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. By sourcing the most cost-effective
suppliers, an organisation will reduce costs and operational risks.
- 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 suppliers
will assist an organisation’s buyers in making 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.
Additional articles can be
found at Supply Chain Management Made Easy. This site looks at supply
chain management issues to assist organisations and people in increasing the
quality, efficiency, and effectiveness of their product and service supply to
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