Supplier Performance Evaluation
Date: 08/11/2019
Prepared by: Majed Abdeen
In my experience, I have found that the majority of government tenders measure suppliers based solely on price as the basis of their evaluation. One of the local government universities called for a direct purchase tender to apply a new ERP system, and they consulted with me during the evaluation of the bidders. In the end, they went with the lowest price, ignoring both bidder quality and my advice. At first, they were impressed by the bidder's fake performance, fake extra teams, fake technical quality, and their low price. However, this did not last long: Soon, the project was terminated for lack of performance. In my perspective, Supplier Performance Evaluation is not an easy task for buyers. It can be a vital success or failure factor for organizations. I would argue that upper management should remember the idiom: "You get what you pay for" when evaluating suppliers.
Introduction
Organizations are increasing the development of Supplier Performance Evaluation (SPE), to identify the best-qualified suppliers and monitor performance (Luzzini et al., 2014, p.113). Unreliable supply and suppliers pose problems; thus, SPE must be utilized early on. Buyers are focusing only on the lowest-price selection criteria and face limitations in the future. Supplier impact on organizational performance relates to both cost and value creation (Luzzini et al., 2014, p.113) ranging from the core- to added future values (Möller & Törrönen, 2003, p.109). Thus, factors including contract duration, technology, and service levels must be considered (MindTools, 2019). Carter’s 10 Cs model is a common SPE framework (MindTools, 2019). Source selection criteria identified by PMI, including evaluation criteria and weighting, also assist decision-making.
SPE Criteria and Weighting
In assessing supplier performance, baselines, and targets are required; SPE criteria must identify weighting and evaluation methodologies. Cost is not always a critical factor in selecting software or service providers: within cost factors, the initial cost is secondary to the total cost during the project and product lifecycle (PMI, 2013, p.219). Carter's 10 Cs enable active Procurement Management by assessing potential suppliers and improving supply-chain management (MindTools, 2019). The 10 Cs are: Competency, Capacity, Commitment, Control, Cash, Cost, Consistency, Culture, Clean, and Communication; consideration of each provides buyer understanding of supplier effectiveness, efficiency, and value-creation ability (MindTools, 2019). Tools including Multicriteria Decision Analysis (PMI, 2017a, p.711), Decision Matrix Analysis, Pugh Matrix Analysis, and Multi-Attribute Utility Theory are used to score suppliers (MindTools, 2019). The Figure below illustrates some source-selection criteria and a weighting system:
During procurement, organizations evaluate supplier performance for agreement measures, compare, and analyze baseline performance. This includes identifying activities ahead-of or behind schedule, over- or under-budget, or with quality and resource issues (PMI, 2017a, p.489). “Inspection” reviews work performed, while “Audits” review the procurement process (PMI, 2017a, p. 489; Snyder, 2017). Collection and analysis of performance data enable evaluation of supplier performance, enabling decision-making regarding sources, plus feedback to current suppliers (Johnson & Flynn, 2015, p.366). SPE may incorporate many metrics; a few essential metrics may be used, or a complex system developed. However, metrics and decisions must be clearly linked. Efficiency is gained through automating real-time metrics (Johnson & Flynn, 2015, p.366).
Evaluation involves assigning points and scales to SPE criteria: with multiple sources supplying identical goods and services, this enables supplier comparison (Johnson & Flynn, 2015, p.369). The “weighted points plan” is a common SPE system utilizing wide-ranging assessment criteria, including the 10 Cs, each of which is weighted according to corporate buying objectives (Johnson & Flynn, 2015, p.370). SPE processes range from formalized and structured to informal (Johnson & Flynn, 2015, p.367). Empirical evidence identifies the following as critical factors for SPE: Price, Quality, Technical, E-Commerce, Performance History, Service, Adaptability, Financial Stability, Reliability, Size, Reputation, Flexibility, Environmental Responsibility, Lead Time, Specialization, Customer Service, Quality Standards, Communication, Technology, and Long-Term Relationship (Cheraghi et al., 2004).
SPE Value Creation
Monitoring supplier performance after contracting is vital to ensure obligations are met and problems dealt with. Documenting SPE enables identification of issues, assessment of seller-suitability for future work, and analysis of overall performance, currently or previously (PMI, 2017a, p.501). In this way, value is created through SPE measurement, aligning purchasing with business objectives; it allows for the creation of strategic relationships and contractual agreements, and efficiency is gained through understanding factors including supply trends, cost-of-ownership, and supplier-buyer liaisons. Other SPE benefits are identified as (Luzzini et al., 2014, p.123):
Knowledge increase
Relationship improvement
Performance improvement
Efficiency and Effectiveness
SPE in the Software Sector
In my sector, acceptance criteria specific to the software include factors such as acceptance testing by users, or successful operation and installation in the production environment (PMI, 2013, p.219). From my experience, I believe SPE must also evaluate supplier stability and project-management approach, both of which are critical for success. Risk can be managed by incorporating specific contract clauses addressing issues such as disputes or supplier dissolution (PMI, 2013, p.222).
Additionally, Agile approaches provide advantages as they allow for immediate corrective action in case of supplier non-performance; SPE can be based on deliverables and milestones to account for the dynamism of the sector (PMI, 2017b, p.77).
References
Cheraghi, S. H., Dadashzadeh, M. & Subramanian, M., 2004. Critical Success Factors For Supplier Selection: An Update. Journal of Applied Business Research, 20(2), pp. 91-108.
Johnson, P. F. & Flynn, A. E., 2015. Purchasing and Supply Management. 15th ed. New York: McGraw-Hill Education.
Luzzini, D., Caniato, F. & Spina, G., 2014. Designing vendor evaluation systems: an empirical analysis. Journal of Purchasing and Supply Management, 20(2), p. 113–129.
MindTools, 2019. Carter's 10 Cs of Supplier Evaluation: Improving Your Supply Chain Management. [Online]
Available at: https://www.mindtools.com/pages/article/10-cs.htm
[Accessed Nov 2019].
Möller, K. K. & Törrönen, P., 2003. Business suppliers value creation potential: a capability-based analysis. Industrial Marketing Management, 32(2), pp. 109-118.
PMI, 2013. Software Extension to the PMBOK® Guide Fifth Edition. 1st ed. Pennsylvania: Project Management Institute, inc.
PMI, 2017a. A Guide to the Project Management Body of Knowledge. 6th ed. Pennsylvania: Project Management Institute, Inc.
PMI, 2017b. Agile Practice Guide. 1st ed. Pennsylvania: Project Management Institute, Inc.
Snyder, C., 2017. A project manager’s book of forms: a companion to the PMBOK guide - sixth edition. 3rd ed. Hoboken, New Jersey: John Wiley & Sons, Inc.