, people and profits.
Looks at the environmental impact of the business and considers whether it is taking steps to reduce its current impact and/or taking positive steps to improve the environment.
Looks at the way that the business deals with its suppliers, workforce, customers and its local community and considers whether it does so fairly and in a way that will contribute to society.
Looks at whether the business will be sustainable in the longer-term and whether its policies towards others is likely to be financially beneficial for all and likely to result in successful long-term relationships.
Judging environment and sustainability
The business’ reputation and past history can be reviewed to identify any major issues. In addition, the organisation can:
- Ask to see the supplier’s policies in this area (note that this alone is insufficient as some suppliers might not implement these policies)
- Ask for examples of programmes that have are being, or have been, implemented and whose impact can be checked
An organisation should review the supplier’s labour standards. This review should consider whether the supplier’s employees are being treated fairly and that there is no evidence of abuse (such as modern slavery, trafficking, failures to pay minimum wages rates) or other types of poor practice.
Judging labour standards
As was the case with the environment and sustainability, the reputation of the supplier can provide useful information. In addition, the supplier’s human resources policies can also be useful to check that they comply with legislation and standards such as the International Labour Organization (ILO) standards. Workplace visits to suppliers, particularly unannounced visits, can help establish whether the supplier’s policies are being implemented.
In addition to the above many suppliers may have accreditation demonstrating their treatment of employees in certain respects e.g. Investors in People Awards.
When deciding whether or not to choose a particular supplier, an organisation will consider whether or not the supplier is financially stable. This is important for two main reasons:
- If the supplier’s finances are poor, its supply of goods or services may be affected. For example, it may be forced to use lower quality materials or labour, or use inefficient or ineffective equipment, in its operations, which can then damage quality or the reliability of supply.
- If the supplier’s finances are poor, there is a higher risk that the supplier may fail and go out of business, in which case a new supplier will have to be found which may take time and may disrupt the organisation’s own operations.
Judging financial stability
In order to judge whether a supplier has any financial difficulties an organisation could:
- Use a Credit Rating Agency to review the finances of the supplier. The Agency will provide their opinion of the supplier’s financial stability.
- Carry out a financial review of the supplier by reviewing their accounts/financial statements and performing an analysis of the figures by calculating financial ratios to help assess the supplier’s financial performance, liquidity, gearing and use of resources