Expected Costs and Benefits: An Analysis of Supplier Evaluation
Published on: Jan, 24, 2011
Expected Costs and Benefits
By becoming more competent in supplier evaluation, firms can expect a number of financial and non-financial benefits. Each particular quality sought in a vendor provides a firm with a different type of benefit. Following are examples of the types of benefits gained from selecting suppliers competent in particular areas.
Selecting vendors with exceptional delivery ability eliminates the “waste” associated with purchasing raw materials such as inventory costs, storage expenses, and the costs of transferring materials multiple times. Many firms have moved to a JIT inventory process in order to reduce the cost of such “waste.” Firms using JIT inventory processes require vendors who are willing to deliver in the manner that the firm requests. Vendors providing exceptional delivery ability provide value to a firm by reducing its risk of running out of material, saving on unnecessary transportation costs, reducing the need for storage and reducing the costs associated with inventory (19).
Vendors offering order flexibility provide value to firms by giving them the ability to seize opportunities or avert crises due to last minute changes. Last minute changes are sometimes unavoidable and flexibility is the key to surviving such changes (19).
Quality and reliability
Selecting vendors that provide exceptional quality and reliability will provide products that conform to the firm’s requirements not only on the first delivery, but on every delivery as long as the relationship lasts. This conformance saves the time and money associated with counting items at the receiving dock and inspecting items for quality. It therefore provides vendors with the ability to deliver directly to the manufacturing floor. Quality is particularly important in a JIT system because the system is so tightly run. If a vendor ships a batch of substandard parts, it is likely the buyer will run out of materials before a corrected order can be received, thus causing a backlog. The assurance of quality minimizes the chance that defective material will initiate such a negative chain reaction. In addition, vendors who assure quality reduce the time and expense associated with returning materials (19).
Vendors offering a fair price provide the benefit of cost reduction to the buying firm, while also providing themselves with a fair profit. A mutually beneficial price allows suppliers to remain profitable and continue business. Firms that earn extremely low profit margins relative to their competitors are likely to either cut corners on quality or to exit the relationship. There are also other benefits related to price. If buyers and suppliers share pricing information, whereby the elements of both company’s profit margins are revealed, both can reap benefits. Engineers in the buying firm can assist suppliers by making cost driving processes more efficient. Likewise, engineers in the supplying firm can assist buyers by developing a lower cost design (19).
Selecting responsive vendors results in benefits when issues arise. If a supplier knows a buyer’s order, has the level of expertise necessary to resolve its particular issues and is responsible for the buyer’s account, there will be a quick follow through and response to problems. In addition, buyers that know who to call and how to contact them may save time when time is of extreme importance (19).
Vendors offering exceptional technical capabilities provide firms with the ability to continuously improve their products in terms of quality and performance. Selecting firms that are technology leaders rather than followers translates into the ability for the buying firm to be a leader in technology. In addition, firms that lead in technical capabilities are more likely to continually improve their products and equipment (19).
Financial and business stability
Selecting firms with financial and business stability increases the likelihood that the partnership will survive through tough times. Firms that are financially stable are likely to offer long-term relationships, quality products and development services (19).
Each of the above qualities provides particular benefits to a buyer. Although it may be difficult or impossible to find a supplier who is the best in every category, the key is to find suppliers that are the best at providing the benefits that are most important to the buying firm. Therefore, buying firms are likely to realize a mixture of the above benefits depending on their priorities.
Various costs are associated with the above benefits. A massive commitment is required by both buyers and suppliers in order to achieve a truly valuable partnership. Buyers may need to put extensive work into the purchasing process. For example, in order to receive the benefits of supplier design suggestions, both the supplier’s engineering team and the buyer’s product designers must be integrated into the decision-making process. This collaboration can be costly and time consuming. In addition, firms can become captive to their strategic supply partners, due to excessive switching costs. Finally, firms run the risk of partners leaking information gained in a long-term buyer-supplier relationship to competitors or using the information themselves to forward integrate and become a potential competitor (23).
The costs and benefits of supplier evaluation are very difficult to weigh. Many are qualitative in nature, such as enhanced customer satisfaction, increased competitiveness, fewer warranty problems and improved responsiveness. Few firms are able to quantify these. However, on a larger scale, researchers have investigated the effects of supplier evaluation on buyer-supplier relationships, which in turn affect financial performance. The data concludes that supplier evaluation ultimately has a positive impact on a firm’s financial performance (3).
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