Evaluate Suppliers
As shown in Exhibit 2.2, when the size of the purchase dictates that a detailed evaluation is required for a new purchase, supplier evaluation may be required. The potential evaluation of suppliers begins after determining that a purchase need exists (or is likely to exist) and the development of material specifications occurs. For routine or standard product requirements with established or selected suppliers, further supplier evaluation and selection is not necessary, and the approval process may be generated. However, potential sources for new items, especially those of a complex nature, require thorough investigation to be sure that purchasing evaluates only qualified suppliers.
The source evaluation process requires the development of a list of potential suppliers. This list may be generated from a variety of sources, including market representatives, known suppliers, information databases, and trade journals.
Buyers use different performance criteria when evaluating potential suppliers. These criteria are likely to include a supplier’s capabilities and past performance in product design, commitment to quality, management capability and commitment, technical ability, cost performance, delivery performance, and the ability to develop process and product technology. These factors are weighted in the supplier evaluation process. Specific examples of such weighting schemes appear in Chapter 8 on supplier evaluation. Final evaluation often requires visits to supplier plants and facilities. Because the resources to conduct such visits are limited, the purchaser must take great care in deciding which suppliers to visit.
In recent years, firms have also begun to utilize an electronic competitive bidding tool called a reverse auction or an e-auction. These mechanisms work exactly like an auction, but in reverse. That is, the buyer identifies potential qualified suppliers to go online to a specific website at a designated time and bid to get the business. In such cases, the lowest bid will often occur as suppliers see what other suppliers are bidding for the business and, in an effort to win the contract, bid it lower. Although they are somewhat ruthless, reverse auctions have been found to drive costs much lower when there is adequate competition in a market.