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Source Selection: Qualifying The Source

Author(s):

Michael J. Moyer. C.P.M.
Michael J. Moyer. C.P.M., President, M2 & Associates, Inc., Austin, TX 78717, 512/388-9425, M2ASSOCIATES@PRODIGY.NET

84th Annual International Conference Proceedings - 1999 

Abstract. The most important job today in Purchasing is Source Selection. Buyers who fail to thoroughly investigate their suppliers have only themselves to blame for their future problems, i.e. quality, deliveries, or financially troubled suppliers. This workshop will show Buyers how to conduct thorough and complete investigations of prospect suppliers prior to making any commitments.

The most important part of your job as a Buyer or Purchasing Professional is developing a "supplier base" of qualified and responsive suppliers. The process of achieving this objective requires the Buyer to: identify attributes the qualified supplier should possess; conduct extensive research on potential suppliers and screen each against the identified attributes; and then review thoroughly with the potential supplier(s) all requirements of the contract prior to commitment. We will review in depth each of these processes beginning with:

Attributes Identification Process. What are the characteristics we are looking for in a "qualified supplier"? Each attribute selected must be measurable, for if it is not measurable we can not manage the supplier. These attributes fall into three classifications:

Business. Suggested characteristics, but not limited to, are:

  • The traditional characteristics of: Quality, Delivery, and Service. What has been their track record in achieving these objectives?
  • Reputation in the industry: are they leaders or followers?
  • Financial stability, will they be around to complete the job? Here we use the Key Financial Ratios: Liquidity, Leverage, Activity, and Profitability.
  • Management capability, are they innovative and creative, and what about turnover within the ranks?
  • Labor relations, are they stable, what about turn-over, and are the employees unionized, and if so, when does their contract come up for renewal?
  • Documentation, is it always thorough and error- free (invoices)?
  • Price competitive in the industry?
  • Electronic Data Interchange (EDI) capability?

Technical. Here we would investigate whether the potential suppliers:

  • Possess all the technical resources required (labor, equipment, processes, etc.) necessary to fulfill the contract?
  • Possess a quality philosophy "Detect Detection" or is it "Defect Prevention"?
  • Are they ISO 9000 certified, or if not, what action steps do they have in place to improve their quality beyond just acceptance?

General. Common characteristics that are important are:

  • Honesty in their relations with their customers and others?
  • Ethical in their actions towards their employees and others?
  • Integrity in business transactions beyond reproach?
  • Committed to being the best, a leader in the industry?

Research, Investigation, and Screening Process. This process identifies potential suppliers, and using our identified attributes of the ideal supplier we identify those suppliers who possess the majority of these attributes. This process, which is sometimes referred to as "Competitive Evaluation" as opposed to Competitive Bidding, employs the following steps:

Source research. Data sources for the information as to who these potential suppliers are fall into two categories:

Traditional sources, which include: Registers (Thomas Register of American Manufacturers and Standard & Poor's Corporations); Trade Journals (Iron Age, and Plastic World Yellow Pages); Professional magazines (Purchasing Today, and Electronic Buyers News); peers (members of N.A.P.M. local affiliates); other Professionals, both internal and external to the organization; the Yellow Pages; Trade Shows; Direct Mail; Sales personnel; Customers; in-house records(Quote History, and Closed Purchase Order Files); and

Electronic Data Bases, such as: Dow Jones; Dun & Bradstreet; MarketPlace; and Dialog by Nexis; to name a few. These sources of supplier information provide an additional dimension in conducting searches in that parameter, such as: Standard Industrial Classification (SIC), sales volume, geographic locations, and employee size, can be utilized to more precisely identify potential suppliers. Upon identifying first pass suppliers a further investigation into each one's financial situation, similar to the D & B Credit Report (key financial stats, key executives, brief history of the business, and pending litigation), plus purchasing performance information, including: quality, delivery, and service experience, and other pertinent purchasing information. Using these data sources this author located fifteen suppliers for a unique commodity, when the client believed their current supplier was a "sole source", and this resulted in the client establishing multiple sources with annual savings in excess of $250,000 on the one product alone.

* Samples to be shown in the presentation.

Using either the traditional or electronic data bases sources the Buyer can develop a carefully screened list of potential suppliers. However, many of these suppliers will not possess a majority of our major attributes, so we will move to the next step in the process.

Attribute match and analysis. Based upon the information gathered on each potential supplier we evaluate each against our list of ideal supplier attributes to identify those suppliers who possess the most of our essential attributes. In this evaluation process we will analyze the key financial ratios

  • (Liquidity, Leverage, Activities, and Profitability) for each supplier under review to determine their financial health; we want assurances that they have the financial where-with-all to do the work, and that they will be around to complete our contract? Emerging from this step there will be suppliers for whom we lack sufficient information, and to obtain this data we will move on to the next step in the process.

    ** Participants will work a case to determine this qualified financially.

    Developing questionnaire. Questions identified from the above step will form the basis of our questionnaire. Having now developed our questionnaire, and subjecting it to a pilot test, we may either mail it to all the suppliers, or use it as a check list in conjunction with interviews with the supplier or their furnished references, or use it as check list when visiting the suppliers to validate all the information acquired on each supplier, or a combination with a mix of the aforementioned applications.

    Validation Process. At this juncture there is a wealth of information, but how factual is it? Validation can be accomplished via the telephone with supplier furnished references, but much is to be gained by seeing first hand the supplier's facilities and meeting the key players. Generally, this validation process will encompass a visit by your supplier evaluation team to the potential supplier(s). However, prior to the first supplier visit, the evaluation team MUST have their questions and highlights well identified so as not to be accused of giving preferential treatment to any one of the several suppliers to be visited.

    Competitive Bid process, where appropriate. At this point we may have a situation in which we have a large number of prospective and qualified suppliers, and we will be required to reduce the list to just a few. It is here that Competitive Bidding should be utilized to determine which of the suppliers have weathered the current economic climate, and this will be determined by the quotes or bids submitted.

    *** Participants will see a series of quote evaluations utilizing graphing.

    Final Selection Process. At this juncture we may have just one or several prospective suppliers. Regardless of the number, we must review with each prospective supplier the following data prior to any commitment:

    Our Expectations and Measurements. Prior to awarding a contract with the supplier of choice we should thoroughly review with that supplier exactly what are our expectations. The expectations should be measurable; measurements should not be restricted to just the technical aspects, but also include business aspects (i.e. quality of paper work - invoice accuracy). Also, we should listen to the supplier's expectations; we do this to make sure that both parties are in synch.

    Terms and Conditions (T's & C's). The T's & C's should get the same review attention as our expectations and measurements described above.

    Post Award Process. This process is critical because here is where our previous efforts either produce the expected results or require corrective action, which may result in removing the supplier from our "qualified supplier base". Generally, there will be minor problems on the first pass with any new supplier, but it is important that these deficiencies be brought to the offending supplier's attention immediately, and you should expect the supplier to provide you with a corrective action plan identifying: "activities" not in compliance, "who" within the organization will be responsible for its correction, a "time date" for completion, and what measurable "results" should be expected at the identified time date. Lacking this, the Buyer should be prepared to remove the supplier from the "qualified supplier base".

    REFERENCES:

    Book References:

    Dobler, Donald W., and Burt, David N., Purchasing and Supply Management: Text and Cases.

    McGraw-Hill Companies, Inc., 1996.

    Fearon, Harold E., Dobler, Donald W., and Killen, Kenneth H., The Purchasing Handbook. McGraw-Hill Companies, Inc., 1993.

    Journal Articles:

    Trent, Robert J., and Monczka, Robert M., Purchasing and Supply Management: Trends and Changes Throughout the 1990"s. International Journal of Purchasing and Materials Management, Fall 1998, 2-11.


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