In a recent consulting role, I was reminded by the rather bullish Managing Director that the “only” role of procurement is to save cost.

I wish I had a dollar for everytime that was put to me. We Supply Chain pro’s know that procurement is so much more than cost. But how do you get that message across and convey the potential and benefits of the supply chain engine room?

Well, one tried and tested method is to use the mantra of the 5 rights of procurement. Of course, you remember these from your CIPS days right? It’s a simple combination of the key deliverables of a successful procurement process

  • The Right Quality,
  • The Right Quantity,
  • The Right Price,
  • The Right Place,
  • At the Right Time.

While it’s a tad simplistic (c’mon Supply chain is waayyyyy more complicated than that) it conveys the fundamentals of what good procurement can be measured by. Whilst I agree Procurement is nuanced, to explain it succinctly the 5R’s hits the nail on the head.

The crux of this is, of course, is that the supply chain function, and procurement, in particular, needs to add value. Procurement often gets a bad press, costs escalate, the wrong suppliers get selected, service may be shoddy so it’s the 5 rights is a neat and simple way of reminding you what procurement should be doing.

But how do you meet the criteria of the 5 Rights, is it by an individual, by a group or by a process? The 5 rights tend to be the acid test of a functioning procurement team and how you meet the 5R’s tends to be a mix of process and personnel.

The 5R’s can be seen in both direct and indirect procurement. There most procurement teams would agree that there most buyers face a balancing act to play between the 5 criteria. For example, Right Quality might determine the price to be paid (which may not be palatable with budget holders). You may have a supplier that can only provide a certain economic order quantity in order to satisfy another criteria. The trick is to get the 5 criteria working in harmony to satisfy the business.

So, next time your boss tells you that procurement is about costs, introduce them to the 5 rights.

When selecting suppliers one of the key process steps is the appraisal phase.   After you’ve built a list of potential suppliers, evaluating them forms a crucial part of the supplier selection mechanism, it allows a supplier to be critiqued against predetermined criteria and then compared to other suppliers through the use of a common standard.

Without a suitable appraisal process, supplier selection can be dangerously subjective which can lead to inappropriate suppliers being used and supply chain instability.

Appraisal of suppliers is generally achieved by assessing two main themes, assessment of things (e.g. raw material, components, organization) and activities (processes, functions).

Why appraise suppliers in the first place?

The key rationale for appraising suppliers is to reduce risk.  By investigating them prior to placing orders you hope to gain an insight into whether the supplier is fit for purpose.

A Supplier appraisal can be time-consuming (and costly) process and therefore not suitable for every type of purchase.  For example – if you are buying a ream of paper would you appraise the supplier?  The answer here is no, however, if you’re looking to contract a $1M dollar contract to buy complex materials you will want to evaluate potential suppliers to help de-risk the process.

Must haves, should haves, like to haves

Many companies look to utilize some form of qualification requirements (i.e must haves i.e. quality standards) against elements that might be variable (capacity, cost etc).  Supplier selection criteria can in some cases extend to large numbers of requirements (which could be many hundreds)  Given this it is important to identify those mandatory requirements without which a supplier cannot be used.

Most organizations will look to simplify the process through using a form of list or checklist.  The structure of this tool is usually as follows:

·         Criteria Category – i.e. Supplier capability

·         Criteria – i.e. Free Capacity

·         Score i.e. 1-10 with 1 being poor and 10 being excellent

·         Weight applied to score when assessed against other criteria groups i.e. is the financial element of the appraisal more important than the capability status.

What categories should you include in your sourcing checklist?

Checklists vary from company to company but tend to be built around some core requirements for example:

·         Costs

·         Risk

·         Capability

·         Schedule

·         Competency (often backed off by industry accreditation i.e. NADCAP for aerospace industry)

·         Quality

·         Environmental/Sustainability

These subsets can be expanded upon in more detail to allow capture of further insight into the company.  For example under capability, you might want to review capacity, ability to manage the outsource elements of the bid, facilities on offer, responsiveness etc.   Increasingly issues such as sustainability and environmental targets find themselves on supplier appraisal checklists.

Such assessment can be simplified if you’re looking to appraise an existing supplier as part of a new bid but some elements can be difficult if you have zero experience of a supplier.

For example – just how do you assess the performance of a brand new supplier when you have no trading history.   In situations like this you might want to review similar projects the supplier has undertaken, or look to assess innovations that the supplier is putting forward as part of its proposal.  Of course, the obvious plan would be to speak to existing customers as part of the appraisal but this isn’t always easy and for many buyers they may look to evidence of management systems and KPI’s that the proposed supplier has in place.

While there can be no end to what actually goes on a supplier appraisal checklist, this can be further complicated by how each attribute on the checklist is weighted.   Where financial attributes may be high on the agenda for some companies when appraising suppliers, for others it might be Environmental policies or capacity.  Such “weighting” will vary from organization to organization, and maybe from bid to bid.

See example below of how you might appraise a suppliers Project Management capability

Project Management Capability assessment

10%

Score 1-5

Risk Management

40%

Resource levels

30%

Project Planning capability

20%

Previous experience

5%

Credibility assessment of project plan provided

5%

Sub Total

100%

 

In this example, you can see how the Project Management capability forms 10% of the overall score of the appraisal.  There are 5 sub-criteria with Risk Management being the most important (highest weighting being assessed).  The Scoring system shows a 1-5 option with 1 being low – 5 being high.

Appraisal for all suppliers?

Whilst you can appraise all suppliers no matter the complexity of value of goods being procured that doesn’t always make sense.  As we stated earlier in this post, many companies will have processes that govern how suppliers are sourced and this will typically have boundaries set with those packages of work of high value or complexity often forming the basis of more formal supplier appraisal.

Who reviews suppliers?

Again this can vary widely from one organization to the other, for many it forms part of the process of strategic supply chain, for others it might be a cross functional team (Quality, Financial, purchasing, Engineering) (check out this great article on the approach here http://www.mypurchasingcenter.com/office-products/blogs/sourcing-cross-functional-teams-challenges-soft-skills/) some companies may outsource this task to specialist consultants.

The key to a successful process is to remove preconceived basis that assessors may have and ensure that the decisions are based on the data, visit the supplier (don’t just rely on internet searches) look for first-hand evidence of performance.  Supplier appraisals don’t have to be complicated.  The key is not rushing in without due preparation.  Take time to have a process that works.  Assess every potential supplier using the same criteria (don’t favorite!) and avoid skipping assessment steps, which can lead to disaster if the wrong supplier is selected.

Have some tips on supplier appraisal and selection, use our comments section below.

Next Page →