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SCRC Article Library: Background: An Analysis of Supplier Evaluation

Background: An Analysis of Supplier Evaluation

Published on: Jan, 24, 2011

by: Arcan Arsan , MBA ‘03 Aimee Shank , MBA ‘03

Background

Adversarial Model
Economic Order Quantity Concept
Partnership Model
Supplier Evaluation

Adversarial Model

It was not until the late 1960s that purchasing was considered more than a clerical function (11). Prior to this time, supplier selection was focused on the short-term. Suppliers were often evaluated solely on price and were quickly dropped when out-bided by another vendor. Suppliers were viewed as adversaries rather than partners and relationships between buyers and suppliers were often short-term. The pre-1960s model of the buyer-supplier relationship was characterized by the following (18):

  • Arm’s length, formal communication
  • Adversarial attitudes
  • Lack of trust
  • Aggressive, ‘win-lose’ approach in negotiations with a price focus
  • Emphasis on individual transactions and short-term contracts
  • Little direct contact and involvement in design activities
  • Reluctance to share information
  • Reliance on goods inward inspection and defect rectification

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Economic Order Quantity Concept

As quality improvement programs began to take hold, buyers began to understand the need for supplier selection based on factors other than price. Traditionally, buyers purchased based on the Economic Order Quantity concept. This model encouraged buyers to place large orders to achieve price breaks. Orders were then delivered to a receiving area, inspected, and moved to a warehouse. Later, orders would be moved to a manufacturing floor where they would be reconditioned. With this system, orders were very standard and late deliveries were not a problem because a backlog of inventory was available.

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Partnership Model

However, companies discovered that this method’s total cost was unnecessarily high and improvement programs such as Just-in-Time (JIT) and Total Quality Management (TQM) began to take hold. This created a need to evaluate suppliers based on new characteristics. Issues such as on-time deliveries, smaller order quantities, frequent delivery schedules, packaging specifications, flexibility, quality and reliability became key supplier qualities. Buyers began to understand that price was not the sole indicator of best value.

The alternate approach to the adversarial model used in the past is the partnership model. This model is used commonly today and is characterized by the following (18):

  • A high frequency of both formal and informal communications
  • Cooperative attitudes
  • A trusting relationship
  • Problem-solving, ‘win-win’ negotiating styles, with an emphasis on managing total costs
  • Long-term business agreements
  • Open sharing of information by multi-functional teams
  • Vendor certification and defect prevention approaches

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Supplier Evaluation

Supplier evaluation has developed into its current form particularly because of advances in quality improvement programs and JIT production efforts. As these advances took place, the need to evaluate suppliers based on characteristics other than price became apparent. The idea of buyers sharing information with vendors became a key to improving quality, quantity, delivery, price, and service performance and the buyer-supplier relationship began to take the appearance of a partnership relationship rather than an adversary relationship (11).

Exceptional supplier performance relies heavily on communication and cooperation between buyers and suppliers over an extended period of time. The adversarial or transactional approach that was used in vendor selection in the past focused on short-term relationships involving many vendors. Thus, it did not provide the time or focus needed to improve supplier performance. In addition, constantly adding new vendors required learning, costing companies both time and money (11).

Moreover, basing supplier selection solely on price proved problematic as quality improvement programs began to take hold. Ignoring other issues such as delivery times and quality were risky to a buyer. They could run out of materials if a delivery was late or defective or run out of storage room if a delivery was early. Other shortcomings of considering only price included an inability to receive orders packaged to specifications, an inability to receive short and frequent deliveries with stable lead times, a lack of supplier responsiveness, a lack of technical capabilities, and a lack of supplier stability (19).

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