The Importance of Supplier Selection

Organisations that fail to analyse how and with whom they spend their financial resources may spend 16 – 21% more per annum than organisations that closely monitor their spending patterns. To be cost-effective, an organisation must periodically review what it spends, as increased costs may be incurred through:

• Purchasing from substandard suppliers.

• Costs that are 7 – 9% ahead of the open market.

• Increased commercial, legal and Health and Safety risks.

The essential role of the supplier selection process is to assist an organisation by providing a process that enables the selection of suppliers:

• Through group consensus.

• Without bias.

• In a way that is fair, open, and transparent.

Getting people involved in the supplier selection process reduces the risks of suppliers not providing the ultimate quality at the most reasonable cost, but this means:

• Establishing requirements.

• Researching the market.

• Evaluating suppliers.

• Negotiating contracts.

• Managing risk.

Risk management is a systematic approach used to identify, evaluate, and reduce or eliminate the possibility of an unfavourable deviation from an expected outcome, such as from the more common risks:

• Financial: These range from risks such as unfavourable currency exchange rates, a supplier’s bankruptcy or paying increased costs by not regularly reviewing and negotiating supply contracts.

• Legal and Contractual: These are often related to disputes, interpretations of contractual obligations, or suppliers' noncompliance with their terms and conditions.

• Health and Safety: An organisation must protect its staff, customers, and members of the public from harm and ill health when conducting business activities. However, purchasing products and services has never been more critical for customers.

It is important to note that the severity of risks may not be proportional to the damage they may cause and that some risks are unavoidable. No matter how much time and effort is spent on risk avoidance measures, mitigating and containing them is imperative.

Organisations must ensure that such risks are transferred back through the Supply Chain to their suppliers by having the appropriate coordinated customer/supplier contracts and applicable quality, assurance, or legislative standards in place to meet their CE, ISO, safety or quality compliance commitments.

Open tendering is the most widely used process for procuring products or services. An organisation’s requirements are detailed in a document advertised within the Open Market for all Suppliers to consider. The benefits of an open tender are that it:

• Is open to all suitable suppliers and bidders.

• Is advertised within an open market.

• Has an objective supplier selection criterion.

• Is neutral, transparent, and without bias.

• Includes unambiguous requirements specifications.

• Involves an objective and straightforward evaluation process.

• Is awarded to the least-cost Supplier without further contract negotiations.

There are many advantages to using an open tender process, some of which include the following:

• People Involvement: The people responsible for the products or services are directly involved with selecting the Supplier within an Evaluation Panel.

• Due Diligence: Due diligence criteria can be standardised, reducing the commercial, operational, and legislative risks of Supplier selection.

• Service: An evaluation panel can consider service levels, and specific service KPIs can be incorporated into the tender documentation. Suppliers will be aware of the standards the organisation wishes to achieve and can price accordingly.

• Quality: It is essential to stipulate the quality of products or services required to evaluate the balance between price and quality accordingly.

• Competitive Value: The open market offers the most significant price competition, as suppliers are unaware of who is bidding at what price.

• Market Awareness: Open tendering allows organisations to review what the market offers and understand available alternatives.

• Control: Organisations can periodically review their requirements to suit the prevailing market conditions based on specific needs, as the open market is the most significant source of innovation.

• Best Fit: Tendering is the best way for organisations to evaluate their pricing against the market and source the best suppliers for various spending categories.

• Service Level Agreements: An organisation can establish its quality and service standards to better position itself to negotiate with suppliers to reduce costs.

A failure to review an organisation’s supply base may cause a loss of untold opportunities that could drive increased efficiency and productivity growth through:

• Reduced Costs: Cost management is essential to purchasing products and services. An organisation can reduce costs and operational risks by sourcing the most cost-effective suppliers.

• Increased Innovation: By choosing suppliers that add the most value and drive innovation, an organisation can actively position itself in a more competitive position by using the latest equipment, technology, and processes.

• Use of Accurate Data: An effective supplier will assist an organisation in building a complete picture of its supply operations and risk exposure, not just by providing superior quality data but by validating it to ensure that the supply chain has the best foundation to base its decision-making.

• Market-Driven Growth: The ultimate opportunities for value growth are sometimes found in previously untapped markets, which are often full of innovative suppliers looking to develop. These markets will assist an organisation’s buyers to make informed decisions in whatever sectors exist, wherever they are located.

• CSR, ISO, CE, Quality and Legal Compliance: Corporate Social Responsibility (CSR), International Standards Organisation (ISO), Conformitè Europëenne (CE), quality and legal risk management issues are vast areas for an organisation to manage. The reputational damage from non-compliance with any of these areas can often be irreparable, adding to the importance for an organisation to engage with market-leading suppliers, who will have a detailed understanding of such obligations.

For this reason, a detailed supplier pre-qualification process is imperative for all organisations procuring products and services. However, it is about more than just asking the right questions; it is also about conducting supplier audits to obtain and validate supplier information using a practical approach that facilitates better and more agile supply decision-making.

An effective supplier selection process will assist an organisation in selecting the most appropriate supplier. The process needs to be simple, easy to understand, and operate to ensure that commercial risks are mitigated while allowing an organisation to select the most appropriate supplier rather than existing suppliers because “we have always used them”.

This is especially important to avoid supply base bias, increase transparency and fairness, and drive customer service, innovation, and cost reductions.

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